Increasing innovation and reducing income inequality are needed in tandem to combat climate change, according to a new paper that researchers say is the first to uncover this interaction.

Reductions in income equality can only lead to reduced carbon emissions within a country when innovation is high, while innovation can only help protect the environment when that country’s income is equally distributed among its citizens, two economists using decades of data from nearly 100 countries said in their paper, set to be published in the April 2021 issue of the Journal of Environmental Management. 

“Increasing equality in income and also encouraging innovation should be a win-win solution for policymakers,” said co-author Dung Phuong Hoang, an international business lecturer at the Banking Academy of Vietnam. “Innovation and income equalization should be done at the same time.” 

Dung wrote the paper alongside her Banking Academy of Vietnam colleague Lan Khanh Chu. 

The paper is the first to empirically examine the interactions among income inequality, innovation and carbon emissions on a global scale, according to the economists. It helps clarify important relationships between factors affecting climate change as policymakers around the world seek both to encourage economic growth and reduce emissions. 

Dung and Lan's research builds on work by other economists who have found trade-offs between income equality and carbon emissions. For example, a group of economists found in a 2000 Oxford Economics Papers article that higher inequality is associated with lower carbon emissions, while in 2016 the Georgetown economist Lutz Sager described an “equity-pollution dilemma” in which more equitable income distribution could raise greenhouse gas emissions. 

Dung said previous studies like these did not find a statistically significant “win-win” connection between innovation and income equality on reduced carbon emissions because they only examined direct relationships between inequality and pollution or innovation and inequality — not the interaction between inequality and innovation in relation to emissions. 

“We give insights into the direct relationship by testing some moderators,” she said. “When we have high innovation, income equalization will help reduce CO2 emissions.” 

In their research, Dung and Lan deployed a generalized method of moments statistical model with World Bank data from 91 countries — including the U.S., China and Germany — between 1971 and 2015. Forty-one of the countries were classified as high-income and 50 as middle income. 

The researchers used CO2 emissions as a proxy for general environmental degradation, and pre-tax and pre-transfer Gini coefficients -- a widely-used statistical measure of income inequality -- to represent income disparities. They measured innovation by the total number of patent applications filed by residents of a given country through the international Patent Cooperation Treaty or with their national patent office. 

In line with previous research, Dung and Lan found that in countries with less innovation, increasing inequality actually reduces emissions. 

Specifically, when examining the direct relationship between inequality and CO2 emissions without interaction effects, a 1% increase in the Gini index is associated with the reduction of CO2 emissions by 0.574%, the researchers found. 

Separately, they reported that a 1% increase in the number of patent applications corresponded with an average 0.06% reduction in CO2 emissions. 

“This result suggests that a country characterized by a wide income gap and [high levels of] innovation is associated with a low level of environmental degradation,” Dung and Lan wrote. 

However, Lang said that looking only at direct relationships obscures how innovation and income inequality work in tandem to impact emissions.

Specifically, the ability of innovation to reduce CO2 emissions is lower or nonexistent in "unequal" societies, the researchers found. South Africa, the most economically unequal nation used in the researchers' model, did not receive any statistically significant environmental benefit whatsoever from innovation. And in the United States and China, an increase in inequality with a static level of innovation led to an increase in emissions. 

“In order to receive benefits from innovation, a country must bring income equality to a certain high level,” Dung and Lan wrote.

Dung believes her research shows that policymakers should strive to decrease economic inequality while encouraging overall economic growth. 

“Many policymakers just look at the direct relationship [where income equality is associated with higher CO2 emissions], so they may think that they need to trade off,” said Dung. “But innovation and income equalization should be done at the same time.” 

An area for further research is the relationship between income inequality and innovation, said Dung. If income inequality drives innovation, as some research has indicated, that could complicate the application of Dung’s ideas. 

“Policymakers may believe that income equalization and innovation maybe conflict with each other,” said Dung. “My results do not answer the question about whether they conflict or not, and I think that is also a future research direction.”

Dung and Lan’s institution, the Banking Academy of Vietnam, is owned by the national government and affiliated with the State Bank of Vietnam, the country’s central bank. 

Lan worked for the central bank directly for one year, where he spoke to government officials from Vietnam and around Asia about economic development issues, Dung said. Those conversations helped the researchers develop the idea to examine the interactions between innovation and income inequality in relation to CO2 emissions, according to Dung. 

The paper, titled “The complementarity of income equalization and innovation for more effective emission reduction,” will be published in the April 2021 issue of the Journal of Environmental Management. The co-authors are Lan Khanh Chu and Dung Phuoung Hoang.