Climate change policies and income inequality

Abstract

This paper examines the dynamic impact of Climate Change Policies (CCPs) on income inequality, for a sample of 39 developed and developing countries, during the period 1990–2020. The results show that CCPs are associated with a significant and persistent increase in income inequality. The effect is robust across various measures of inequality and sensitivity tests, including an instrumental variable strategy. The effect of CCPs only materializes in the case of market-based CCPs, is stronger in countries characterized by a higher share of low-educated workers and initial level of inequality, while is mitigated in those with comprehensive redistribution policies, and during periods of fiscal expansions and stronger economic growth. These findings have important policy implications, as they emphasize the importance of the timing and design of CCPs, as well as the role of complementary policies.