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The way in which you earn money has an impact on carbon emissions.

Photo of buildings emitting smoke taken from above

Reducing your carbon footprint typically entails being mindful of the products you purchase, your mode of transportation, and conserving energy in your household. However, a recent study published in PLOS Climate reveals that being mindful of consumption is just one aspect of the issue. Your income level and how it is earned also play a significant role. The study found that the top 10% of high-earning households in the U.S. contribute to approximately 40% of the country’s carbon emissions. A substantial amount of these emissions can be attributed to investment income. These findings could potentially influence policy-making in creating fairer systems for carbon taxes.

Household Carbon Footprints

The measurement of carbon footprints typically takes into account individual consumption habits and how they contribute to carbon emissions.

There are numerous factors that may prevent individuals from altering their daily travel routine, purchasing goods from nearby sources, or incorporating energy-efficient appliances into their homes.

Jared Starr, a sustainability scientist at the University of Massachusetts Amherst, stated that there are certain restrictions to this idea. He explained that it assumes individuals have an inexhaustible amount of options, understanding, and ability to buy items with lower carbon footprints, which is not always true. Starr also mentioned that there are numerous factors that prevent people from altering their daily commute, purchasing locally-made goods, or installing energy-efficient appliances.

Instead of centering on spending, which can be impacted by an individual’s availability, financial resources, and whereabouts, Starr and his team examined the environmental impact of earning income. The team calculated the carbon emissions generated through wages, as well as profits from investments (rental income, dividends, interest, and capital gains) and retirement funds (Social Security or personal retirement accounts).

The group utilized Eora MRIO, a worldwide database that records carbon emissions from both suppliers and producers, to determine the contribution of each industry category to the total carbon emissions.

Using the data, the researchers calculated the amount of emissions required to generate 1 dollar of income for a particular industry. This information was then compared to household-level data from the U.S. Bureau of Labor Statistics and Census Bureau’s Current Population Survey from 1990 to 2019. The data showed the amount of income earned by individuals from different industries. Additional details on household investment incomes were obtained from the Congressional Budget Office, which categorizes household incomes by type (such as wages, investments, and government entitlements like unemployment or disability benefits).

The researchers estimated the carbon emissions produced by investment income by assuming that households had a diverse investment portfolio that followed a stock market index, rather than being actively managed. They also considered the contributions of different industries to greenhouse gas emissions. To account for potential fluctuations, they allowed for a variation of 25% in the carbon intensity of a household’s investments, as explained by Starr.

“The magnitude of inequality is quite remarkable.”

According to researchers, in 2019, the wealthiest 10% of American households were responsible for approximately 40% of all emissions in the United States. Among the top 1%, earnings were made up of 28% to 43% from investments, while the poorest households relied more on wages and may not have had any investment income.

The research team discovered that individuals in lower-income brackets were more likely to have jobs in industries that produce less greenhouse gases, such as retail, education, and service fields. On the other hand, those in higher-income groups tended to work in sectors that contribute to higher levels of carbon emissions, such as financial institutions that fund fossil fuel projects and luxury real estate companies. The study also revealed that higher-paid workers have more disposable income for investment, which can also lead to increased emissions. Additionally, due to our economy’s reliance on fossil fuels, the value of a company often correlates with its carbon footprint, as noted by Starr.

The difference in emissions between the wealthiest and poorest individuals is significant. According to Starr, approximately 65 million households, which make up half of the American population, only account for 14% of the emissions from income. The magnitude of this inequality is quite remarkable.

Chart showing that incomes in wealthy households are responsible for more emissions than poor households

The top 0.1% of affluent households emit an amount of CO2 equivalent to the size of Mount Everest (2,670 tons).2

Each year, credit is given to Jared Starr.

Taking away the factor of consumption from carbon footprints is a fresh perspective on the origin of household emissions. Regan Patterson, an environmental engineer at the University of California, Los Angeles, who was not part of the research, acknowledged that the study presented proof for something that is commonly assumed but has not been proven. She noted that their results align with other studies on greenhouse gas emissions from affluent households.

2) emissions per year

According to Starr, the least wealthy individuals in America generate less than 2 tons of CO2 emissions based on their income annually.2) per year, compared with the top 0.1% of households, which emit 2,670 tons of CO2

In other words, a high-earning household can surpass the lifetime emissions of a low-earning household in just 15 days.

Rethinking Carbon Taxes

According to Patterson, examining emissions based on income can promote discussions about implementing carbon taxation measures and decreasing greenhouse gas emissions in various industries.

At present, carbon taxes are imposed on products purchased by consumers rather than on money earned from investments. This disproportionately affects low-income individuals who spend all of their income on goods and services. Furthermore, only 40% of a high earner’s income is subject to a consumer-focused carbon tax, while 100% of a low earner’s income is affected. According to Starr, this further amplifies the burden placed on low-income earners for reducing carbon emissions.

Instead, implementing a tax on investment income related to carbon could potentially help alleviate the burden of mitigation efforts. According to Starr, putting a carbon tax on shareholders based on the company’s carbon intensity could motivate them to shift their investments away from heavily taxed companies in their own self-interest. This approach could also encourage corporations to reduce their carbon footprint in order to attract potential investors.

—Sarah Derouin (@Sarah_Derouin), Science Writer

Reference: Derouin, S. (2023). The importance of financial practices in relation to carbon emissions. Eos, 104. Retrieved from Published on October 10, 2023.

Text © 2023. The authors. CC BY-NC-ND 3.0

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