Abstract

This paper investigates the marginal effect of income inequality on carbon emissions per-capita. We use a panel consisting of 68 countries over a 50-year period from 1961 to 2010. We report estimates that support the hypothesis that there is a trade-off between carbon emissions per-capita and income inequality. This trade-off is not homogeneous across countries and depends upon the level of development measured by income per-capita. Using panel smooth transition regression, we find that this relationship is negative for countries with low to moderate income per-capita but becomes slightly positive after passing a threshold located around fifteen thousand 2011 US dollars. Moreover, the inequality elasticity of emissions per-capita is comparable in magnitude to its income elasticity. Therefore, both inequality and income levels are crucial to define policies to reduce carbon emissions. This implies a challenge to policymakers who pursue to reduce both income inequality and carbon emissions.