E-DSGE Model with Environmentally Aware Consumers

Abstract

This paper delves into the evaluation of environmental policy, focusing on the role of green consumption, previously neglected in the literature. This article analyzes how green consumption, driven by environmental awareness, affects business cycles and the transmission mechanism of environmental policies. We augment the standard Dynamic Stochastic General Equilibrium (DSGE) model to evaluate these transmission mechanisms by including endogenous green consumption choices, time-varying environmental concerns, and an environmental concern shock. The model is estimated using Bayesian estimation for the US economy, measuring public environmental concerns based on a Climate Change News Index. Our findings indicate that (i) an environmental concern shock plays a crucial role in influencing the variances of both renewable and fossil energy consumption, thereby contributing to the decoupling of emissions and GDP; (ii) environmental concerns lead to reduced investments in emissions abatement by dirty firms under a cap-and-trade policy; (iii) green consumption driven by environmental awareness dampen macroeconomic fluctuations amplifying the negative impact on consumption after adverse exogenous shocks; (iv) over the transition to climate neutrality, sustainable goods mitigate adverse impacts on consumption.