The income-pollution relationship and the role of income distribution Evidence from Swedish household data

The main purpose of this study is to analyze the relationship between pollution and income at household level. The study is motivated by the recent literature emphasizing the importanceof income distribution for the aggregate relation between pollution and income. The main findings from previous studies are that if the individual pollution-income relationship is nonlinear, then aggregate pollution for, say, a whole country, will depend not only on average income, but also on how income is distributed. To achieve our objective we formulate a model for determining the choice of consumption of goods in different types of household. Furthermore we link the demand model to emission functions for the various goods. The theoretical analysis shows that without imposing very restrictive assumptions on preferences and the emission functions, it is not possible to determine a priori the slope or the curvature of the pollution-income relation. The empirical analysis shows that, given the model used, thepollution-income relation has a positive slope in Sweden and is strictly concave for all three pollutants under study (CO2, SO2, NOx), at least in the neighborhood of the observed income for an average household. Further, the results show that the curvature of the relation differs between different types of households. We also show that altering the prevailing income distribution, holding average income constant, will affect aggregate emissions in the sense that an equalization of incomes will give rise to an increase in emissions. One implication is then that the development of aggregate pollution due to growth depends not only on the income level, but also on how growth is distributed.