Research article
The complementarity of income equalization and innovation for more effective emission reduction

https://doi.org/10.1016/j.jenvman.2021.112007Get rights and content

Highlights

  • This paper examines the effect of income inequality and innovation on CO2 emissions conditional on the level of each factor.

  • A panel dataset of 91 countries is analyzed by system GMM estimation.

  • Income equality only reduces CO2 emissions at high level of innovation.

  • Innovation reduces CO2 emissions when income distribution is relatively fair.

  • These moderation effects are the stronger in the case of middle-income countries.

Abstract

This study examines the effects of income inequality and innovation on environmental quality, conditional on the level of each factor. We apply system generalized method of moments to a panel dataset of 91 countries from 1971 to 2015. The estimation results consistently reveal that although income inequality and innovation significantly contribute to better environmental quality, the effect of one factor largely depends on the evolution of the other. Specifically, the beneficial impact of income equality on environmental quality can only be achieved at a high level of innovation. In the same way, innovation is only an effective tool for a nation to reduce environmental degradation when income is fairly distributed among its citizens. This means that more equitable income distribution and higher innovative capacities are two interrelated prerequisites that must both be in place for a country to actualize their beneficial environmental impacts. Overall, our findings shed new light on the relationship between income inequality, innovation, and environmental quality, and they provide relevant implications for policymakers with regard to tackling the dual tasks of reducing inequality and pollution.

Introduction

In the past 50 years, the world has witnessed a dramatic increase in greenhouse gases. As a major cause of global warming, greenhouse gases constitute a catastrophic threat to sustainable economic growth and the lives of human beings (IPCC, 2018). Since carbon dioxide (CO2) is a leading source of greenhouse gases, this threat has put countries under high pressure to lower CO2 emissions. Despite a series of multilateral agreements and collaborative efforts among countries to curb global CO2 emissions, such as the United Nations Framework Convention on Climate Change (UNFCCC), the Kyoto Protocol, and the Paris Agreement, it is reported that total greenhouse gases have consistently grown by 1.5 per cent per year (IPCC, 2018). In fact, the literature also suggests a number of strategies to either manage or lower carbon emissions, such as developing a low-carbon finance index (Mohsin et al., 2020), raising financial inclusion (Le et al., 2020), adopting a carbon emissions transfer scheme (Sun et al., 2020a,b), and encouraging technological innovation (Yang et al., 2014). However, most countries face difficulties with designing a comprehensive and effective emissions reduction plan. One important reason for this may be the fact that, apart from targeting CO2 emissions reduction, a country still needs to achieve socioeconomic objectives such as growth, poverty reduction, and income equality. In addition, economic, social, and environmental targets are not always harmonized with each other due to their complicated interrelationships.

A crucial line of research examines the environmental impacts of social and economic factors. With regard to the role of income inequality, there is no consensus in theoretical viewpoints or empirical evidence. Specifically, income inequality, an unsettled social problem, is believed to negatively affect environmental quality, with a political economic explanation (Boyce, 1994, 2008; Laurent, 2015). Meanwhile, the positive linkage between the two constructs is supported by the “marginal propensity to emit” perspective (Ravallion et al., 2000; Borghesi, 2006). Empirical findings regarding this relationship vary across countries for several reasons, including economic and social characteristics (Gassebner et al., 2008; Ibrahim and Law, 2016; Grunewald et al., 2017). On the other hand, the impact of technological innovation, a crucial driver of economic development, on CO2 emissions has attracted wide interest among both academics and practitioners (Yang et al., 2014). Technological innovation had been mostly believed to result in the reduction of CO2 emissions by improving energy usage efficiency and introducing eco-friendly products until its rebound effects on increased energy consumption take place (Lin and Liu, 2012).

The mixed empirical findings about either the inequality-environment or the innovation-environment nexus further raise a critical question about whether the effect of either income inequality or innovation on environmental quality is conditional on other factors (Zhang et al., 2017; Sarr and Noailly, 2017; Wang et al., 2017; Yu and Du, 2019). In fact, previous studies mostly examine the effect of either income inequality or innovation on environmental quality separately; however, a country may pursue technological progress and income equalization simultaneously. In this research, we aim to not only reach a conclusion about the direct impacts of inequality and innovation on environmental degradation but also to examine how these two strategies may interact with each other in influencing environmental quality when they are conducted simultaneously. Specifically, this study will answer three primary questions: (1) Do income inequality and innovation directly impact environmental quality? and if so, how? (2) Does income inequality moderate the impact of innovation on environmental quality, and if so, how? and (3) Does innovation moderate the impact of income inequality on environmental quality, and if so, how?

This study employs the system generalized method of moments (GMM) for a panel data set of 91 countries from 1971 to 2015 published by the World Bank. The findings indicate that the beneficial impacts of income equality on environmental quality can only be achieved at a high level of innovation. Likewise, innovation is an effective tool to reduce environmental degradation only when the equitable income distribution condition is satisfied.

This research contributes to the literature in two ways. Firstly, we shed light on the mixed empirical evidence regarding the direct impacts of inequality and innovation on the environment by examining how each factor could influence the effect of the other on environmental quality. This paper presents the first empirical research on the moderating effect of income inequality and innovation on environmental quality on a global scale. Second, this study answers a critical question regarding whether economic, social, and environmental targets can be unified for sustainable development. While the government could use innovation as an effective tool to mitigate the undesirable impact of income distribution on environmental quality, maintaining relatively fair income distribution can ultimately help a country to reap the benefits of innovation. Developing a cleaner, more equal and innovative society forms a win-win solution rather than a trade-off as claimed in previous studies (Ravallion et al., 2000; Gillingham et al., 2016; Liu et al., 2019; Sager, 2019). This study, therefore, provides important evidence to support policymakers in achieving sustainable development.

The remainder of this paper is organized as follows. Section 2 provides a literature review. Section 3 presents the data and methodology in detail. Section 4 reports and discusses the results. Section 5 covers the conclusion and policy implications.

Section snippets

Income inequality and environmental quality

Various models and theories confirm that the equal distribution of wealth or disposable income is necessary for economic growth. Based on the endogenous fertility model, since most families need to trade between the quantity and education of their children (Becker and Barro, 1988), poor parents are more inclined to have many children to increase family income while richer families tend to have less due to the high opportunity costs of raising children. As a result, income inequality further

Model specification

This study examines the relationship between environmental quality, income inequality, and innovation by employing an extended version of the STIPART model (stochastic impacts by regression on pollution, affluence, and technology). We use CO2 emissions, which stem from the burning of fossil fuels and the manufacture of cement, to proxy for environmental degradation. The Gini pre-tax and pre-transfer represents the income inequality of a country. To measure innovation, we employ total patent

Results

This section presents and discusses the empirical findings of the study. The first part reports and explains the main results. The second part performs several robustness tests.

Conclusions and policy recommendations

The results can be summarized as follows. This research's findings partially support the negative effect of income inequality on environmental quality, as featured in the political economic explanation and Veblen effects (Boyce, 2008; Cushing et al., 2015; Laurent, 2015; Schor, 1998; Veblen, 1934) and affirmed in mounting empirical evidences (Baek and Gweisah, 2013; Kasuga and Takaya, 2017; Liu et al., 2019; Uzar and Eyuboglu, 2019). Similarly, in line with the IPAT model (Ehrlich and Holdren,

Credit author statement

Lan Khanh Chu: Conceptualization, Methodology, Data curation. Dung Phuong Hoang: Writing- Reviewing and Editing.

Declaration of competing interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

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