International transfer to reduce global inequality and transboundary pollution

In this paper, we analyze the response of the future world’s carbon stock to a reduction in global inequality among countries, using a framework that allows countries to make their environmental policy strategically. Heterogeneity across countries is related to income, emission technology, and environmental damage costs. We show that reducing global inequality would have a mitigating effect on the path of future world’s carbon stock if the relative number of richly-endowed countries in the subgroup of high-tech countries is greater than that in the subgroup of low-tech countries. The response of the future world’s carbon stock to a reduction in global inequality depends on the relative strength of two forces working in opposite directions: the mitigating force and the aggravating force. The mitigating force is associated with a measure of both richly-endowed/high-technology countries and poorly-endowed/low-technology countries. The aggravating force is associated with a measure of both richly-endowed/low-technology countries and poorly-endowed/high-technology countries. Status-seeking motives among countries act as a multiplier of the effects of the inequality reduction on the future path of the pollution stock. Our results highlight complex interactions to scrutinize in the design of international climate change policies while taking global inequality issues into account.