Does Environmental Policy Affect Income Inequality? Evidence from the Central Environmental Protection Inspection

Abstract

This paper quantifies the impact of environmental policy on income inequality. We focus on the Central Environmental Protection Inspection (CEPI) led by the central government in China. Using a difference-in-differences estimator, we find evidence that the environmental regulation decreased the per capital income while increased inequality of urban-rural income. While the policy can reduce pollution levels and bring environmental benefits in aggregate, our findings suggest that the regulation appear to reduce the labor demand of manufacturing industry, hinder the general innovation and investment of entrepreneurs and upgrade green technology and thus results in greater inequality. In addition, the impact of environmental policy depends on local government’s execution incentive.

Keywords: income inequality, Environmental regulation, urban-rural gap