The effect of institutional quality on the relationship between income inequality and environmental quality in Iran

Document Type : Research Paper

Authors

Department of Economics, Faculty of Economics, Management and Administrative Sciences, Semnan University, Semnan, Iran .

10.22059/jne.2025.398031.2823

Abstract

The main objective of this research is to examine the role of institutional quality on the relationship between income inequality and environmental quality, using data from the period 1984-2022 in Iran. For this purpose, per capita carbon dioxide (CO2) emissions and the Gini coefficient are used as indicators of environmental pollution and income inequality, respectively. Furthermore, the institutional quality index is calculated based on the arithmetic mean of indicators such as government stability, socio-economic conditions, investment outlook, corruption, administrative system quality, rule of law, and democratic accountability, drawn from twelve political risk indicators in the International Country Risk Guide (ICRG). The results from applying the Dynamic Ordinary Least Squares (DOLS) technique indicate that in the long term, the impact of income inequality on CO2 emissions is positive and statistically significant, while the interactive effect of institutional quality and income inequality on CO2 emissions is negative and significant. Therefore, Improvements in institutional quality weaken the positive relationship between income inequality and CO2 emissions. Other results indicate that an increase in per capita fossil fuel consumption leads to higher environmental pollution, while the share of renewable energy in total energy consumption has a negative and significant effect on environmental pollution. In line with the results, it is recommended that economic policymakers mitigate the positive effect of income inequality on environmental pollution by strengthening institutional quality and governance transparency.
JEL Classification: Q53, E02, O15, O53

Keywords

Abd Razak, F.D., Khalid, N., Ali, M.H., 2021. Asymmetric Impact of Institutional Quality on Environmental Degradation: Evidence of the Environmental Kuznets Curve. Sustainability 13(22), 12507.
Afroz, R., Limon, R.A., Afroz, S., 2022. Role of human capital, income inequality and renewable energy consumption on CO2 mitigation in Malaysia.
Borghesi, S., 2006. Economic inequality and environmental degradation: Revisiting the EKC hypothesis. Ecological Economics 57(3), 544-571.
Boyce, J. K., 2007. Is inequality bad for the environment? Revisited. Research in Social Problems and Public Policy 15, 267–288.
Boyce, J.K., 1994. Inequality as a cause of environmental degradation. Ecological Economics 11(3), 169-178.
Chen, W., Li, K., Zhang, Y., Sun, X., 2020. Income inequality, energy consumption, and carbon emissions: Evidence from a global panel of G20 countries. Energy Economics 89, 104814.
Ebrahimi, M., Babaei Agh Esmaili, M., Kafili, V., 2016. Income Inequality and Environmental Quality: A Case Study of Iran. Econometric Modelling 2(1), 59-79. (In Persian)
Fatima, N., Zheng, Y., Guohua, N., 2022. Globalization, institutional quality, economic growth and CO2 emission in OECD countries: An analysis with GMM and quantile regression. Frontiers in Environmental Science 10, 967050.
Febrianto, R., 2018. Economic inequality and carbon emissions in Southeast Asia. Journal of Environmental Accounting and Management 6(4), 379-393.
Hao, Y., Chen, H., Zhang, Q., 2016. Will income inequality affect environmental quality? Analysis based on China's provincial panel data, Ecological Indicators 67, 533-542.
Harati, J., Dehghani, A., Taghizadeh, H., Amini, T., 2016. The Effects of Economic and Political Inequality on Quality of Environment in Selected Countries: GMM Panel Analysis. Journal of Economic Modeling Research 7(23), 197-232. (In Persian)
Jianu, I., Dobre, I., Bodislav, D.A., Radulescu, C.V., Burlacu, S., 2020. The implications of institutional specificities on the income inequalities drivers in European Union. arXiv preprint arXiv: 2007.11436.
Kanie, N., Biermann, F. (Eds.). 2017. Governing through goals: Sustainable development goals as governance innovation. Mit Press.
Kartal, M.T., Samour, A., Adebayo, T.S., Depren, S.K., 2023. Do nuclear energy and renewable energy surge environmental quality in the United States? New insights from novel bootstrap Fourier Granger causality in quantiles approach. Progress in Nuclear Energy 155, 104509.
Khademol Hosseini, J., Mousavi, S.N., Khodaparast Shirazi, J., 2022. The effect of income inequality on SO2 and SPM emissions. Iranian Journal of Agricultural Economics and Development Research 53(2), 539-551. (In Persian)
Kouadio, H.K., Gakpa, L.L., 2022. Do economic growth and institutional quality reduce poverty and inequality in West Africa?. Journal of Policy Modeling 44(1), 41-63.
Lalkhezri, H., Karimi Potanlar, S., 2019. Evaluation the Effect of Income Inequality on Carbon Dioxide Emissions in Iran (with Emphasis on Energy Intensity). Iranian Economic Issues 6(1), 181-200. (In Persian)
Le, T.H., Chang, Y., Park, D., 2016. Trade openness and environmental quality: International evidence. Energy Policy 92, 45-55.
Mackenbach, J.P., Stirbu, I., Roskam, A.J.R., Schaap, M.M., Menvielle, G., Leinsalu, M., Kunst, A.E., 2008. Socioeconomic inequalities in health in 22 European countries. New England Journal of Medicine 358(23), 2468-2481.
Marsiliani, L., Renström, T.I., 2000. Time inconsistency in environmental policy: Income inequality and growth. Oxford Economic Papers 52(3), 497-520.
Mozaffari, Z., Vaysi, F., 2023. The Effect of Income Inequality on Ecological Footprint in Iran. Stable Economy Journal 4(3), 82-105. (In Persian).
Ongo Nkoa, B.E., Song, J.S., 2022. Does institutional quality increase inequalities in Africa?. Journal of the Knowledge Economy 13(3), 1896-1927.
Pata, U.K., Samour, A., 2022. Do renewable and nuclear energy enhance environmental quality in France? A new EKC approach with the load capacity factor. Progress in Nuclear Energy 149, 104249.
Ravallion, M., Heil, M., Jalan, J., 2000. Carbon emissions and income inequality: An overview. Oxford Economic Papers 52(4), 651–669.
Scruggs, L., 1998. Political and economic inequality and the environment. Ecological Economics, 26(3), 259–275.
Shahabadi, A. Samari, H., Nemati, M., 2017. Factors affecting environmental performance index (EPI) in selected OPEC countries. Iranian Economic Review 12(3), 457-467.
Shobande, O. A., Ogbeifun, L., Tiwari, A.K., 2024. Unlocking information technology infrastructure for promoting climate resilience and environmental quality. Technological Forecasting and Social Change 198, 122949.
Torras, M., Boyce, J.K., 1998. Income, inequality, and pollution: A reassessment of the environmental Kuznets curve. Ecological Economics 25(2), 147-160.
Ullah, A., Ali, A., 2024. Investigating corruption, income inequality, and environmental degradation in Pakistan: A time series analysis.
United Nations Framework Convention on Climate Change. Paris Agreement. UNFCCC, 2015.
Ur Rehman, S., Gill, A.R., 2023. Digital Transformation, Institutional Quality, and Environmental Sustainability: Evidence from SAARC Countries. iRASD Journal of Economics 5(2), 392-407.
Worldometers. (2022). Iran COemissions. Worldometers.
Xaisongkham, S., Liu, X., 2024. Institutional quality, employment, FDI and environmental degradation in developing countries: evidence from the balanced panel GMM estimator. International Journal of Emerging Markets 19(7), 1920-1939.
Yang, X., Liu, Y., Zhang, H., Wang, J., 2022. The impact of income inequality and institutional quality on CO₂ emissions: Evidence from emerging economies. Environmental Economics and Policy Studies 24(2), 178-194.
Zhang, L., Zhao, Q., Wu, F., 2022. Reassessing the environmental Kuznets curve in the context of global inequality. International Journal of Environmental Research and Public Health 19(8), 10234.