Drivers of eco-efficiency and the criticality of environmental policy stringency in OECD countries

Existing studies show that environmental policies can improve eco-efficiency, but their moderating effect has been ignored in the literature. In this study, we investigate how the multidimensional reality of environmental policy stringency influences the interplay between export diversification and eco-efficiency in the nine most economically diversified OECD (Organisation for Economic Co-operation and Development) economies. Adopting balanced panel data from 1995 to 2020, empirical results based on Method of Moments Quantile Regression indicate that environmental policy stringency and technological innovation improve the ecoefficiency of OECD countries. Export diversification, energy utilisation, and financial deepening, on the other hand, are found to have negative relationships with eco-efficiency in OECD countries. The results also indicate that the relationship between economic growth and eco-efficiency follows a U-type pattern, confirming the environmental Kuznets curve hypothesis. Furthermore, the marginal effect of export diversification on ecoefficiency increases as environmental policy stringency increases, suggesting that a simultaneous increase in export diversification and environmental policy stringency can improve eco-efficiency. The implication of these findings is that export diversification policies must be combined with more stringent environmental policies and programs to facilitate eco-efficiency and ecological sustainability.