Researchers have found that applying a carbon tax to luxury goods would be a “fairer” way to achieve emissions reductions.
The study, published in the first week of July in the academic journal One Earth, found that taxing luxury goods would be more effective at reducing carbon emissions than current schemes. The new research found that by taxing luxury items, such as flights and SUVs, greenhouse gas emissions would fall more than with a general carbon tax on all goods.
In the ongoing struggle to reduce carbon emissions and slow down climate change, new legislation and policy directions are constantly being debated. If countries want to meet their emissions reduction targets, the situation must change.
A carbon tax requires companies to pay for every tonne of carbon dioxide that exceeds a set limit. The goal of the tax is to encourage producers and distributors to reduce carbon dioxide emissions and invest in alternative, more environmentally friendly production or supply processes.
How do carbon taxes work at present?
Currently, carbon taxes are uniform across economic sectors, regardless of the product or service sold. Often, revenue from this tax is directed towards green energy research and development.
Currently, significant carbon taxes have been introduced in more than twenty countries: Argentina, Canada, Chile, China, Colombia, Denmark, the European Union, Japan, Kazakhstan, South Korea, Canada, Mexico, New Zealand, Norway, Singapore, South Africa, Sweden, South Africa, the United Kingdom, and Ukraine.
The European Union has its own emissions system, called the EU ETS, which was established in 2005. Companies that are participants in the EU ETS can buy and sell carbon dioxide that they are allowed to emit under the system before surrendering their allowances at the end of the year.
Each year, the EU lowers the maximum permissible volume of emissions, resulting in a 43% decrease in emissions from electricity and heat generation and energy-intensive industries since the system's inception. However, some researchers believe that this is an ineffective way to reduce household emissions, as some products with high carbon dioxide emission levels, such as heating and fuel, are essential for daily life.
With a general carbon dioxide emission charge, high-income and low-income households are charged the same amount, thereby disproportionately affecting those on lower wages.
Study covered 90% of the world's population
Researcher Yannick Oswald (Yannick Oswald) and his team modelled the results of applying only a luxury tax in 88 countries, representing approximately 90 per cent of the world's population. Products defined as “luxury” varied by location, based on how consumers might react to increased prices.
“Under our proposed scheme, luxury goods, such as long-haul travel or driving high-performance cars, would face a higher carbon tax, while goods and services that meet basic human needs, such as housing, cooking and healthcare, would face a lower carbon tax,” explains Yannick Oswald.
Using the US as an example, Yannick Oswald's team applied a uniform carbon tax of $150 (€135) per tonne and compared it with a variable luxury goods tax. Home heating was modelled at $100 (€90) per tonne, household appliances at $200 (€180) per tonne, and package holidays at $300 per tonne. The uniform tax resulted in an average emissions reduction of 4.4% in the country. With the luxury goods tax, this reduction increased to 4.8 per cent.
More benefits than just emissions reduction
The results of the study are quite revealing. The findings suggest that if all 88 countries were to implement a luxury goods tax, it would likely provide 75% of the emissions reductions needed to keep global warming below 2 °C by 2050. However, to meet the carbon emission targets set out in the Paris Agreement, Yannick Oswald notes that this system would need to begin “immediately, universally and with high and rapidly rising carbon prices compared to any currently implemented policy”.
Reducing carbon emissions is not the only benefit mentioned in this scenario. In higher-income countries in particular, inequality gaps would also likely narrow, as many of the reductions would apply to luxury goods rather than essential household goods, resulting in, according to Yannick Oswald, a “fairer distributional impact”.
Taxing only luxury items may not be realistic. Implementing a luxury tax would be incredibly complex, as simply collecting enough data on every product would be a monumental task. But as Yannick Oswald points out, “if you want to implement this policy in the long term, you need a good data flow that ensures something like this”. It would also likely face political difficulties, as taxing the wealthy often requires a sound justification for voters to support it.