The Relationship between Consumption and CO2 Emissions: Evidence for Portugal

Abstract

his paper establishes an empirical relationship between CO2 emissions from burning fossil fuels and private consumption of non-durable goods and services. Using a typical life cycle-permanent income hypothesis framework, we reject the hypothesis that inclusion of CO2 emissions in the consumption function is not supported by the data. Furthermore, our results suggest the existence of a distaste effect or negative state dependence effect. This result has important policy implications as it suggests that decarbonizing the economy would ultimately stimulate private consumption. Our results also have implications for both the cyclical behavior and the smoothing process of consumption, which depend on the branch of the environmental Kuznets curve that the country is on as well as on the prevalence of intertemporal dependent preferences.