Income Inequality, Trade, and Environmental Externalities

Abstract

This paper investigates the intersection of income inequality, international trade, and environmental externalities, with a focus on carbon dioxide (CO2) emissions. Drawing on a panel dataset of 160 countries from 1980 to 2019, the study combines a theoretical framework grounded in welfare economics with empirical analysis using fixed-effects panel regressions. The results reveal that income concentration, particularly among the top 9% and top 1%—is a strong predictor of higher CO2 emissions. This relationship is intensified in countries that are more open to trade, suggesting that trade may facilitate the offshoring of pollution-intensive production. We distinguished between production-based and consumption-based emissions and shows that elite income groups not only emit more domestically, but also import significant carbon-intensive goods, effectively externalizing environmental costs to other countries. These dynamics are especially pronounced in advanced economies and high-income countries, while emerging and low-income economies exhibit more localized effects. By incorporating trade interactions and disaggregated income shares, the analysis offers new evidence on the spatial and social distribution of emissions. The findings underscore the need for climate policies that recognize and address both inter- and intra-national inequalities in emissions responsibility. Redistribution, progressive carbon taxation, and trade reforms may be key levers in achieving both climate and social justice.