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What if carbon taxes were based on income linked to emissions—rather than consumption?

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What if carbon taxes were based on income linked to emissions—rather than consumption?

A new study suggests that a shareholder-based carbon tax might be more effective than a consumer-based one.
August 29, 2023

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Income generated from investments is responsible for more than half of the very hefty carbon footprints of the wealthiest Americans, according to a new analysis. The finding in turn suggests a way to redesign carbon taxes to make them fairer and more effective at spurring decarbonization of the economy.

The U.S. has dramatic and increasing levels of economic inequality, with a growing fraction of national income flowing to those at the top, and especially the tippy top, of the income distribution. Past studies have also shown that the super-rich have absolutely massive carbon footprints compared to regular folks.

Most of these previous studies have looked at the emissions associated with people’s consumption of goods and services.  In the new study, researchers instead analyzed carbon emissions associated with generating people’s incomes. The results of this new income-based analysis “are more extreme,” says study team member Jared Starr, a sustainability researcher at the University of Massachusetts Amherst.

Starr and his colleagues combed through existing databases of both emissions and household income and used an established model of the global economy to build a picture of how income-based emissions have evolved over the past 30 years.

In 2019, the incomes of the top 10% of households were associated with about 40% of U.S. emissions, the researchers report in the journal PLoS Climate. The incomes of the top 1% were associated with 15-17% of national emissions, more than the lowest earning 50% of U.S. households.

 

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Over the last 30 years, the average carbon emissions generated per dollar of income has fallen – which is good news. This means that for the bottom 99%, carbon emissions have fallen while incomes have increased. But for the top 1%, incomes have grown even faster than the emissions intensity of incomes have fallen. The upshot is a larger and larger share of national emissions associated with household incomes of the wealthy.

“I believe it is problematic in a democratic society that a small group of people are creating a huge amount of emissions in order to produce income and wealth, while poorer groups in society are left to disproportionately face the climate harms caused by those emissions,” Starr says.

Until now, climate policy hasn’t done a very good job of addressing this issue, Starr and his colleagues argue. Conventional carbon taxes target emissions associated with consumption. The burden of such taxes often falls most heavily on the poor, because a lot of their spending goes to carbon-intensive basic expenses like home heating and transportation. Meanwhile, the rich save a lot of their income, so it’s not exposed to a consumption-based tax. And they have enough money that the tax doesn’t really induce them to change their behavior.

But the new study suggests a way around this. The researchers found that income from investment holdings accounts for 38-43% of emissions for the highest earning 1% of households, and more than 50% of emissions for the top 0.1%. They propose a new kind of carbon tax focused on investments, with investments in carbon-intensive industries taxed more heavily than those in green industries.

“Focusing carbon policy on investments may have some equity advantages, since it concentrates behavior change among those creating the most emissions, reaping the most economic benefits, and those with the most power to decarbonize the economy,” explains Starr.

“I think if we make it in investors’ financial self interest to decarbonize their portfolios, then they would become a powerful force in helping the economy move in that direction,” he adds.

Source: Starr J. et al.Income-based U.S. household carbon footprints (1990-2019) offer new insights on emissions inequality and climate finance.” PLoS Climate 2023.

Image: © Anthropocene Magazine.

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