Income inequality as a barrier to the CO2-reducing potential of public investment: evidence from Latin America

This paper aims to empirically analyze the association between public investment and carbon emissions relative to Gross Domestic Product (GDP) for a panel of Latin American countries from 1994 to 2019. Given that reduced income inequality can enhance the effectiveness of environmental policies, the estimations are carried out under two income inequality regimes: higher and lower. A nonlinear Local Projections model with a threshold is employed, dividing the sample into two groups based on the Gini index. The results show that, during periods of relatively low income inequality, the estimated response of carbon-intensity growth to changes in public investment is negative over time. In contrast, under conditions of relatively high income inequality, the estimated association is not statistically significant at the 10% level. Our estimates suggest that a 10% increase in public investments is associated with an approximately 4.40% reduction in the growth rate of carbon intensity in the low-inequality regime, as measured by the Gini index, until the fourth year following the increase in public investment. These empirical findings support existing literature highlighting the positive association between income inequality and carbon emissions.