Green preferences

This paper studies how interaction between economic decision-making and environmental awareness affects US business cycle and GHG emissions in a two-sector DSGE model. We emphasize the mechanisms that relate carbon emissions dynamics, consumer behavior, and environmental awareness in a framework incorporating two classes of goods (i.e., “clean” and “dirty”). This paper offers three main results. First, green consumption preferences play a key role in emissions reduction when they internalize emissions concentrations. Second, a green preference shock is the second source of fluctuation in many sectoral variables and stabilizes the business cycle. Third, a pollutant supply shock leads to sustainable consumption procyclicality documented in US data, only if households are environmentally aware.