Income Inequality as a Barrier to the CO2-Reducing Impact of Public Investment: Evidence from Latin America

This paper aims to empirically analyze the impact of public investment on 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, public investment leads to a reduction in emissions over time. In contrast, under conditions of relatively high income inequality, the effect is not statistically significant. We find that a 10% increase in public investment reduces emissions by approximately 4.40% in contexts of relatively low-income inequality, as measured by the Gini index, until the fourth year after the shock. These empirical findings support existing literature highlighting the positive association between income inequality and carbon emissions.