Modeling the Income Dependence of Household Energy Consumption and its Implications for Climate Policy in China

We estimate Engel Curves based on Chinese household microdata and show in general equilibrium simulations that they imply substantially lower energy demand and CO2 emissions, relative to projections based on standard assumptions of unitary income elasticity. Income-driven shifts in consumption reduce the average welfare cost of emissions pricing by more than half. Climate policy is also less regressive, as rising income leads to rapid convergence in the energy intensity of consumption baskets and more evenly distributed welfare loss across households. Our findings underscore the importance of correctly accounting for the relationship between income and energy demand in high-growth economies.