Green energy and wage inequality: Is there a causal effect?11We thank Co-editor Julien Chevallier, three anonymous referees, Arman Eshraghi, Tuan Anh Luong, Duc Khuong Nguyen, Faith Tan and participants at Vietnam Symposium in Global Economic Issues for useful comments and suggestions. Chi-Chur Chao acknowledges the research support from the National Science and Technology Council of Taiwan (NSTC 114-2410-H-035-032)

To protect the environment, global efforts have been devoted to climate change issues, with a particular attention to renewable (or green) energy in both the production and consumption process. While green energy has undeniable benefits on the wellbeing of individuals, whether it may heighten or lessen the status of wage inequality in an economy over time remains unknown. This paper attempts to shed some lights on this topic. To this end, a general-equilibrium model is considered in which green energy investment, funded by corporate taxes, serves as an output-scaling factor in manufacturing production. It is shown that in the short run, green energy yields a double dividend for the economy by improving social welfare and at the same time narrowing the income gap between skilled and unskilled labors. In the long run, green energy may promote firm entry, which enlarges the income disparity and hence repudiates the short run gains. Using data from 65 countries in the period from 1960 to 2022, we show that a 1% increase in green energy investment uplifts the GDP growth rate by 15.57% and reduces wage inequality in all sample countries and emerging and developing countries by about 0.44% and 1.15% in the short run, respectively. In the long run, green energy investment increases wage inequality in emerging and developing countries, confirming the theoretical predictions. Results provide a strong case for governments around the world to consider the distributive effects of green energy on the economy, an area that has been neglected thus far.