The dynamic impact of economic growth and economic complexity on CO2 emissions: An advanced panel data estimation

Abstract

The goal of this study is to explore the causal relationship among economic growth, economic complexity and CO2 emissions by using panel data of 95 countries for the period 1996–2015. A novel panel Granger approach proposed by Juodis et al. (2021) is adopted. Under this approach, we can explore the Granger causality in homogeneous or heterogeneous panels. To uncover the heterogeneous causal effects at different income levels, this study further divide the sample into three groups according to their annual income levels. Empirical results show that there are bi-directional causalities among economic growth, economic complexity and CO2 emissions for all groups. However, the magnitudes of the effects are heterogeneous for different groups. As to low-income countries, economic complexity is positive and significant for CO2 emissions, while CO2 emissions are negative for economic complexity. Furthermore, there is a positive interaction between economic complexity and CO2 emissions for middle-income countries. Regarding high-income countries, however, increasing economic complexity might effectively reduce CO2 emissions, and CO2 emissions can significantly increase economic complexity. Additionally, economic complexity will prominently decrease GDP in low-income countries. These findings are robust to different economic complexity indexes. Our results suggest that both developing and developed countries should set a reasonable CO2 emissions target, and on this basis, maintain a good balance between economic complexity and CO2 emissions.