Research Findings

How does income inequality affect the relation between economic growth and CO2 emissions?

September 19, 2018

Since 2014, global energy related carbon dioxide emissions have stagnated while the global economy has grown, ushering in the era of “decoupling.” The International Energy Agency (IEA) attributes this phenomenon to increases in renewable energy consumption, shifts from coal to natural gas, enhancements in energy efficiency, as well as structural changes in the global economy.

The first three of these factors have a clear association to decoupling. For instance, one may expect decoupling of economic growth and emissions, if the share of energy consumption from renewables increases. Similarly, enhancements in energy efficiency should reduce emissions, assuming there is no corresponding increase in energy consumption, which is referred to as the rebound effect (However, colleagues and I have critiqued these assertions; see links above.)

Structural changes in the global economy, also cited by the IEA, are more complex than these other factors contributing to decoupling. What are “structural changes in the global economy”? Have there been changes in how wealth is accumulated? If so, are these changes deliberate? Is growth in the global economy shifting to different nation-states? If so, which ones?

I tend to take good news about environmental quality with a grain of salt. While I am not a pessimist on the matter, much positive news about the environment derives from a one-dimensional understanding of a complicated issue. This was the case in 2015, when I first heard the news about “decoupling. At the time, I was researching another trend attributed to “structural changes in the global economy” – rising income inequality.

In 2014, the OECD published a very startling report on income inequality since the Great Recession. Since the Great Recession, real disposable household income had stagnated, and the income of the bottom 10% of the population in OECD nations had declined. (This trend has continued to the present.) This led me to ask, along with my colleague, Patrick Greiner, if reducing income inequality can really contribute to decoupling.

For us, it was not about the direct correlation between income inequality and emissions or the direct correlation between economic growth and emissions. We understood income inequality as one structural change in the global economy that may alter the relationship between economic growth and emissions. We were interested in how income distributed to specific segments of the population (e.g., the bottom and top 20% of income earners) affects the relationship between economic growth and emissions.

To model these ideas, we used the most reliable data on economic growth and emissions from the World Bank, as well as data in Solt’s database on income inequality. Using several different measures of income inequality, we found that when income inequality is high, the relationship between emissions and economic development is tightly coupled. In other words, when an increasing share of income goes to those at the top, the relationship between economic growth and emissions becomes more tightly coupled. Conversely, when an increasing share of income goes to those at the bottom, economic growth and emissions decouple.

These findings offer a moment of reflection. If economic growth has recently been defined by rising income inequality, but declining income inequality decouples economic growth from emissions, is it possible to achieve decoupling without having a serious conversation about inequality? Moreover, if emissions have stagnated in recent years while economic activity has increased, is it possible that the type of economic activity stimulating growth also stimulates inequality? Financial markets would be a prime example of economic activity that stimulates inequality but leads to growth that is not tightly coupled with emissions.

So, what does this all mean? It would be foolish to think that the recent period of decoupling means we are on the right path toward preventing global temperatures from rising by two degrees Celsius. The reality is, global CO2 emissions have stagnated and not declined. Decoupling at this point has not meaningfully reduced emissions. In addition, the past tells us that our current period of decoupling has occurred despite the fact that inequality, which has historically led to a tighter coupling between economic growth and emissions, has risen.

Despite the recent coincidence of rising inequality and stagnant emissions, the bulk of the evidence about economic growth, emissions, and inequality suggests that decreases in inequality are more effective at decoupling economic growth and emissions. The most positive aspect of my findings is its suggestion that the best path toward reducing emissions is in line with reducing poverty.

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