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Rising US Income Inequality and Declining Residential Electricity Consumption: Is There a Link?

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Abstract: After growing steadily for decades, in the mid-2000s, average US household energy consumption began declining. Using household-level data from the Residential Energy Consumption Survey and Current Population Survey between 1990 and 2020, we decompose overall changes in per-household consumption into three components: a) average income; b) cross-household income and geographic distribution; and c) consumption habits, which includes energy efficiency. Growth of average income caused consumption to increase by 11 percent, and rising income inequality reduced consumption by 9 percent, nearly entirely offsetting the effect of income growth. If inequality had remained at 1990 levels, average consumption would have continued growing steadily through 2020. After controlling for average income and the income distribution, changes in habits reduced consumption by a similar amount as rising income inequality. Back-of-the-envelope calculations indicate an unexpected effect of rising income inequality: climate and air quality improvements valued at $3.14 billion in 2020 due to lower electricity consumption. The results indicate the importance of coordinating inequality and pollution policies.

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