The impact of income inequality on public environmental expenditure with green consumers

Abstract

This article analyzes the impact of income inequality on environmental policy in the presence of green consumers. We first perform an empirical analysis using a panel of European countries over the period 1995–2021. The results show a negative relationship between inequality and public environmental expenditure, which is weaker with higher inequality. We also find a negative correlation between environmental expenditure and green consumption, that highlights the substitutable nature of the relationship between the two variables. We next develop a model with two main ingredients: citizens with different income capacities have access to two commodities that differ in terms of environmental impact, and they vote on the environmental policy. In equilibrium, the population is divided into two groups, conventional vs green consumers. An increase in inequality raises the marginal cost of policy through size and composition effects. The higher the equilibrium tax, the larger the overall effect. This provides us with an explanation of the main empirical result.