Income inequality and the trade-off between socio-economic and ecological goals

No country currently achieves basic social needs without exceeding ecological limits, yet the environmental cost of attaining given living standards differs substantially across countries. This paper examines whether income inequality moderates this trade-off. Unlike much of the literature, which emphasizes within-country dynamics, we focus on cross-country variation. Employing a cross-sectional time-series panel of 124 countries from 1992–2015, we estimate models with Mundlak decompositions that isolate between-country differences. Our results show contrasting patterns: in low- and high-income countries, greater income equality is linked with lower environmental costs at a given standard of living. In contrast, in middle-income countries, greater inequality is associated with lower ecological damage. We interpret these differences through variation in the marginal propensity to consume and to emit, suggesting that distributive structures shape how societies navigate the trade-off between living standards and environmental sustainability.