The complementarity of income equalization and innovation for more effective emission reduction

This study examines the effects of income inequality and innovation on environmental quality, conditional on the level of each factor. We apply system generalized method of moments to a panel dataset of 91 countries from 1971 to 2015. The estimation results consistently reveal that although income inequality and innovation significantly contribute to better environmental quality, the effect of one factor largely depends on the evolution of the other. Specifically, the beneficial impact of income equality on environmental quality can only be achieved at a high level of innovation. In the same way, innovation is only an effective tool for a nation to reduce environmental degradation when income is fairly distributed among its citizens. This means that more equitable income distribution and higher innovative capacities are two interrelated prerequisites that must both be in place for a country to actualize their beneficial environmental impacts. Overall, our findings shed new light on the relationship between income inequality, innovation, and environmental quality, and they provide relevant implications for policymakers with regard to tackling the dual tasks of reducing inequality and pollution.