The Effect of Environmental Policy Stringency on Carbon Footprints Across Income Deciles

Abstract

This thesis investigates the effect of environmental policy stringency, proxied by the OECD environmental policy stringency (EPS) index, on the carbon footprints of different income deciles. Utilizing a fixed-effects model for 23 European countries from 1994 to 2019, our analysis reveals that a one-unit increase in the EPS index corresponds to an average reduction of 693.9 kg of CO2 equivalent in per capita emissions. The highest 10% of earners are found to emit over seven times more than the lowest 10%. Consequently, higher-income groups also show greater absolute reductions in carbon footprints compared to lower and middle-income groups. The highest income decile is nearly 8 times more responsive to changes in policy stringency than the lowest-earning decile. However, calculating the elasticities of emissions with respect to the EPS, we find that the second to ninth deciles are more affected by the EPS relative to their initial level of emissions. Market-based policies are shown to be particularly impactful in diminishing personal carbon emissions, and policy stringency primarily influences carbon footprints through consumption-based emissions. By enhancing the understanding of the relationship between household carbon footprints and climate policies, our thesis contributes to existing literature, highlighting the importance of accounting for the distributional impacts of these policies to ensure fairness in policymaking.