Does income inequality reshape the environmental Kuznets curve (EKC) hypothesis? A nonlinear panel data analysis

Abstract

The COVID-19 pandemic has further increased income inequality. This work is aimed to explore the impact of income inequality on the environmental Kuznets curve (EKC) hypothesis. To this end, income inequality is set as the threshold variable, economic growth is set as the explanatory variable, while carbon emission is set as the explained variable, and the threshold panel model is developed using the data of 56 countries. The empirical results show that income inequality has changed the relationship between economic growth and carbon emissions from an inverted U-shaped to an N-shaped, which means that income inequality redefines the environmental Kuznets curve and increases the complexity of the decoupling of economic growth and carbon emissions. Specifically, economic growth significantly increases carbon emissions during periods of low income inequality, however, as income inequality increases, economic growth in turn suppresses carbon emissions. In the period of high income inequality, economic growth inhibits the increase of carbon emissions. However, with the increase of income inequality, the impact of economic growth on carbon emission changes from inhibiting to promoting. Panel regressions for robustness tests show that this phenomenon is more pronounced in high-income countries. We therefore contend that the excessive income inequality is bad for the win-win goal of economic growth without carbon emission growth, and the income distribution policy should be included in the carbon neutral strategy.