Why do emissions persist? Income reference dependence and household carbon footprints

To address the empirical paradox that rapid household income growth in China has coincided with rising household carbon emissions (HCE), this paper incorporates prospect theory into the household income-consumption-emissions framework and examines how two forms of income reference dependence-expected-income reference dependence and peer-income reference dependence-affect HCE. Using data from the China Household Finance Survey (CHFS) for 2011-2019, we estimate HCE through an input-output life-cycle assessment approach and employ fixed-effects models with rich household- and region-level controls. Robustness is further assessed through alternative variables, alternative model specifications, and endogeneity tests. The results show that: (1) both forms of income reference dependence significantly increase HCE. A RMB 10,000 increase in the gap between expected and actual income is associated with an average increase of 3.1% in HCE, equivalent to about 30.6 kg; the same increase in the gap between peer income and actual income is associated with an average increase of 0.5%, equivalent to about 5.0 kg. Both effects are statistically significant at the 1% level. (2) Mechanism analysis indicates that loss aversion increases HCE by inducing survival-oriented consumption in the case of expected-income shortfalls and conspicuous consumption in the case of peer-income shortfalls, whereas risk preference uniformly drives higher emissions through risk-oriented consumption. (3) Further analysis shows that these effects are more pronounced in households headed by males, households with lower educational attainment, and households located in economically less developed regions. (4) Horse-race tests suggest that HCE is more strongly associated with expected-income shortfalls than with peer-income gaps. Overall, this study provides new evidence from a behavioral decision-making perspective on the difficulty of decoupling income growth from emissions in transition economies.