Association for Public Policy Analysis & Management

The relationship between income inequality and carbon emissions is gaining importance in the environment and economic development literature. In this paper, I have examined the effect of income inequality and economic growth on per capita carbon emissions using long panel data. This paper addresses a gap in the literature where the effects of inequality get concealed, become imperceptible or even manipulated by the non-consideration of stages of economic development in the time period under study. The analysis uses two blocks of countries, the OECD-16 and the emerging economies (N-16), and examines the relationship using different inequality metrics and model specifications. The robustness of the FE model results is shown, along with an establishment of the direction of causality using the Granger test. The results support the Environmental Kuznets Curve hypothesis and show that the relationship varies based on the country group.

From a policy perspective, the findings can help suggest policy design to promote social equity, as the N-16 countries indulge in a race to the bottom, weakening environmental regulations for economic development & poverty reduction. Other interesting results are observed from the impacts of redistribution through higher taxes and in the political debate on carbon taxation in many countries. Some avenues for future work are also presented.