The Impact of Income Inequality on Environmental Quality: A Sectoral-Level Analysis

Abstract

There is a growing literature on the relationship between income inequality and emissions. However, these studies ignore the sectoral level differences in carbon emissions. We argue that the environmental effect of inequality might vary at the sectoral level. Our main purpose is to contribute to this growing literature on the inequality-emissions nexus by considering sectoral-level differences. For that purpose, we focus on five different sectors: power industry, buildings, transport, other industrial combustion, and other sectors. To specify our model, we augment the environmental Kuznets curve framework with income inequality by controlling the effect of globalization and urbanization. Our country sample consists of 28 OECD economies for the period between 1990 and 2018. Methodologically, we apply the second-generation panel unit root, cointegration tests, and estimators, which produce robust results against the cross-sectional dependence. Our findings reveal that not only income but also income inequality is a crucial factor in explaining changes in sectoral emissions. While rising income inequality increases carbon emissions from the power and building sectors, this finding turns out to be negative for the transport, other industrial combustion, and other sectors. Our results suggest that policies aimed at reducing carbon emissions should be designed at the sectoral level.