Environmental Engel Curves

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

Abstract Proposal No: 1156170 Institution: National Bureau of Economic Research Inc NSF Program: ECONOMICS Principal Investigators: Arik Levinson Title: Environmental Engel Curves This project investigates the relationship between households' incomes and the amount of pollution embodied in the goods and services they consume. It provides the first-ever estimate of an Environmental Engel curve (EEC) - a graphical depiction of the relationship between household income and consumption-related pollution. Over the past 30 years, while real U.S. household income approximately doubled, many measures of the pollution attributable to household consumption have remained relatively flat or declined. Some of this reduction in pollution per dollar of household consumption has been the result of consumers switching to a relatively cleaner mix of goods and services. Part of this switch has been a consequence of economy-wide social changes, such as regulation-induced price changes and growing environmental consciousness. But part of the switch has been due to an underlying and possibly coincidental preference by richer people for relatively cleaner goods and services. This project calculates annual EECs for the United States and thus provides a basis for decomposing the improvements in pollution attributable to U.S. households into those two parts: changing nationwide prices and preferences, and household income growth. To date, evidence about the income-pollution relationship is based on comparisons across countries at a particular point in time, or across time within a particular country. These aggregate data are insufficient to estimate EECs or to differentiate between consumption patterns driven by society-wide changes and consumption patterns due solely to income growth. In order to estimate the income-pollution relationship, all other factors must be held equal - including the prices and characteristics of available goods, which are likely to vary significantly across countries or over time. Consequently, this project estimates year-specific EECs within the United States for each year from 1984 to the present. This involves combining data from the Consumer Expenditure Survey (CEX), the Bureau of Economic Analysis benchmark input-output tables, the U.S. Economic Census and Census of Agriculture, and a new dataset of industry-specific pollution intensities called the Trade and Environmental Assessment Model (TEAM). Debates about the relationship between economic growth and environmental degradation have a long history. Some proponents of stringent environmental regulations have claimed that economic growth must be slowed in order to preserve the environment. Opponents of regulations occasionally note that wealthier countries have less pollution, and infer that economic growth improves the environment. While both conclusions may mistake correlation for causation, one mechanism that could ameliorate the effect of economic growth in pollution due to economic expansion would involve richer households consuming a less pollution intensive set of goods. By estimating household-level EECs, this project represents the first empirical link between the broad literature on growth and the environment and the fundamental microeconomic literature on consumer preferences and income growth.