Governments across the globe are increasingly confronted with two pressing challenges: environmental degradation and the persistence of economic inequality. While each has long been the subject of policy debate, there has been little effort to understand how they are connected, or to examine whether initiatives designed to mitigate one might also shape the other. Addressing this gap, a new study entitled The Economics of Inequality and the Environment, co-authored by the Potsdam Institute for Climate Impact Research (PIK) and published in the Journal of Economic Literature, offers the first comprehensive overview of how environmental protection and social inequality interact.
At the heart of the study lies the concept of social welfare, understood as the sum of individual well-being derived from consumption, leisure, and environmental quality. The researchers emphasise that environmental policy affects all three components, not only through improvements in air, water, or climate, but also through shifts in incomes and prices. Because these changes are felt differently by rich and poor households, environmental policies are rarely neutral in their distributional effects. A tax on fossil fuels, for example, may alter the relative welfare of different groups even before considering its environmental benefits.
As co-author Ulrike Kornek, a PIK researcher and Professor of Environmental and Resource Economics at Kiel University, explains, this perspective has concrete implications for climate policy design. The success of instruments such as carbon pricing depends heavily on whether they widen or reduce the income gap. Governments can redistribute revenues to protect poorer households, but this raises further questions about the overall impact on emissions. Moreover, the degree of inequality within a society influences its collective willingness to invest in environmental protection, while climate change itself tends to deepen existing disparities, creating a feedback loop between the two issues.
The study investigates these links through three main channels. The first is the distribution of benefits from environmental policy. Poorer households, often lacking the resources to adapt to extreme weather, tend to gain more from measures that reduce climate risks. Fewer days of excessive heat, for instance, can improve productivity and wages, while reducing workplace accidents. Similarly, climate stability supports agriculture, potentially lowering food prices and enhancing food security. In this way, environmental policy can serve not only ecological but also social objectives.
The second channel concerns the distribution of costs. Policies that increase the price of essentials such as petrol or heating fuel tend to affect poorer households disproportionately, particularly in industrialised countries. At the same time, industries exposed to climate regulations may pass on costs through reduced wages or lower returns on capital, indirectly shaping the gap between rich and poor. The third channel highlights the feedback from inequality to environmental outcomes, what the researchers term the “equity–pollution dilemma.” Here, redistribution that improves the economic position of poorer households can inadvertently increase spending on carbon-intensive goods. At the same time, persistent inequality may weaken the political consensus needed for ambitious climate action.
To strengthen the evidence base for policymaking, the authors call for more empirical studies that measure “income elasticities”—the extent to which changes in household income alter behaviours such as energy consumption or willingness to pay for climate protection. They also stress the need for more precise environmental data to map these interactions in detail. As Kornek concludes, inequality and environmental degradation cannot be addressed in isolation. Only by recognising their interplay can governments design strategies that deliver both fairness and sustainability, ensuring that efforts to protect the planet also support social cohesion.
More information: Ulrike Kornek et al, The Economics of Inequality and the Environment, Journal of Economic Literature. DOI: 10.1257/jel.20241696
Journal information: Journal of Economic Literature Provided by Potsdam Institute for Climate Impact Research (PIK)