Green Consumption and Income Elasticities: Cross-country Evidence on Environmental Engel Curves

We examine how income growth reshapes the composition of household consumption between green and non-green goods across countries. Using harmonized data on Environmental Goods and Services (EGS) for 138 countries over 1995–2015, we measure green consumption as expenditure on goods and services explicitly designed to prevent or reduce environmental degradation and estimate a non-linear environmental Engel curve. Green consumption behaves as a luxury at low income levels but progressively transitions toward a necessity as income rises. We further show that income elasticities of green consumption are systematically higher than those of non-green consumption, revealing income-driven composition effects in the consumption basket. These non-homothetic demand patterns imply that income growth systematically shifts household expenditure toward or away from goods intended to reduce environmental pressures, with important policy implications. Applying our estimates to a stylized Climate Fund redistribution, we show that accounting for heterogeneous income elasticities changes its predicted outcome. Relative to the homothetic benchmark with unit elasticities, the response of global green consumption remains limited, whereas the increase in global non-green consumption is substantially larger.