Environmental policy and human capital inequality: A matter of life and death

This paper analyzes the economic implications of an environmental policy when we account for the life expectancy of heterogeneous agents. In a framework in which everyone suffers from pollution but health status also depends on individual human capital, we find that the economy may be stuck in a trap in which inequality rises steadily, especially when the initial pollution intensity of production is too high. We emphasize that such inequality is in the long run costly for the economy in terms of health and growth. Therefore, we study whether a tax on pollution associated with an investment in pollution abatement can be used to address this situation. We show that a stricter environmental policy may allow the economy to escape from the inequality trap while enhancing the long-term growth rate when the initial inequality in human capital is not too large.