Let’s implement a luxury carbon tax, because not all carbon is created equally

Sen. Elizabeth Warren’s (D-Mass.) talk about a wealth tax has made more than one billionaire nervous, including climate activist Bill Gates. Meanwhile, on climate others have also criticized the Green New Deal and similar efforts for weakening the fight on climate change by trying simultaneously to tackle inequality. 

But there is a way to do both: by taxing the carbon emissions from luxury consumption — something the Democratic presidential candidates and the sponsors of the Green New Deal might want to consider adding to their climate proposals. 

For $250,000, the super-rich will soon be able to visit sub-space. Meanwhile, back on earth, American workers will drive pickup trucks to their jobs and families will keep their thermostats low to save on heating costs.

All three will generate greenhouse gas emissions. Scientists explain that the climate impact of carbon emissions is the same irrespective of why and where they are created. That, in part, is why many economists want to tax all carbon the same. 

But does it make sense from a policy perspective to ignore why and how the carbon was created? Is it sensible to treat the emissions from highly discretionary and luxurious consumption by the rich the same as those generated to meet basic needs of middle-class and poorer households? There is an argument to say no, 

Maybe not all carbon is created equal. Unsurprisingly, just as there is income inequality, there is inequality in carbon emissions. In the United States, the richest 10 percent emit four times more than the bottom 50 percent; the disparity is even greater at a global level and for the top 1 percent. Billionaires and millionaires enjoy a lavish carbon-heavy lifestyle that isn’t accessible to middle-class families. Flying transatlantic first class in the front of the plane generates four times more carbon than riding in the back in tightly-packed economy.

Or consider high-end sports cars or yachts or private jets (remember the criticism leveled against Prince Harry and Meghan Markle for taking private jets while advocating for action on climate).

The luxury emissions market is big and getting bigger. Americans purchase 2 million luxury vehicles a year, while luxury yacht sales total $5.7 billion globally and is expected to grow to $10.2 billion by 2025. 

Soon there will be space tourism, a novel but GHG-intensive activity restricted to the super-rich. And the potential for luxury emissions is growing as the number of millionaires worldwide increases from 42 million today to a projected 63 million in 2024. 

Yet, we all share one common carbon budget, estimated at below 1,100 GtCO2. In contrast to incomes where “more is better” and even extravagant spending by the rich can produce jobs for working-class families, carbon is a “zero-sum” game: the more the rich emit through their lavish lifestyles, the less there is for everyone else.

While wealth globally keeps increasing, the carbon budget keeps getting smaller, eaten up in part by the high-carbon extravagant activities of the rich. A luxury carbon tax could be used to charge the rich for this climate extravagance, one that wouldn’t apply to the emissions generated by working families in making ends meet.

And in deciding how much to charge, we don’t need to follow the traditional approaches of tying the tax to the “social cost of carbon” or using a uniform rate based on carbon content. Instead, we could apply a tax rate well above the carbon impact of these extravagant emissions precisely because they constitute a wasteful use of our common carbon budget. 

How much should we tax someone for spewing carbon on their $52 million visit to the International Space Station? A lot.

This tax would target luxury carbon items, not middle and working-class staples. A $200,000 Lamborghini sports car would be taxed but not a Ford pickup (whose emissions can be lowered using other tools, like fuel economy standards). Nor would it apply to a high-end but “zero-carbon” Tesla.

It would also need to be structured to prevent the rich from moving their consumption to tax free countries. In fact, with many of the millionaires living in Europe, China and Japan, these places should also consider a similar tax. 

What are the benefits? Numerous. First, this tax sends an important message: extravagant emissions that waste our common carbon budget will carry a high price. Second, it raises revenues (like other luxury taxes).

Third, it can spur innovation as manufacturers redesign their luxury products and burnish their brand through low-carbon advancements to avoid this tax; some of these advancements might even improve more affordable products purchased by the middle-class.

Fourth, it is another way to tax the rich to address economic inequality — a climate complement to a wealth tax, whose revenues can be used to pay for pro-poor programs. Finally, it can reduce emissions by making extravagant high-carbon activities less desirable. 

The impact of this targeted luxury tax on emissions, or the revenues it raises, will be more limited than an economy-wide carbon tax.

However, its focus on the consumption of the rich should ease the populist concerns facing broader carbon taxes which typically have a heavier impact on working-class and poorer families that spend a bigger portion of their income on gasoline and other carbon-intensive products (concerns that led to the yellow-vest demonstrations in France). In fact, this luxury tax probably works best packaged with such a broader tax. 

For all these reasons, a luxury carbon tax is worth considering. 

Philippe Benoit is currently an Adjunct Senior Research Scholar at Columbia University’s Center on Global Energy Policy and was previously Division Head, Energy Environment, at the International Energy Agency.