Economic complexity-carbonization nexus in the European Union: A heterogeneous panel data analysis

The economic contributions of economic complexity, characterized by knowledge, sophistication, and diversification, are well documented. However, its decarbonization impacts remain unclear and need more research, especially in complex economies. Therefore, this study tests the economic complexity effects on carbon dioxide (CO2) productivity (output per emissions) and CO2 intensity (emissions per capita) for 22 European Union countries from 1995 to 2018. The study follows a cointegration framework considering heterogeneity and cross-country dependence diagnostics. Augmented mean group estimates confirm that higher economic complexity reduces CO2 productivity and increases CO2 intensity. Additionally, energy efficiency (output per energy supply) improvement is found as a key driver of decarbonization. Higher per capita income intensifies emissions, but non-linear income effects do not reveal an environmental Kuznets curve pattern. Deindustrialization improves decarbonization, while environmental tax revenues have insignificant influences. A bidirectional causality is established between CO2 intensity and economic complexity. Overall evidence suggests policies favoring energy-efficient green complexity.