Environmental Engel Curves with predicted consumption for high-income households: An application for Ecuador

Studies on the macro level about the relationship between income inequality and carbon emissions champion the idea of a “social dilemma”, where inequality reductions lead to emission increases (Kopp and Nabernegg, 2022, Grünewald et al, 2017). A great part of this dilemma is explained on the micro level by the concave relationship between household income and household consumption (and therefore with the emissions embodied in consumption). Nevertheless, empirical evidence for this concave relationship is drawn either directly from household surveys (bottom-up approach) which suffer from undercoverage and underreporting of high-income households (Levinson and O’Brian, 2019, Sager, 2019), or from studies correcting for the income of rich households and then deriving emissions from income through a constant elasticity (top-down approach), whereby the elasticity stems from the same household surveys (Chancel, 2022). Our study assesses the validity of the concave income-emissions relationship for the case of Ecuador, where we have access to exhaustive micro data. The method includes three steps: First, we correct the income distribution of the income and expenditure household survey from 2012 with tax microdata and the application of Distributional National Accounts methods (Blanchet et al, 2020); second, we predict consumption for the corrected high-income households; and third, we associate carbon emissions to the consumption of households through input-output tables. The derived Environmental Engel Curves (EEC) for the bottom-up and top-down approach are compared to the EEC from our methodology. Preliminary results show that our corrections challenge the concavity of the income-emission relationships.