Carbon neutrality and wage inequality in a sustainable economy: New evidence from business dynamism

Efficient management of carbon dioxide (CO2) emissions is crucial to protect the environment, and its growth effect has been emphasized in the literature. This study draws attention to its equity effects. In a general equilibrium setting, with a fixed number of manufacturing firms, CO2 emission reduction may worsen the skilled-unskilled wage gap depending on capital reallocation between sectors. In the long run, the carbon reduction policy can cause firms to exit manufacturing. Such business dynamism reduces the demand for skilled labor. Stringent carbon reduction policies then yield double dividends by lowering the carbon level and mitigating wage inequality. Data on 112 countries from 1960 to 2018 were used to validate the effects on wage inequality. It is found that CO2 emissions reduction worsens income inequality in the short run for both high- and middle-income countries, but the effect is mitigated in the long run. Results yield rich policy implications.