The Climate Cost of Inequality: Trade-offs and Structural Effects

Working Paper 2025-687

Abstract

The relationship between income inequality and carbon emissions remains ambiguous in both theory and evidence. A declining–marginal–propensity-to-emit (MPE) framework predicts a short-term trade-off between reducing inequality and limiting emissions, whereas political-economy perspectives suggest that higher structural inequality increases carbon output. Empirical studies often report negative associations, but these frequently conflate within-country dynamics with cross-country differences. We argue that distinguishing these levels can reconcile the evidence: the MPE mechanism primarily operates within countries over time, while political-economy channels shape structural, cross-country variation. Using data from the World Inequality Database, we conduct two complementary analyses. First, simulations on a global sample of 162 countries from 2019 test whether shifts in national income distributions alter carbon emissions at constant GDP, isolating the within-country MPE effect. Second, cross-sectional panel analyses examine whether households at equivalent income levels generate more emissions in more unequal societies. Our results show a modest within-country trade-off — most pronounced in low- and middle-income countries and when the income share of the middle class rises — alongside a cross-country pattern in which higher inequality is systematically associated with higher emissions across the income distribution. These findings highlight the coexistence of opposing dynamics and underscore that climate policy should balance short-term trade-offs against the structural benefits of reducing inequality.

Authors: Svenja Flechtner, Martin Middelanis.