Does economic complexity lead to global carbon emissions convergence?

Abstract

This study examines how economic complexity, along with human capital, total factor productivity, foreign direct investment, and trade openness, leads to per capita CO2 emissions (PCO2Es) convergence at club level in the case of 42 countries for the period of 1998-2019. To do so, first, this study implements the Phillips and Sul novel club convergence approach, and results show the existence of three clubs implying the distinct transition paths. Secondly, to examine how the economic complexity affects the PCO2Es in each club, this study applies a panel data model. This study finds the divergence in PCCO2Es when all 42 countries are considered together. However, there is existence of three clubs that are converging to their steady states due to economic complexity along with control variables. Further, the impact of economic complexity on PCO2Es is found to be different for the three clubs. For instance, a positive and significant relationship has been noted for clubs 1 and 2 (high and moderate PCO2Es). This implies that economic shifts in these countries degrade the environment. While in the case of club 3, we find a negative and significant relationship suggesting an improvement in the environmental quality. From the policy point of view, it can be suggested that environmental policies should be designed at the club level by targeting economic complexity. Further, club 1 and club 2 may improve the environmental quality by adopting some of the successful environmental policies from club 3 countries.