Carbon emissions, income inequality and economic development

Abstract

This paper investigates whether changes in income inequality affect carbon dioxide ( $$\mathrm{CO}_2$$ ) emissions in OECD countries. We examine the relationship between economic growth and $$\mathrm{CO}_2$$ emissions by considering the role of income inequality in carbon emissions function. To do so, we use a new source of data on top income inequality measured by the share of pretax income earned by the richest 10% of the population in OECD countries. We also use Gini coefficients, as the two measures capture different features of income distribution. Using recently innovated panel data estimation techniques, we find that an increase in top income inequality is positively associated with $$\mathrm{CO}_2$$ emissions. Further, our findings reveal a nonlinear relationship between economic growth and $$\mathrm{CO}_2$$ emissions, consistent with environmental Kuznets curve. We find that an increase in the Gini index of inequality is associated with a decrease in carbon emissions, consistent with the marginal propensity to emit approach. Our results are robust to various alternative specifications. Importantly, from a policy perspective, our findings suggest that policies designed to reduce top income inequality can reduce carbon emissions and improve environmental quality.