Per-capita income, consumption patterns and CO2 emissions

This paper investigates the importance of per-capita income and the sectoral composition of consumption as determinants for the level and evolution of carbon dioxide (CO2) emissions across countries. It is based on the model and estimation strategy in Caron, Fally and Markusen (2012) which allows the identification of the income elasticity of consumption by controlling for cross-country price differences which are inferred from bilateral trade flows. At the sector-level, we find a statistically significant negative correlation between income elasticity and the total CO2 intensity of production. At the country-level, the data exhibits an inverted-U relationship between per-capita income and the average CO2 content of both consumption and production. The relationship holds when evaluated using average production intensities and is thus partially generated by differences in consumption patterns. In turn, we find these differences to be explained by per-capita income levels. Importantly, the link is much weaker for the total CO2 content of consumption than for the direct content, as total energy demand is more income-elastic than direct household consumption. This finding implies a modest scope for per-capita income growth to reduce aggregate CO2 emission intensity purely through its impact on consumption shares. We estimate the elasticity of the average total CO2 content of worldwide consumption (which equals that of production) to per-capita income to be only -0.06, with, however, larger reductions in rich countries.