This study empirically investigates the dynamic effects of climate change on within-country income inequality. Using panel data of 17 APEC member economies, I estimate impulse responses via the local projection method. Temperature and precipitation shocks, defined as deviations of temperature and precipitation from their historical norms, are also exploited to measure country-specific climate change. The empirical results reveal the following. First, temperature and precipitation shocks deteriorate income inequality measured by the Gini index; these effects are long-lasting. Moreover, asymmetric effects exist: heatwaves and droughts more significantly increase income inequality than coldwaves and floods. Lastly, current redistribution policies do not seem to effectively mitigate those adverse effects. I also discuss implications of carbon pricing/tax and environmental taxes related to income inequality.

Executive Summary

I. Introduction

II. Related Literature

III. Econometrics and Data

1. Local Projections

2. Identification Strategy

3. Data

IV. Empirical Results

1. Results in the Linear Model

2. Results in the Non-linear Model

3. The Role of Redistribution Policy

V. Discussion and Policy Implications

VI. Concluding Remarks

References