Adjusting Chinese income inequality for environmental equity

Given the extensive discussion of China's air pollution and urban income inequality problems, relatively little attention has been paid to any relationship which may exist between the two. This paper seeks to do so, by exploring the existence of environmental equity in China. Specifically, we first calculate traditional measures of urban income inequality (the Gini coefficient and Theil's T and L indices) for the years 1995 and 2004. Then, we estimate ‘pollution-adjusted’ incomes using China-based health functions and economic valuation studies, and recalculate the income (or now welfare) inequality measures. The results indicate that as pollution cleanup efforts gain traction over time, the regressive consequences of pollution may diminish. We thus conclude with an encouraging note for developing countries: improving welfare distribution can coexist with an improving environment.