Inequality and climate change: Two problems, one solution?

This paper re-examines the relationship between per capita income, inequality, and per capita emissions while accounting for nonhomotheticity in green preferences and nonlinearities in the impact of economic growth on GHG emissions. Theoretically, our research is motivated by the fact that if environmental quality is a good with low priority on the hierarchical scale, the effect of inequality on emissions should vary depending on the level of income per capita. In low-income countries, high inequality decreases the demand for brown goods among the poor segment of the population and increases the demand for green goods among richer pioneer consumers, potentially reducing emissions. However, as income rises, a richer median voter will be more likely to approve more stringent environmental policies, and thus, lower inequality becomes beneficial for the environment, and is capable to partially offset the environmental impact of the transition towards a consumption-based society. We test this hypothesis by augmenting a standard EKC equation with the interaction between income per capita and the Gini coefficient. Our results for CO2 and SO2 emissions corroborate our main hypothesis: reducing inequality is beneficial for the environment especially for rich countries.