Working Paper: NBER ID: w24923
Authors: Justin Caron; Thibault Fally
Abstract: This paper investigates the role of income-driven differences in consumption patterns in explaining and projecting energy demand and CO₂ emissions. We develop and estimate a general-equilibrium model with non-homothetic preferences across a large set of countries and sectors, and trace embodied energy consumption through intermediate use and trade linkages. Consumption of energy goods is less than proportional to income in rich countries, and more income-elastic in low-income countries. While income effects are weaker for embodied energy, we find a significant negative relationship between income elasticity and CO₂ intensity across all goods. These income-driven differences in consumption choices can partially explain the observed inverted-U relationship between income and emissions across countries, the so-called environmental Kuznets curve. Relative to standard models with homothetic preferences, simulations suggest that income growth leads to lower emissions in high-income countries and higher emissions in some low-income countries, with only modest reductions in world emissions on aggregate.
Keywords: Income; Consumption Patterns; CO2 Emissions
JEL Codes: F18; O10; Q47; Q56
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| per capita income (D31) | average energy and CO2 intensity of consumption (Q41) |
| per capita income (D31) | consumption patterns (D10) |
| consumption patterns (D10) | CO2 intensity (L94) |
| per capita income (D31) | CO2 emissions (L94) |
| income growth (O49) | CO2 emissions in high-income countries (F64) |
| income growth (O49) | CO2 emissions in low-income countries (Q32) |
| 1% increase in income (D31) | 0.88% increase in direct consumption emissions (F62) |
| income elasticity of CO2 emissions (Q43) | varies across countries (O57) |