CO2 Emissions and Income Inequality By Nicole Grunewald, Stephan Klasen, Inmaculada Martínez-Zarzoso and Chris Muris Georg-August University of Göttingen

Outline Motivation Underlying Theories Related Literature Data and Empirical Model Main Results Conclusions 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality

Motivation Can we wait for a development path that takes us on a sustainable future? EKC versus IPAT Who are the winners and the losers of environmental degradation? Changes in income distribution also affect pollution levels 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2013) CO2 and Income Inequality

Underlying Theories Political economy (Boyce, 1994, 1998) Greater power inequality  more pollution Aggregation bias (Heerink, Mulato and Bulte, 2001) Lower inequality  higher emissions Emulation theory (Vleben, 1919) Higher inequality  higher emissions Rate of environmental trade preference: willingness to trade present benefits for future benefits. Higher rate: more weight on the present 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2013) CO2 and Income Inequality

Underlying Theories(cont) Political economy (Boyce, 1994, 1998) Via cost-benefit analysis and impacts on the rate of environmental time preference (short-run benefits, long-run costs) Normative Cost-Benefit Rule versus Positive Power-Weighted Social Decision Rule max i bi where i = power of ith individual More unequal distributions of wealth and power tend to yield worse environmental outcomes Rate of environmental trade preference: willingness to trade present benefits for future benefits. Higher rate: more weight on the present. But In a society characterized by substantial inequalities of wealth and power, these considerations imply that the level of environmental degradation prescribed by BCA may be “too much.” 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality

Underlying Theories (cont) Political economy (Boyce, 1994, 1998) Incidence: Social decisions on environmental protection systematically favor those with more wealth and power over those with less II. Magnitude: More unequal distributions of wealth and power tend to yield worse environmental outcomes Rate of environmental trade preference: willingness to trade present benefits for future benefits. Higher rate: more weight on the present 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality

Political Economy (Boyce, 1994, 1998) II Political Economy (Boyce, 1994, 1998) II. Magnitude: Two Types of Inefficiency losers’ marginal cost winners’ marginal benefit $ Type-I inefficiency Type-II inefficiency E" E* E' Level of environmentally degrading economic activity Key: E* = “optimal” level prescribed by cost-benefit analysis; E' = level under the power-weighted social decision rule when winners are more powerful than losers; E" = level under the power-weighted social decision rule when losers are more powerful than winners 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality

Underlying Theories (cont) Aggregation Bias: For concave EKC at household level Redistribution  increase pollution Vf(Y) Vf(Y) Rate of environmental trade preference: willingness to trade present benefits for future benefits. Higher rate: more weight on the present Y1 Y1 Y2 Y2 Ym Ym 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality

Underlying theories (cont) Emulation Theory (Vleben, 1919) Higher inequality  increase conspicuous consumption  higher emissions But, the rich are believed to have a lower marginal propensity to consume (emit) than the poor! (Ravallion et al., 2000) Opposite argument from the Comparative propensity to consume theory Rate of environmental trade preference: willingness to trade present benefits for future benefits. Higher rate: more weight on the present 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality

Related Literature Authors Dependent Variable EKC Other variables Income Inequality Sample and model Torras and Boyce (1998) Sulfur dioxide, Smoke, Heavy particles etc Yes GDP cubed Literacy Political rights Gini (+), low-, (-),high- income 19-42 countries 1977-1991 OLS Ravallion et al. (2000) CO2 per capita Population and Gini interactions with all variables Time trend Gini (+), Interaction with GDP (+) 42 countries, Average Gini 1980s, 1975-1992 OLS and FE Borghesi (2000) GDP cubed, Population density, Industry share, Interaction OLS: Gini (-), Interaction (+), FE: Gini not statist. Signinficant 37 countries, 1988-1995 OLS , RE and FE Heerink et al. (2001) No Gini (-) 64 countries, 1985 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality

Novelties in this Study Adjusted Gini index by Grün &Klasen and SWIID by Frederick Solt This allows us to analyze a larger sample of countries over a longer time period Gini Dataset Observations Countries Years WDI 515 142 3.62676 WIDER 1448 146 9.91781 Gruen and Klasen SWIID_net 4403 165 26.6848 11/24/2018

Data description Unbalanced panel dataset: 165 countries from 1980 to 2008: CO2 from Oak Ridge Center GNP from Penn World Tables GINI from Gruen and Klasen as well as Standardized World Income Inequality Database Other variables from WDI 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality

Empirical model The EKC model augmented with inequality is given by, ln denotes natural logs CO2 denotes CO2 emissions per capita GDPpc is GDP per capita Gini is the adjusted Gini index GDPGini is an interaction term between lnGPDpc and lGini A composite error term and time dummies are added 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality

Empirical Model Grouped Fixed Effects Estimator (preferred model) Determines groups endogenously Controls for time invariant group effects Allows for time varying group effects Instrumental variable approach (alternative technique), Instruments: Corruption Political orientation Education level Labour regulations 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality

Results FE Estimator Dep. Var. lCO2_pc WDI Gruen and Klasen SWIID_net   FE Estimator Dep. Var. lCO2_pc WDI Gruen and Klasen SWIID_net lGDP_pc 2.681 2.492** 2.302*** (2.106) (0.978) (0.690) lGDP_pc_sq -0.0768 -0.120*** -0.126*** (0.0794) (0.0420) (0.0302) lGINI 1.051 -0.788 -1.403* (1.894) (1.039) (0.759) lGDP_pclGINI -0.178 0.0611 0.154* (0.216) (0.118) (0.0886) Constant -22.93* -18.67*** -17.63*** (12.76) (5.766) (4.143) Observations 493 1,325 3,966 R-squared 0.309 0.532 0.444 Number of cid 140 139 158 Note:Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1; Year Dummies included 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality

Results Group FE Estimator Nr. of groups 6 5 4 3 2 Dep. Var. lCO2_pc   Group FE Estimator Nr. of groups 6 5 4 3 2 Dep. Var. lCO2_pc SWIID_market lGDP_pc 4.147*** 4.133*** 3.729*** 2.985*** 3.296*** (0.252) (0.251) (0.345) (0.494) (0.668) lGDP_pc_sq -0.205*** -0.204*** -0.149*** -0.134*** -0.151*** (0.00704) (0.00713) (0.0107) (0.0130) (0.0188) lGINI -1.241** -1.273** -0.706 -2.092** -2.030 (0.532) (0.528) (0.580) (0.989) (1.319) lGDP_pclGINI 0.127** -0.0215 0.144 0.124 (0.0615) (0.0609) (0.0666) (0.113) (0.150) Iassignment 2 -1.555*** 2.177*** -0.699*** 0.809** 0.859*** (0.101) (0.106) (0.0945) (0.310) (0.136) Iassignment 3 -0.925*** -1.580*** 0.528*** -0.779*** (0.0810) (0.132) (0.0781) (0.0814) Iassignment 4 -0.454*** -0.484*** 1.631*** (0.0777) (0.110) (0.394) Iassignment 5 0.0313 -0.951*** (0.0977) Iassignment 6 2.223*** (0.0387) Constant -26.44*** -26.22*** -25.01*** -19.58*** -21.01*** (1.980) (2.002) (2.523) (3.914) (5.272) Observations 2,933 R-squared 0.977 0.973 0.966 0.955 0.925 Robust standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1 11/24/2018

Results Group FE Estimator Nr. of groups 7 6 5 4 3 Dep. Var. lCO2_pc   Group FE Estimator Nr. of groups 7 6 5 4 3 Dep. Var. lCO2_pc SWIID_Net lGDP_pc 3.729*** 3.230*** 3.286*** 3.602*** 2.242*** (0.258) (0.269) (0.272) (0.366) (0.570) lGDP_pc_sq -0.182*** -0.169*** -0.177*** -0.154*** -0.156*** (0.00889) (0.00844) (0.00859) (0.0122) (0.0157) lGINInet -1.237*** -1.994*** -2.203*** -1.071** -4.033*** (0.379) (0.432) (0.426) (0.524) (0.907) GDPGINIn 0.141*** 0.221*** 0.241*** 0.0439 0.419*** (0.0428) (0.0476) (0.0474) (0.0580) (0.101) _Iassignmen_2 3.119*** 1.520*** -3.601*** 0.517*** -1.587*** (0.0810) (0.127) (0.104) (0.0820) (0.168) _Iassignmen_3 0.984*** 0.616*** -2.966*** -0.626*** -0.749*** (0.112) (0.0932) (0.0858) (0.158) _Iassignmen_4 0.462*** 0.621*** -2.046*** 1.598*** (0.0730) (0.0734) (0.107) (0.457) _Iassignmen_5 -0.636*** 3.589*** -2.497*** (0.0945) (0.103) (0.0894) _Iassignmen_6 0.507*** 1.074*** (0.0526) (0.0966) _Iassignmen_7 0.00106 (0.0448) Observations 2,937 R-squared 0.981 0.977 0.973 0.966 0.956 Robust standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1 11/24/2018

Results We find that the relationship between inequality and CO2 per capita varies with GDP per capita: The elasticities for the minimum income level is -1% and for the maximum income level it is 0.5% Once a country passes the threshold of a GDP per capita of 9330 US$ (PPP), redistribution measures will be good for the environment (decrease CO2 per capita) 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality

Results Above average inequality countries beyond the income threshold are: Argentina, Austria, Brazil, Chile, Hong Kong, Israel, Kazakhstan, Latvia, Mauritius, Mexico, Panama, Russian Federation, Singapore, South Africa, Trinidad and Tobago, Turkey, United States and Uruguay 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality

Grouped Fixed Effects (5 groups) G1 Blue G2 Red G3 Black G4 Grun G5 Yelow 11/24/2018 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality 20

Group Specific Time Effects 1 Australia Belarus Bosnia and Herzegovina Bulgaria Canada Czech Republic Estonia Guinea-Bissau Guyana India Jordan Kyrgyz Republic Luxembourg Macedonia, FYR Mauritania Poland Russian Federation Sierra Leone South Africa Suriname Trinidad and Tobago United States 3 Albania Botswana Brazil Burkina Faso Cameroon Cape Verde Chad Colombia Costa Rica El Salvador Gabon Guatemala Haiti Lao PDR Madagascar Mali Mauritius Namibia Nepal Panama Paraguay Peru Sri Lanka St. Lucia Swaziland Tanzania Uganda Uruguay 4 Algeria Armenia Bangladesh Belgium Benin Burundi Cyprus Denmark Egypt, Arab Rep. Finland Georgia Germany Ghana Greece Hungary Indonesia Iran, Islamic Rep. Ireland Israel Jamaica Japan Korea, Rep. Malaysia Mozambique Netherlands Nicaragua Niger Nigeria Pakistan Romania Senegal Singapore Slovak Republic Slovenia Tajikistan Thailand United Kingdom Venezuela, RB Vietnam Yemen, Rep. Zambia 5 Angola Argentina Austria Belize Bolivia Cambodia Central African Republic Chile Comoros Cote d'Ivoire Croatia Djibouti Dominican Republic Ecuador Ethiopia Fiji France Gambia, The Guinea Honduras Hong Kong, China Iceland Italy Kenya Latvia Lithuania Malawi Malta Mexico Morocco New Zealand Norway Papua New Guinea Philippines Portugal Rwanda Spain Sweden Switzerland Tunisia Turkey 2 Azerbaijan China Kazakhstan Moldova Mongolia Turkmenistan Ukraine Uzbekistan 11/24/2018

Main Conclusions Declining inequality can lead to declining CO2 per capita emissions if a country has passed an average income level of 9330 US$ (PPP) Some high income inequality countries such as Brazil, Chile, Mexico or South Africa are in that group Still many other high inequality countries are not in this group such as China or Indonesia, there redistribution policies may lead to increasing emissions 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality

Thank you for your attention 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality

Grouped Fixed Effects (7 groups) 6 Sierra Leone 7 Chad Gabon Namibia 11/24/2018 11/24/2018 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality 24 24

Descriptive statistics Variable Obs Mean Std. Dev. Min Max lCO2_pc 4146 -7.87 1.70 -13.47 -4.57 lGDP_pc 4064 8.40 1.25 5.02 11.20 lGDP_pc_sq 72.14 20.95 25.16 125.33 lGINInet 3292 3.60 0.28 2.71 4.27 GDPGINIn 3087 30.89 3.91 20.49 40.97 11/24/2018 Grunewald, Klasen, Martinez-Zarzoso and Muris (2012) CO2 and Income Inequality