Inequality, consumer choice, and the environment

In this thesis I investigate the relationship between income inequality and the carbon content of consumption, as well as the repercussions this relationship has for policies intended to lower emissions and soften inequalities. In Chapter 1 I show that the consumer cost of carbon pricing is globally regressive, and more so across countries than within. I show this using a novel, global approach to estimating the consumer cost. On the demand side, I allow consumption to differ both between countries and across income levels within them. On the supply side, I model substitution of inputs along global value chains. I identify all model parameters from trade data. I also estimate the incidence of the EU Emissions Trading System introduced in 2005 and a hypothetical EU Border Carbon Adjustment. In Chapter 2 I show how the distribution of income may influence aggregate emissions. I quantify the carbon dioxide (CO2) content of household consumption using micro-data from the United States. I estimate Environmental Engel curves, which describe the relationship between household income and CO2. I then describe a potential “equity-pollution dilemma”—progressive income redistribution may raise aggregate emissions. I estimate that progressive transfers may raise household carbon by 5.1% at the margin, and by 2.3% under complete redistribution. In Chapter 3 I ask how the inequality-consumption relationship changes when consumers are motivated by status. I propose a model in which consumption is influenced by a reference level shaped by peer consumption. While status-seeking complicates comparative statics, I show that the sign of the inequality-consumption relationship can be predicted under certain conditions. In particular, status-seeking acts like a multiplier when the reference level is a simple mean. Concave Engel curves suggest that more inequality lowers demand for status goods, which also tend to be more carbon intensive.