Not all carbon emissions arise from the same sources. Some come from essential needs like keeping a home warm, while others come from nonessential activities such as leisure travel. Yet carbon taxes are often applied uniformly to all emissions, regardless of whether they stem from basic needs or luxury activities. This approach can deepen inequalities across populations in Canada, the United States, and beyond.
A recent study published in One Earth argues for higher taxes on emissions from the luxury sector. If 88 countries adopt this approach, the model suggests substantial cuts in total emissions, with reductions nearing 75 percent in the targeted sector. The aim is to align with the Paris Agreement goal of restricting global warming well below 2 degrees Celsius by 2050.
Economist Yannick Oswald of the University of Leeds notes that there is a concrete injustice in how energy use varies between basic needs and luxuries, and that policies often fail to reflect this reality in practical terms.
Tourism marketing and travel costs are often highlighted as economically sensitive areas. A caption accompanying a related image reads Tourism holidays should be taxed more than home heating.
Across many nations, including Canada and Mexico, carbon pricing policies have been implemented. These schemes either apply a single rate to all emissions or target a specific type of emission such as heating or fuel. However, prior research shows that in high income countries these policies tend to place a heavier burden on low income households and do not always deliver large emissions reductions. The reason appears to be that heating and fuel already make up a larger share of low income spending and cannot easily be cut back.
Tourism should pay more than heating
To illustrate how a tax that separates essential from luxury emissions could work, researchers built a model using household carbon footprints from 88 countries. For each country they set separate tax rates for different kinds of purchases, ensuring that activities that dominate low income spending are taxed less than those tied to higher income consumption. In this framework, vacation travel would bear a higher tax than home heating.
Under a flat tax, about 37 percent of revenue would come from luxury purchases. Focusing the tax specifically on the luxury sector raises the share of revenue from luxury spending to about 52 percent.
The luxury tax proposed in this analysis not only appears fairer by shielding low income families from proportionally higher costs, but it also shows a slight edge in reducing annual household emissions in the short run. The reasoning is straightforward: when prices rise, luxury purchases are more readily forgone than basic necessities.
While the luxury approach proves fairer in all countries studied, researchers note that a flat tax could still be equitable in some low income economies. For instance, in South Africa, lower income households already spend far less on fuel or heating than wealthier families, which can tilt the balance in favor of a flat tax. Conversely, applying a luxury sector focus tends to enhance equity in higher income countries.
Implementing such a policy could drive meaningful progress in cutting global emissions, but researchers acknowledge practical challenges. Few countries currently impose carbon taxes, and a luxury sector focus may invite avoidance strategies by higher income groups.
Oswald adds that public support for fair climate measures is high, and luxury carbon taxes are likely to be viewed as legitimate. The key takeaway is clear: climate policies should reflect the varied ways people consume, which strengthens the fairness of policy outcomes.
Reference work: DOI: 10.1016/j.oneear.2023.05.027
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