Income inequality and carbon emissions in Asia: Does financial inclusion matter?

Abstract The upsurge in the amount of carbon emissions in Asia has been potentially due to the increasing income disparities in the region. Meanwhile, with the increasing level of digital financial services, the digital approach to financial inclusion could complement the traditional approach. Therefore, we investigate the impact of income inequality on carbon emissions across 17 Asian countries for the period 2011 to 2022. We also investigate the effects of traditional and digital financial inclusions on the relationship between income inequality and CO2 emissions. This study employs the panel fixed‐effect estimator, Quantile regressions, and 2SLS to estimate the model specifications of the study. Findings reveal that income inequality has a positive and significant impact on CO2 emissions in both linear and non‐linear models. Findings also show that both traditional and digital financial inclusion significantly moderate the relationship between income inequality and CO2 emissions, with digital financial inclusion having a lesser impact. The study further finds that economic freedom is the transmission channel through which income inequality impacts CO2 emissions, suggesting that higher income disparities lower economic freedom, which further contributes to the amounts of CO2 emissions. Our findings theoretically support the marginal propensity to emit theory and the environmental Kuznets curve hypothesis. Our findings are robust to alternative measures of income inequality, CO2 emissions, and endogeneity concerns.