On the relationship between consumption and CO2 emissions: the case of Portugal

This paper establishes an empirical relationship between CO2 emissions from burning fossil fuels and household consumption expenditures. Using a conceptual framework specific to the life cycle-permanent income hypothesis, we reject the hypothesis that non-inclusion of CO2 emissions is not supported by the data. Furthermore, our results suggest the existence of a distaste effect (or negative state dependence).

This result has important policy implications because it suggests that decarbonizing the economy has a positive effect on health conditions, which stimulates consumption for good health. 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 and on the prevalence of an intertemporarily dependent preference framework in utility.