Can environmental policies put the GINI back in the bottle?

As governments pursue increasingly ambitious environmental policies to address climate change, concerns have grown regarding their potential distributional consequences. While the environmental benefits of stricter regulation are well established, there remains limited consensus over whether such policies increase or reduce income inequality. This thesis examines the relationship between environmental policy stringency and income inequality across OECD economies over the period 1990–2020. Environmental policy stringency is measured using the OECD Environmental Policy Stringency (EPS) Index and its market-based, non-market and technology support sub-indices, which may affect firms, workers and households through different economic channels. Income inequality is measured primarily using the GINI coefficient for disposable income. The study also examines regional income inequality, recognising that the costs and benefits of environmental policies may be unevenly distributed across regions within countries. A two-way fixed effects model exploits within-country changes in environmental policy stringency over time, controlling for common year effects and time-invariant country characteristics. No statistically significant association is identified between the aggregate EPS Index and income inequality. However, disaggregating the index reveals heterogeneity across policy categories. Market-based and non-market environmental policies are generally associated with lower levels of income inequality, while technology support policies are positively associated with inequality. These relationships are modest, vary in statistical significance across specifications and are not retained when allowing for time-delayed policy effects. No statistically significant association is identified between environmental policy stringency and regional income inequality. Additional analyses focusing on countries’ largest observed increases in EPS provide only limited and measure-dependent evidence of further associations with inequality. This thesis forms part of an evolving strand of empirical studies which examines the relationship between the stringency of a nation’s environmental policies and income inequality. It adds to this literature both through its use of a different empirical strategy and its extension to investigate regional income inequality. Additionally, by examining different typologies of environmental policy, it contributes to the existing literature on how different forms of environmental policy may have differing distributional consequences. This analysis adds to the discussion of how equity must be considered alongside environmental effectiveness in policy design in order to support a just and politically sustainable transition to a low-carbon economy.