Income Inequality, Economic Growth and Carbon Dioxide Emissions Nexus: Empirical Evidence from Ethiopia

The relationship between income inequality, economic growth and CO2 emissions is ambiguous both theoretically and empirically. Hence, this study examines the link between income inequality and CO2 emissions in Ethiopia for time span covering 1979–2014 using ARDL bounds test and DOLS approach to cointegration. The Zivot-Andrews unit root test and Clemente-Montanes-Reyes unit root test reveal that some of the variables under consideration are stationary at level while others become stationary after first differencing. Both ARDL and DOLS approaches confirm that there is a long-run relationship among the series during the study period. The long-run empirical results show that a 1% increase in economic growth accounts for a 1.05% increase in CO2 emissions while a 1% increase in economic growth squared reduces CO2 emissions by 0.11%. The U-test result reveals that the relationship between CO2 emissions and economic growth confirms existence of the Environmental Kuznets Curve hypothesis. The effect of income inequality on CO2 is not robust to alternative estimation techniques; it is statistically insignificant under the ARDL estimation, but DOLS estimates show that a 1% increase in income inequality increases CO2 emissions by 0.21% in the long-run during the study period. In the long-run a 1% rise in urbanization, population size, energy intensity and industrialization each positively contribute to environmental degradation in Ethiopia by 0.38%, 0.22%, 0.07% and 0.11% respectively. Results from the Toda-Yamamoto Granger causality show a bidirectional causal relationship between CO2 emissions and all other variables except economic growth. CO2 emissions granger causes economic growth with no feedback effect. Results suggested important policy implications in the light of achieving its 2030 targets of low-carbon economy for Ethiopia.