How are carbon emissions and income inequality related?

What is it about?

We examine the relationship between economic growth and CO2 emissions by considering the role of income inequality in the carbon emissions function. We find that an increase in top-income inequality is positively associated with CO2 emissions. Further, our findings reveal a nonlinear relationship between economic growth and CO2 emissions. 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.

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Why is it important?

The existing literature provides mixed and inconclusive evidence on the relationship between income inequality and CO2 emissions mainly due to the econometric model misspecifications and lack of comparable inequality data over time and space. Our paper complements these studies by accounting for slope heterogeneity in each individual unit and cross-sectional dependence in errors, as well as addressing endogeneity that may arise due to simultaneity and omission of relevant variables. In addition, we use long panel data on top income inequality that allows us to estimate long-run relationships between the variables. This is important because inequality is a slow-moving process and needs a long enough data series to capture the changes over time. In light of these shortcomings in existing studies, this paper attempts to fill the gap in the existing literature in terms of both estimation techniques and data.

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