Conference Agenda

Environmental deterioration has become an urgent point of concern for policymakers, evidenced by the recent launch of a set of policy initiatives that aim to transform the European Union and other OECD members towards low-carbon societies. This planned transition carries significant economic and social implications, with the potential for both desired and adverse impacts. To understand if the positive or the negative effects dominate, this study examines the distributional impacts of the stringency of environmental policies in EU countries. This paper provides empirical evidence on the impact of environmental policy adoption and stringency, measured by OECD’s Climate Actions and Policies Measurement Framework (CAPMF), on income inequality, measured by the pre-tax, post-tax national income, and disposable income Gini coefficients. The use of these three measures of income inequality shows the full redistributive effects of environmental policy adoption and stringency. Employing a panel dataset covering 20 EU countries over 32 years, the study addresses slope heterogeneity, cross-sectional dependence, and potential endogeneity by utilizing the Augmented Mean Group (AMG) estimator by Eberhardt & Teal (2010). Influential factors affecting income inequality, including GDP growth, unemployment, inflation, and public social expenditure, are controlled for in the analysis. Robustness checks are conducted using the CCEMG and (MG) estimators, alternative measures of income inequality (such as the pre-tax income share of the top 10 percent), and additional control variables. The findings show that environmental policies initially increase income inequality, disproportionately affecting lower-income groups. However, redistribution through taxation, in-kind transfers, and direct cash assistance neutralizes this effect, making disposable income inequality statistically insignificant. This underscores the role of social welfare mechanisms in ensuring an equitable green transition. We conclude that in higher-income countries, such as those in the EU, increasingly rigorous environmental policies can have unintended adverse economic and social implications. However, the current redistributive policies can mitigate these adverse effects.