The assessment of economic complexity and financial development on environmental quality: evidence for panel cointegration approach

The environment plays a crucial role in mitigating ecological catastrophes by safeguarding the atmosphere. Environmental quality in developed nations is influenced by various factors, with economic complexity and financial development indices standing out prominently among other influencing factors. This study investigates the impact of economic complexity (specifically, trade and technology) and financial development (including global, institutional, and market indices) on carbon dioxide (CO2) emissions within a panel of G20 countries using multiple models. Real GDP, along with renewable and non-renewable energy consumption, serves as explanatory variables in the empirical modeling. Employing panel cointegration techniques, the study covers the period from 1999 to 2021. Empirical findings reveal that all variables are integrated of order one, and the cross-sectional dependence test (CD) suggests the application of first-generation unit root tests. Pedroni cointegration tests further confirm long-run cointegration in all models. The Fully modified OLS (FMOLS) and the Canonical Cointegrating Regression (CCR) long-run estimations indicate that global, institutional, and market financial indices, as well as the economic complexity index of trade, are associated with decreased CO2 emissions. Conversely, the economic complexity index of technology is linked to increased CO2 emissions in the long run. Interaction variables linking financial development indices with economic complexity indices have demonstrated a significant and negative impact on CO2 emissions. These results carry important policy implications, suggesting that G20 countries should prioritize export diversification toward more complex, energy-efficient products and leverage financial development to support structural transformation. Additionally, by using financial tools to enhance technological sophistication (e.g., patent quality), governments can help reverse the adverse effects of technological complexity on the environment, thereby fostering long-term CO2 mitigation.