Economic Research-Ekonomska Istraživanja

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Income inequality, innovation and carbon

emission: Perspectives on sustainable growth

Anila Mushtaq, Zongsheng Chen, Nizam Ud Din, Bashir Ahmad & Xiaolu
Zhang

To cite this article: Anila Mushtaq, Zongsheng Chen, Nizam Ud Din, Bashir Ahmad &
Xiaolu Zhang (2020) Income inequality, innovation and carbon emission: Perspectives on
sustainable growth, Economic Research-Ekonomska Istraživanja, 33:1, 769-787, DOI:
10.1080/1331677X.2020.1734855

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ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA
2020, VOL. 33, NO. 1, 769–787
https://doi.org/10.1080/1331677X.2020.1734855

Income inequality, innovation and carbon emission:

Perspectives on sustainable growth
Anila Mushtaqa, Zongsheng Chena, Nizam Ud Dinb,c , Bashir Ahmadd and
Xiaolu Zhanga
a
School of Economics, Nankai University, Tianjin, China; bDepartment of Accounting, Nankai Business
School, Nankai University, Tianjin, China; cDepartment of Business Management, Kararkoram
International University, Pakistan; dLyallpur Business School, Government College University,
Faisalabad, Pakistan

ABSTRACT ARTICLE HISTORY

The present study aims to investigate the impact of income Received 30 November 2019
inequality and economic growth on carbon dioxide (CO2) emis- Accepted 20 February 2020
sion through the moderating role of innovation in China at
KEYWORDS
national and regional levels. To test the hypothesised relation-
Income inequality; CO2
ships, this study took the data from 1995 to 2015 and employed emission; technological
panel estimation. Findings of the whole analysis show that innovation; sustainable;
income inequality and economic growth influence CO2 emission growth; moderating effect
in China. Moreover, technological innovation moderates the pro-
posed link. However, the findings at the regional level are mixed, JEL CODES
thus confirming the existence of regional differences. Policy impli- O13; O31; O44; F64
cations are also discussed.

1. Introduction
Carbon dioxide (CO2) emission is a major threat to environmental quality and to the
sustainable economic growth of numerous countries. This threat has placed countries
under pressure to become low-carbon economies (Liu, Xiao, Zikhali, & Lv, 2014). As
a result, a series of agreements, including the United Nations Framework Convention
on Climate Change (UNFCCC), Kyoto Protocol and Paris Agreement, has been made
among different countries to control the global CO2 emission. In addition, various
developed and industrialised countries have devised and implemented their own poli-
cies to reduce this emission (Shi, Sun, Lin, & Zhao, 2019; Zhao, Zhang, & Shao,
2016). This action highlights that decreasing the level of CO2 emission has become
an important strategy for sustainable development in recent years (Wei, Li, Wu, & Li,
2019). Structural transformation in industries, for example, is conducive to curb CO2
emission. This effect cannot be significant unless the structure of energy consumption
significantly changes (Mi, Pan, Yu, & Wei, 2015). However, technology, consumption

CONTACT Nizam Ud Din [email protected]; [email protected]

ß 2020 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.
This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/
licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is
properly cited.
770 A. MUSHTAQ ET AL.

structure of energy, industrial structure and urbanisation may help to control the
level of CO2 emission. Economic and environmental issues are becoming more crit-
ical, and researchers are more interested in examining the effects of technological
innovation on CO2 emission (Yang, Yu & Du, 2019). Furthermore, the impact of
innovation on carbon emission depends on the economic development stage of the
economy (Fan, Liu, Wu, & Wei, 2006). Several studies have found that technological
innovation may result in the decline of CO2 emission (Guo, 2017). The relationship
of carbon emission to income inequality and innovation on the regional perspectives
has yet to be investigated. Therefore, this study aims to investigate the relationship
between income inequality and carbon emission when a country focuses on innov-
ation. Moreover, this study considers income inequality based on regions to link it
with innovation that influences carbon emission.
Fast growing economies, such as Brazil, Russia, India, China and South Africa
(BRICS), have entered into a new paradigm (i.e. innovation-oriented economy), which
also has changed the pace and the factors of economic growth (Yu & Du, 2019).
Moreover, China is one of the second-largest economies and one of the largest CO2
producers worldwide; it has emitted 9.12 billion tons of carbon in 2016—27.3% of the
total global carbon emission (Shi et al., 2019). Considering this amount, China has
aimed to become a low-carbon and sustainable economy (Luo, Dubey, Papadopoulos,
Hazen, & Roubaud, 2018). The major challenge in this transition process is keeping the
economic growth rate high whilst significantly reducing carbon emission in China (Qi,
Peng, & Tan, 2019). Therefore, the effects of income inequality (Shi et al., 2019; Zhang
& Zhao, 2014) and economic growth (Wang, Li, Fang, & Zhou, 2016) on carbon emis-
sion are extensively studied, particularly with reference to environmental Kuznets curve
(EKC) hypothesis (Kaika & Zervas, 2013). However, past studies have barely examined
the role of technological innovation in these relationships. To become a low-carbon
economy, China has shifted the economic growth from high-speed growth to medium-
to-high growth and factor-driven growth to innovation-driven growth, which poses
new challenges to the linkages between the economy and the environment (Yu & Du,
2019). This type of shift requires new insights into an old problem. Therefore, revisiting
the effects of income inequality and economic growth on CO2 emission by considering
the role of technological innovation in China is imperative. Similarly, during the rapid
economic growth in China, income inequality has risen, which increases the quantity
of carbon emission in the country (Hao, Chen, & Zhang, 2016). Liu, Wang, Zhang, Li,
and Kong (2019) have found an inverted U-shaped relationship between income and
CO2 emission by using EKC hypothesis, thus confirming that high-income inequality
leads to environmental deterioration.
The present study contributes to the literature in two ways: Firstly, this study con-
tributes to the literature of income inequality and carbon emission in the regional
context. Secondly, this study examines the effect of income inequality on CO2 emis-
sion by exploring the moderating role of technological innovation, which has
attracted little attention in past research. Thus, this study also contributes to EKC
hypothesis. Third, considering regional disparities, this study has covered more
regions than previous studies (Zhang & Zhao, 2014). Therefore, the present study
contributes to regional economies that focus on innovation.
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 771

The remainder of this paper is organised as follows. Section 2 provides a literature

review. Section 3 presents the methodology in detail. Section 4 describes the analysis
and results. Section 5 covers the discussion, conclusion and policy implications.

2. Literature review
Reducing income inequality and carbon emission whilst maintaining high economic
growth under the policy of technological innovation is challenging for China. As a
major producer of CO2, China is under huge pressure to control carbon emission.
Therefore, numerous scholars have become increasingly interested in identifying the
key drivers of CO2 and the conditions that can increase or decrease the quantity of
carbon in the environment. Since the introduction of impact, population, affluence
and technology (IPAT), several studies have separately studied the impact of income
inequality and economic growth on CO2 emission in China (Zhang & Zhao, 2014;
Liu et al. 2019).
Scholars have used different theoretical approaches to understand the nature of the
relationship between income inequality and carbon emission. Firstly, Boyce (1994)
has provided a political economic perspective on this relationship. According to this
perspective, environmental pollution may depend on the distribution of income and
power among the rich and the poor. Unlike the poor, rich people, though they have
a larger share in carbon emission, have more ability to protect themselves from the
detrimental effects of environmental degradation; conversely, this burden is borne by
the poor (Laurent, 2015). The second perspective relies on the marginal propensity to
emit, in which CO2 fluctuates with the variation in income distribution (Borghesi,
2006). When income inequality increases, the carbon emission tends to decrease
(Ravallion, Heil, & Jalan, 2000). The third approach is based on the assumption that
higher inequality leads to higher energy consumption, thus increasing carbon emis-
sion (Borghesi, 2006; Ravallion et al., 2000). Although these three perspectives have
different standpoints, they confirm that income inequality and carbon emission have
a strong link. To verify this relationship, scholars have conducted a range of empirical
studies and found interesting results.
For example, one group of researchers highlights that a well-established positive
relationship exists between income inequality and carbon emission. Zhang and Zhao
(2014) have stated that income inequality causes an increase in carbon emission and
varies from region to region. Liu et al. (2019) have also found that in China, income
growth increases carbon emission and supports the EKC. Further, Golley and Meng
(2012) have used the input–output (IO) method to calculate direct and indirect emis-
sion consumption from the survey Urban Household Income and Expenditure Survey
(UHIES) conducted by the National Bureau of Statistics (NBS) of China. Their study
results show that carbon emission varies from household to household with different
income levels. Golley and Meng (2012) have further found that a household with a
high income causes more emission than a low-income household. Moreover, Baek
and Gweisah (2013) have used time series data and the autoregressive distributed lag
(ARDL) model and examined that impartial income distribution can improve envir-
onmental quality both in the short and long run.
772 A. MUSHTAQ ET AL.

Contrary to the first group, the second group highlights a negative relationship
between income inequality and carbon emission. Jun, Zhong-Kui, and Peng-Fei
(2011) have explored a significant adverse relationship between income inequality
and carbon emission. Grunewald, Klasen, Mart
ınez-Zarzoso, and Muris (2017) have
also found that low- and middle-income countries contribute to high carbon emis-
sion. Furthermore, H€ ubler (2017) has employed quantile regression and found that
high inequality leads to a decrease in carbon emission. Moreover, Heerink, Mulatu,
and Bulte (2001) has found that nations with a higher income inequality produce less
carbon emission. Likewise, Borghesi (2006) has used the Gini coefficient, measured
income inequality for 35 nations and analysed income inequality effects per capita
carbon emission. The findings further explored that income inequality can help to
reduce carbon emission in underdeveloped countries.
Other researchers have examined inequality–carbon emission links from a short-
and long-term perspective. For example, using panel data from 1997 to 2015, Liu
et al. (2019) have examined the effect of income inequality on carbon emission and
found that in the short run, high income inequality increases carbon emission,
whereas in the long run, high income inequality reduces carbon emission in the US.
Baek and Gweisah (2013) have investigated the short- and the long-term effects of
income inequality in the US; they have found that more equal income distribution
results in better environmental quality in both the short and long run. In another
study, Akbostanci, T€ur€
ut-Aşik, and Tunç (2009) have studied the association between
income inequality and carbon emission in Turkey and revealed the existence of a
unique relationship between these two variables in the long run. They have also
reported that a monotonously increasing relationship exists between carbon emission
and inequality.
Given the above discussion, empirical evidence also confirms that income inequal-
ity and carbon emission are closely linked in China. However, findings show the lack
of consensus on the type of relationship because researchers have found different
relationships, such as linear (positive) relationship (Zhang & Zhao, 2014), U-shaped
relationship (Zhao et al., 2016), inverted U-shaped relationship (Liu et al., 2019) and
no relationship (Wolde-Rufael & Idowu, 2017).
Numerous other studies have tested the growth–carbon emission nexus using the
popular EKC hypothesis (Grossman & Krueger, 1991). EKC suggests that an inverted
U-shaped relationship exists between economic growth and emission. In the early
stage of economic growth, the carbon emission level rises. Once the growth reaches
the threshold point and the income level increases, the environmental quality also
starts improving. To confirm this hypothesis, a range of studies has been undertaken.
However, the results are mixed. For example, some studies (i.e. Apergis & Ozturk,
2015; Dong, Sun, Jiang, & Zeng, 2018) have empirically found the existence of EKC,
whereas other studies (i.e., Akbostanci et al., 2009; Mikayilov, Galeotti, & Hasanov,
2018; Nasir & Rehman, 2011) have failed to find any support for the existence of this
hypothesis. However, other studies have found an N-shaped and an inverted N-
shaped EKC (Mart
ınez-Zarzoso & Bengochea-Morancho, 2004; Ozokcu € €
& Ozdemir,
2017). However, Moomaw and Unruh (1997) have reported that neither the N-shaped
nor the U-shaped connection between carbon emission and economic growth exists.
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 773

These contradictory results have led to a number of scholarly criticisms regarding

EKC. For example, Yang, Sun, Wang, and Li (2015) have argued that the link built
on the EKC hypothesis using a limited data set cannot be appropriate to develop a
particular model because such models are applied worldwide. Another criticism of
the EKC is the heterogeneity problem that can be easily recognised across the regions
and countries through panel estimation and can be solved by using cointegration and
unit-root tests (Apergis, 2016; Liu et al., 2019) However, models like the EKC fail to
deal with such problems due to the nonlinearity (Gonzalez, Battles, Collins, Robards,
& Saah, 2015).
Several other studies have found the relationship between economic growth and
CO2 emission using EKC (Gonzalez et al., 2015). Using provincial data in China, Du,
Zhou, Pan, Sun, and Wu (2019) have found that the economic development of most
of the provinces is positively related with CO2. Similarly, Esso and Keho (2016) have
reported that economic development positively relates to carbon emission in Sub-
Saharan nations. In a recent study, Nie and Xing (2019) have examined economic
development in relation to carbon emission in different regions of China and con-
cluded that economic growth influences carbon emission. Taking this observation
into account, the present study expects that economic growth and CO2 emission are
closely linked.
The use of technological innovation as a vital factor can reduce income gap and
carbon emission. Innovation refers to ‘creative destructions’ (Hong, 2018). By recog-
nising the value of innovation in its National Middle to Long Term Plan for Science
and Technology Development 2006–2020 (MLP, 2006), China has set itself to become
the largest innovative country in the world (Liu, Serger, Tagscherer, & Chang, 2017).
Therefore, heavy investment in activities to improve the innovative performance and
growth of the country has become a vital internal strategy in the country. China’s
competitive advantage mainly rests on cheap labour, and with the rising income level,
long-term sustainable growth will not only rely on cheap labour. Instead, China must
accelerate technological innovation to continue the momentum of income growth
(Liu et al., 2017). Existing literature has indicated that technological innovation
decreases income inequality (Thewissen & Rueda, 2019). For example, people who
work in innovative firms earn more than those who work in less innovative firms
(Liu et al., 2017). In sum, workers with jobs that require advanced technical skills are
highly paid (Breau, Kogler, & Bolton, 2014). In addition, innovative regions attract
creative and highly skilled workers by offering them competitive wages; however,
innovative cites have high inequalities (Depalo & Di Addario 2014; Fan et al., 2006).
Liu and Lawell (2015) have found a U-shaped relationship, which means that minor
innovations reduce inequality and breakthrough innovations; however, these innova-
tions can increase income inequalities in Chinese provinces. Other studies, such as
that of Domenico and Di Addario (2014) have observed that innovation decreases
overall income inequality and increases top income share. Such observation entails
that innovation can decrease income inequality in a way that individuals with fewer
technological skills may learn from those with more advanced skills. Thus, individuals
who improve their skills can also earn more. Thereby, the income gap between work-
ers tends to decrease.
774 A. MUSHTAQ ET AL.

Likewise, innovation is connected to CO2 emission. However, the findings are

mixed. For example, energy-related R&D expenses increase carbon emission in 19
high-income OECD nations (Koçak & Ulucak, 2019). Using the STIRPAT model in
different nations, Fan et al. (2006) have found that technological innovation and CO2
are connected but are different across the nations. Similarly, Kumar and Managi
(2009) have found that technological innovation mitigates carbon emission in devel-
oped countries, but it increases CO2 emission in developing economies. In addition,
Dauda, Long, Mensah, and Salman (2019) have explored the impact of economic
development and innovation on carbon emission across 18 developed and developing
economies and found that innovation causes a reduction in carbon emission in G6
economies; however, innovation leads to a surge in emission in BRICS and MENA
nations. Numerous other studies (i.e. Kumar & Managi, 2009; Liang, Zhao, He, Xu,
& Ma, 2019; Wang, Chen, & Zou, 2005) have found a negative relationship between
technological innovation and income inequality. Thus, innovation reduces carbon
emission and improves environmental quality (Yu & Du, 2019; Zhao, Ma, & Yang,
2013). Technology helps to introduce energy-efficient innovation, which reduces
environmental degradation (Balsalobre-Lorente, Shahbaz, Roubaud, & Farhani, 2018;
Samargandi, 2017). Hence, technology plays an undoubtedly important role in miti-
gating carbon emission. However, this effect can differ across various regions based
on the regional properties, policies and infrastructures. Considering the discussion,
technological innovation in a country can be vital in curbing income inequality and
carbon emission.
Despite the voluminous previous research that has explored the relationship of
income inequality, economic growth, technological innovation and CO2 emission
with practical implications, further research from various aspects is needed. Firstly,
previous studies have examined the direct impact of income inequality, economic
growth and technological innovation on CO2 emission, whereas less research has
focused on the indirect effects (moderating) role of innovation. Similarly, many stud-
ies have overlooked to test direct and indirect relationships between study variables
across different regions of China. Whereas, considering regional differences, studying
these relationships in different regions can reveal some interesting findings, which
can help the policymakers to develop the national as well as regional policies accord-
ingly. Therefore, this study intends to avoid these limitations and analyses the rela-
tionship between variables of studies at a national and regional level. In doing so, this
study follows IPAT model (Di, Rui, & Hai-Ying, 2011). Researchers have widely used
this model when they examined the role of technology with reference to CO2 emis-
sion (Hailemariam, Dzhumashev, & Shahbaz, 2019; Zhou & Song, 2016).

3. Methodology
Our theoretical framework encompasses the EKC hypothesis, which demonstrates the
relationship between environmental degradation and income levels (Grossman &
Krueger, 1991). Some recent studies (i.e. Ellabban, Abu-Rub, & Blaabjerg, 2014;
Golley & Meng, 2012) have focused increased attention on environmental degradation
influenced by the distribution of income. Jun et al. (2011) have stated that income
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 775

distribution can be used as a descriptive variable. Usually, when discussing the associ-
ation between environmental quality and economic growth, the researcher tends to
examine a range of variables, including GDP, income per capita and energy con-
sumption. However, income inequality tends to be limited in terms of variables espe-
cially when examining the regional differences at the income level. The regression
models FE, PSCE, N-W and FGLS are employed.

lnCO2 ¼ b0 þ b1  lnðRGDPÞ þ b2  lnðRGDPs qÞ þ b3  lnðGINIÞ

þ b4  lnðInnovationÞ þ b5  lnðEIÞ þ b6  lnðindStrÞ þ b7  lnðURBÞ þ eij ,
(1)

where lnC02 is the total carbon emission, an indicator of environmental degradation.

lnRGDP is the total regional GDP. lnGINI is a coefficient of inequality measurement.
lnInnovation is the technology innovation calculated by the total patent applications
accepted. lnEI indicates energy intensity measured by the total consumption ratio to
the GDP. lnURB is urbanisation. lnindstr is the industry structure, which is measured
by the primary industry ratio to the GDP.
For the GINI coefficient, this study adopts the data collected by Tian (2012) from
1995 to 2010. For the following five years (2011 to 2015), we calculated the data
through the formula that Tian (2012) applied:

 
lc lr lc lu 

GINI ¼ Pc Gc þ Pr Gr þ PuPr ,
l l l 

where GINI is the Gini coefficient of the population. Gc and Gr are the Gini coeffi-
cients of the rural population and the urban population, respectively. In addition, Pc
indicates the proportion of the urban population. Pr denotes the rural population
proportion, where mu and mc show the income per capita of urban residents and rural
residents, respectively. m denotes the income per capita for the whole region.

3.1. Data source and description

We use a panel dataset of 27 provinces of China from 1995 to 2015 and divide the
sample into six regions. The data of carbon emission was calculated by the
Intergovernmental Panel Data of Climate Change in 2006. The data of regional GDP
and primary industry value added were collected by the NBS of China. Data on
energy consumption were collected by the City Statistical Yearbook. Data on urban-
isation were collected by the China Compendium and the China Statistical Yearbook.
Table 1 describes the descriptive statistics of the study. For CO2, we obtain the
20500.99 mean, which is close to the maximum value. Meanwhile, the Gini coefficient
mean is 0.349. For innovation, the mean value is 14592.3 (Table 2).
776 A. MUSHTAQ ET AL.

Table 1. Variables description.

Variables Definition
Carbon emission (C02) Total carbon emission
GDP (Rgdp) Log of Total regional GDP
GINI Measure the difference in income distribution
Energy intensity (EI) Total energy consumption divided by GDP
Urbanization (URB) Urban population divided by total population
Industry structure (IndStr) Primary value-added divide GDP
Technology innovation Number of Domestic Patents Application Granted(item)
Source: The Authors.

Table 2. Descriptive statistics.

Variable Obs Mean Std. Dev. Min Max
CO2 567 20500.99 16238.61 1148.358 94582.98
GINI 567 0.349 0.100 0.1068 0.5665
URB 567 0.440 0.207 0 0.962
IndStr 567 0.139 0.074 0.0043 0.357
Innovation 565 14643.95 35225.63 43 269944
EI 567 1.708 2.478 0.181 55.3
RGDP 567 22641.9 21293.15 1826 107960
Source: The Authors.

4. Empirical analysis and discussion

4.1. Income inequality, innovation and carbon emission
The aim of this study is to investigate the relationship between income inequality,
innovation and carbon emission. At the country level, the high-income inequality,
improving innovation and high energy intensity are responsible for CO2 emission.
The results of the panel estimation whole sample are presented in Table 3. The coeffi-
cient of lnGINI is significant at a 10% level of significance and has a positive relation-
ship with carbon emission. Thus, with higher income inequality, CO2 emission
increases. Similarly, the coefficient of innovation (lninovation) is positive and signifi-
cant at level 1% (0.206). Hence, innovation also degrades the environment at the
national level.
The lnGDP (lnRGDP_sq) coefficient is positive (negative) and statistically signifi-
cant at a 1% level, which shows a non-monotonic relationship. Findings confirm the
existence of an inverted U-shaped EKC in China. This finding illustrates that deterio-
rated environmental quality results from the massive consumption of energy resource
benefits to economic growth, thereby boosting carbon emission. Therefore, this find-
ing implies that CO2 emission is increasing in China. Moreover, the coefficient on
energy intensity (lnEI) is (0.069) positive and significant at 5%. This finding indicates
that a rise of 1 unit in the energy intensity causes of 0.69% increase in CO2 emission.
The coefficient of industry structure (IndStr) is negatively related to carbon emission.
Therefore, a unit increase in the industry structure causes a 3.7% reduction in envir-
onmental degradation.
We estimate other models, such as PCSE, N-W and FGLS for the robustness test,
as shown in Columns 2, 3 and 4 in Table 3. The coefficients of lnGINI, lnInnovation,
lnRGDP and lnEI are positive and statistically significant. Moreover, the results indi-
cate that CO2 follows an inverted U-shaped trend and supports EKC. Also, the
industry structure discourages environmental degradation.
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 777

Table 3. Whole sample analysis.

FE PCSE N-W FGLS
VARIABLES sign (1) (2) (3) (4)
lnGINI þ 0.0630 0.200 0.200 0.175
(0.0339) (0.0482) (0.0588) (0.0381)
lnInnovation – 0.206 0.350 0.350 0.288
(0.0254) (0.0369) (0.0557) (0.0259)
lnRGDP þ 2.33e-05 7.84e-05 7.84e-05 9.38e-05
(4.56e-06) (1.12e-05) (1.02e-05) (5.92e-06)
lnRGDP_sq – 2.71e-10 9.83e-10 9.83e-10 1.17e-09
(5.73e-11) (1.77e-10) (1.44e-10) (9.05e-11)
lnEI ? 0.0693 0.555 0.555 0.604
(0.0332) (0.0741) (0.171) (0.0376)
lnURB ? 0.0352 0.144 0.144 0.171
(0.0295) (0.0399) (0.0418) (0.0321)
IndStr ? 3.669 1.281 1.281 1.082
(0.342) (0.296) (0.283) (0.209)
Constant 8.327 6.025 6.025 6.398
(0.217) (0.317) (0.494) (0.211)
Observations 565 565 565 565
R-squared 0.825 0.698
N 27 27 27 27
Standard errors in parentheses
p < 0.01; p < 0.05; p < 0.1.
Source: The Authors.

The empirical findings reveal a positive and significant association between income
inequality and carbon emission in China at the national level. These results are simi-
lar to several previous studies (Baek & Gweisah, 2013; Hao et al., 2016; Liu et al.,
2019; Zhang & Zhao, 2014). Rapid economic growth is characterised by the rising
income levels as high carbon emission in the environment. Rapid economic growth,
industrialisation and urbanisation are the main reasons for the high level of carbon
emission in the second-largest economy of the world (Zhang & Zhao, 2014). The
excessive population of China relies on a higher value-added share of the manufactur-
ing sectors than Pakistan (Imran, Husen, Kaleem, Bangash, & Ud Din, 2020).
Therefore, China uses heavy manufacturing capital and has a significantly low ratio
of clean capital to dirty capital (Yoon & Yoon, 2018). This finding implies that when
inequality decreases, the income level of the poor increases. As a result, the use of
energy-intensive goods in the economy also rises, thus emitting more CO2 to the
environment (Hailemariam et al., 2019). Similar results have also been found in
Turkey (Uzar & Eyuboglu, 2019), confirming that the increase in inequality damages
the environmental quality in the country.

4.2. Income inequality and regional carbon emission

China is among the countries with the largest area. The country is divided into differ-
ent regions: North, Northwest, Eastern, Central and South, Southwest and Northwest.
Therefore, we analyse the regional level to determine the impacts of income inequal-
ity and innovation on carbon emission in these regions.
The results of the six regions are presented in Tables 4 and 5. In Table 4, Column 1
estimates the results for the North region. The coefficients of lnGINI, lnRGDP and LnEI
are significant and have a positive relationship to CO2. These results are similar to the
result of the whole country, but the coefficients are higher than those of the country
 778

Table 4. Regional analysis of CO2 emission.

North region Central and South Region Northeast Region
A. MUSHTAQ ET AL.

FE PCSE N-W FGLS FE PCSE N-W FGLS FE PCSE N-W FGLS

VARIABLES Sign (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
lnGINI þ 0.199 0.129 0.129 0.107 0.191 0.0530 0.0530 0.0697 0.0132 0.0233 0.0233 0.00878
(0.0463) (0.102) (0.0574) (0.0383) (0.0750) (0.111) (0.0604) (0.0568) (0.133) (0.0875) (0.0604) (0.0591)
lnInnovation – 0.321 0.195 0.195 0.228 0.171 0.108 0.108 0.154 0.153 0.114 0.114 0.100
(0.0835) (0.0504) (0.0422) (0.0298) (0.103) (0.160) (0.0853) (0.0743) (0.101) (0.0374) (0.0301) (0.0165)
lnRGDP þ 1.512 0.428 0.428 0.511 1.981 0.852 0.852 0.555 0.454 0.739 0.739 1.107
(0.344) (0.501) (0.268) (0.191) (0.688) (0.948) (0.558) (0.552) (0.895) (0.828) (0.465) (0.315)
lnRGDP_sq – 0.0139 0.0460 0.0460 0.0413 0.0378 0.000328 0.000328 0.0221 0.0629 0.116 0.116 0.136
(0.0181) (0.0290) (0.0149) (0.0108) (0.0363) (0.0543) (0.0313) (0.0313) (0.0411) (0.0441) (0.0279) (0.0169)
lnEI ? 0.877 0.992 0.992 0.937 0.111 0.169 0.169 0.425 1.326 1.115 1.115 1.124
(0.0620) (0.0769) (0.0612) (0.0355) (0.0460) (0.0703) (0.130) (0.0629) (0.203) (0.205) (0.146) (0.0644)
lnURB ? 0.00686 0.0895 0.0895 0.0986 0.216 0.408 0.408 0.327 0.375 0.714 0.714 0.794
(0.0608) (0.0757) (0.0443) (0.0428) (0.101) (0.121) (0.0866) (0.0708) (0.328) (0.307) (0.157) (0.126)
IndStr ? 0.224 0.519 0.519 0.562 2.718 0.153 0.153 0.575 2.007 0.202 0.202 0.845
(0.810) (0.630) (0.406) (0.315) (1.287) (1.731) (1.016) (0.927) (2.179) (1.326) (0.616) (0.597)
Constant 0.458 4.072 4.072 3.977 4.327 2.722 2.722 4.065 1.376 7.537 7.537 9.224
(1.371) (2.058) (1.057) (0.791) (3.642) (4.974) (3.005) (2.902) (4.640) (4.065) (1.942) (1.577)
Observations 84 84 84 84 105 105 105 105 63 63 63 63
R-squared 0.990 0.986 0.859 0.907 0.922 0.955
Number of years 21 21 21 21 21 21 21 21 21 21
Note: lnRGDP_sq is square of regional GDP. Standard errors in parentheses
p < 0.01; p < 0.05; p < 0.1.
Source: The Authors.
Table 5. Regional analysis of CO2 emission.
Eastern region Southwest region Northwest Region
FE PCSE N-W FGLS FE PCSE N-W FGLS FE PCSE N-W FGLS
VARIABLES Sign (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
lnGINI þ 0.0871 0.0902 0.0902 0.0453 0.161 0.0350 0.0350 0.0220 0.0453 0.0520 0.0520 0.0399
(0.0945) (0.0689) (0.0528) (0.0507) (0.101) (0.102) (0.0650) (0.0498) (0.120) (0.0921) (0.0652) (0.100)
lnInnovation – 0.0540 0.0652 0.0652 0.0604 0.0790 0.134 0.134 0.190 0.751 0.894 0.894 0.820
(0.0559) (0.0941) (0.0333) (0.0344) (0.0780) (0.0818) (0.0585) (0.0440) (0.274) (0.337) (0.191) (0.188)
lnRGDP þ 1.316 1.241 1.241 1.683 0.679 0.843 0.843 1.102 0.0321 0.0110 0.0110 0.0159
(0.497) (0.892) (0.372) (0.406) (0.513) (0.921) (0.423) (0.401) (0.0218) (0.0239) (0.0149) (0.0146)
lnRGDP_sq – 0.0110 0.0064 0.00641 0.0277 0.0064 0.00813 0.00813 0.00281 1.577 1.365 1.365 1.380
(0.0288) (0.0510) (0.0198) (0.0227) (0.0281) (0.0537) (0.0239) (0.0236) (0.150) (0.246) (0.117) (0.0716)
lnEI ? 0.575 0.590 0.590 0.635 0.936 1.060 1.060 1.096 0.0819 0.167 0.167 0.152
(0.0555) (0.108) (0.0618) (0.0421) (0.148) (0.154) (0.0873) (0.0705) (0.0784) (0.0704) (0.0360) (0.0314)
lnURB ? 0.0533 0.0395 0.0395 0.0352 0.143 0.0254 0.0254 0.0987 0.104 0.140 0.140 0.142
(0.0516) (0.0470) (0.0503) (0.0342) (0.0984) (0.149) (0.0863) (0.0717) (0.0412) (0.0643) (0.0244) (0.0169)
IndStr ? 1.969 1.911 1.911 2.269 1.974 3.158 3.158 3.646 0.825 1.089 1.089 1.115
(0.496) (1.021) (0.392) (0.360) (1.197) (1.178) (0.566) (0.494) (1.123) (1.104) (0.522) (0.315)
Constant 0.763 0.358 0.358 2.801 3.680 3.115 3.115 2.344 0.316 0.637 0.637 0.352
(2.536) (4.461) (1.932) (2.021) (2.188) (4.032) (1.885) (1.781) (0.986) (1.194) (0.614) (0.633)
Observations 126 126 126 126 82 82 82 82 105 105 105 105
R-squared 0.899 0.948 0.843 0.900 0.930 0.954
Number of years 21 21 21 21 21 21 21 21 21
Note: lnRGDP_sq is square of regional GDP. Standard errors in parentheses.
p < 0.01; p < 0.05; p < 0.1.
Source: The Authors.
ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA
779
780 A. MUSHTAQ ET AL.

level. Moreover, the Gini coefficient (0.199) is higher than that of other regions.
However, the coefficient of lninnovation is negative and significant, which is different
from the results of the whole country. The result shows that this region encourages more
service-based technological innovation, which cannot cause CO2 emission. The coefficient
of lnURB is insignificant. Therefore, the urbanisation neither supports nor discourages
CO2 emission. These results are robust with other regression models, that is, N-W and
FGLS but not PCSE, as shown in Columns 2, 3 and 4 (Table 4).
In Table 4, Column 5 presents the results for the Central and South regions. The
coefficients of lnGINI, lnInnovation and lnURB have a significant and negative rela-
tionship with CO2 emission. Therefore, income inequality, innovation and urbanisa-
tion decrease CO2 emission. The coefficient of lnInnovation is significant at a 10%
level and has a negative association with CO2 emission. However, the coefficients of
IndStr, and lnEI are significant and have a positive association to CO2 emission.
Therefore, the results are partially similar to those of the whole country. These results
are consistent with prior literature (Yoon & Yoon, 2018). Similarly, the coefficients of
lnRGDP and lnGDP_sq do not support the EKC in this region. We estimate PECSE,
N-W and FGLS for the Central and South regions, as shown in Columns 6, 7 and 8.
The Northeast region is quite different from the entire country, shown in Table 4.
In Column 9, lnEI is significant and has a positive relationship with the emission of
CO2, the remaining variables are insignificant. However, the lnRGDP (lnGDP_sq) is
negative (positive) relationship with CO2 emission and is statistically significant,
which confirms that it follows a U-shaped EKC to some extent, as shown in Column
12 of Table 4.
Table 5 presents the result of CO2 emission in the Eastern region (Columns 1-4),
Southwest region (Columns 5-8) and Northwest region (9-12) of China. In Table 5,
Columns 1-4 present the results for the Eastern region. The coefficient on GINI is
insignificant. The coefficient of lnInnovation is negative and significant at a 10%
level, shown in Columns 3 and 4. Thus, innovation discourages CO2 emission in the
Northeast region. The coefficients of lnRGDP, lnEI and lnStr are statistically signifi-
cant and positively associated to CO2 emission (Columns 1, 2 and 4). However, the
coefficient of GDP square (lnRGDP_sq) is insignificant. Thus, the EKC does not exist
in the Eastern region of China.
The Southwest region is also not much different from the Northeast region, as shown
in Table 5, Columns 5-8. In Column 5, only lnEI is significant and positively related to
CO2. The coefficients on IndStr have a negative association to CO2 and significant at a
1% confidence interval. The results are not the same as the whole country.
Table 5 shows the results of the panel estimation of the Northwest region. The
coefficients of lnGINI and lnRGDP are insignificant, whereas the coefficient of
lnInnovation, lnEI, and lnURB are statistically significant and are positively associ-
ation with CO2. Moreover, lnRGDP is insignificant, but the coefficients of
lnRGDP_sq are positive and significant at a 1% level of confidence (Columns 10-12).
Therefore, the Northwest is at the early stages of the EKC.
The findings are mixed at the regional level. For example, this relationship has
been found to be positive in North China and the Eastern region, negatively signifi-
cant in the Central and South region and insignificant in the rest of three regions.
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 781

10000 20000 30000 40000 50000

(mean) co2
0

1995 2000 2005 2010 2015

year

region = 1 region = 2
region = 3 region = 4
region = 5 region = 6

Figure 1. Trend of mean CO2 emission of six regions of china including region 1 is norther, region
2 is Northeast, region 3 is Eastern, region 4 is Central and South, region 5 Southwest, region 6 is
Northwest. Source: The Authors.

These findings are consistent with previous similar studies (Clarke-Sather, Qu, Wang,
Zeng, & Li, 2011; Wolde-Rufael & Idowu, 2017) that have also found interregional
differences in inequality and carbon emission (i.e. Figures 1 and 2). The possible
research for these regional differences can focus on the differences in economic
growth, human capital, urbanisation, industrial concentration and income level
across regions.

4.3. Innovation as a moderating variable

This study measures whether innovation moderates the relationship between income
inequality and CO2. In Column 1 of Table 6, the coefficient of the interaction term
(lnGINI  Innovation) is positive and is significant and positively related to CO2.
The results indicate that higher income inequality and innovation increases the emis-
sion of CO2. This result indicates that innovation and inequality can cause carbon
emission. However, this relationship can either be stagnant or become stronger if the
country’s carbon emission policy remains the same. lnRGDP is positive and signifi-
cant, implying that economic growth increases the emission of CO2. In addition, the
coefficient of lnRGDP_sq is significant and has a negative relationship with CO2,
thus showing the relationship of EKC with carbon emission.
The results show that innovation is one of the key factors for reducing the income
gap and increasing the carbon emission in China (Figure 3). In the process of
‘economic catch-up’, the Chinese government has heavily concentrated on investing
in R&D activities in the country, which has definitely reduced the income gap in the
country (Liu et al., 2017). Consistent with previous studies (Fan et al., 2006; Koçak &
Ulucak, 2019), technological innovation is a source of high carbon emission. In a
782 A. MUSHTAQ ET AL.

.45 .4
(mean) ginicoefficient
.25 .3 .2.35

1995 2000 2005 2010 2015

year

region = 1 region = 2
region = 3 region = 4
region = 5 region = 6

Figure 2. Trend of mean income inequality of six regions of china including region 1 is norther,
region 2 is Northeast, region 3 is Eastern, region 4 is Central and South, region 5 Southwest, region
6 is Northwest. Source: The Authors.

Table 6. Moderation effect of technology innovation on income.

FE PCSE N-W FGLS
VARIABLES sign (1) (2) (3) (4)
lnGINI þ 0.653 1.379 1.379 1.113
(0.193) (0.584) (0.344) (0.268)
lnInnovation – 0.275 0.475 0.475 0.404
(0.0310) (0.0533) (0.0669) (0.0357)
lnGINI  lnInnovation ? 0.0758 0.166 0.166 0.135
(0.0201) (0.0603) (0.0364) (0.0281)
lnRGDP þ 2.32e-05 8.12e-05 8.12e-05 9.61e-05
(4.50e-06) (1.15e-05) (1.02e-05) (5.83e-06)
lnRGDP_sq – 2.12e-10 8.92e-10 8.92e-10 1.12e-09
(5.87e-11) (1.68e-10) (1.41e-10) (9.49e-11)
lnEI ? 0.0436 0.506 0.506 0.604
(0.0335) (0.0738) (0.172) (0.0389)
lnURB ? 0.0315 0.134 0.134 0.180
(0.0292) (0.0399) (0.0423) (0.0320)
IndStr ? 3.730 1.044 1.044 0.883
(0.338) (0.311) (0.277) (0.223)
Constant 7.691 4.817 4.817 5.280
(0.272) (0.556) (0.608) (0.316)
Observations 565 565 565 565
R-squared 0.829 0.709
N 27 27 27 27
Note: lnRGDP_sq is square of regional GDP. Standard errors in parentheses.
p < 0.01; p < 0.05; p < 0.1.
Source: The Authors.

recent study, Sheng, Miao, Song, and Shen (2019) have observed that innovation
plays a moderating role in the relationship between urbanisation and CO2 emission.
Although previous research has scantly used innovation as a moderator between the
relationship of innovation and CO2 emission, our study has found that technological
innovation is an important moderator in this link. This finding highlights that
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 783

0 .2 .4 .6
100000

Co2 50000

0
.6

.4
gini
coefficient
.2

0
300000

200000
Innovation
100000

0
0 50000 100000 0 100000 200000 300000

Figure 3. Income inequality, innovation and carbon emission. Source: The Authors.

innovation can help to reduce the inequality level and decrease the level of carbon
emission by introducing energy-efficient innovations.

5. Conclusion
The present research has aimed to examine the relationship between income inequal-
ity and carbon dioxide emission through the moderating role of technological innov-
ation in China. This study has employed the panel model, covering the period from
1995 to 2015, and reported interesting empirical findings.
Our findings demonstrate that (i) carbon emission increases as the income gap
widens. (ii) Empirical results also confirm that innovation not only has a direct posi-
tive impact on the CO2 emission but also moderates the relationship of income
inequality and carbon emission at the national and the regional level. (iii) The param-
eters of GDP and GDP square are positive and negative, respectively, which means
that the relationship between economic development and carbon emission is nonlin-
ear. This observation confirms the existence of an EKC in China. Hence, the energy
intensity of the share of energy consumption to GDP is positive and significant, thus
showing that an increase in energy consumption results in an increase of carbon
emission at the national level.
Based on the above findings, this study provides the following policy implications.
Considering the potential of economic growth, along with current carbon emission
policies, China must focus on more efficient policies to decarbonise the economy.
Moreover, technological innovation in the Chinese context, particularly those that are
784 A. MUSHTAQ ET AL.

energy efficient, not only reduces the income gap but also helps to improve environ-
mental quality. Thus, policymakers particularly focus on the growth of R&D activities
in the country. Environmental taxes and incentives for the use of clean energy can
improve the success of this process. The study results show that fair income inequal-
ity can reduce CO2 emission. Therefore, the Chinese government’s policies with
regards to the distribution of income can be used to safeguard the environment from
carbon from. Moreover, a mechanism that reduces the income gap between the rich
and the poor must be present, and the poor should not pay the cost of carbon emit-
ted by the rich. In addition, a mechanism must be present so that China can escape
from the middle-income trap.
Moreover, considering regional differences, the government must pay attention to
the quality of economic growth in all regions so that the residents’ income grows
consistently. In this way, the government can reduce the regional differences and
ensure that all segments of the country across every region can enjoy almost the
same benefits. Regions with high carbon emission should contribute more to the wel-
fare of the poor segment of the country, which not only helps to reduce the detri-
mental effects of CO2 emission but also reduces income disparities.

Disclosure statement
No potential conflict of interest was reported by the author(s).

ORCID
Nizam Ud Din http://orcid.org/0000-0002-6092-4358

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