The Link between Economic Complexity and Carbon Emissions in the European Union Countries: A Model Based on the Environmental Kuznets Curve (EKC) Approach

Abstract

The aim of the paper is to apply the Environmental Kuznets Curve (EKC) model in order to explore the link between economic complexity index (ECI) and carbon emissions, in 25 selected European Union (EU) countries from 1995–2017. The study examines a cointegrating polynomial regression (CPR) for a panel data framework as well as for simple time series of individual countries. In the model is also included the variable ‘energy intensity’ as main determinant of carbon emissions. Depending on economic complexity, the CO2 emissions pattern was found to exhibit an inverted U-shaped curve: in the initial phase, pollution increases when countries augment the complexity of the products they export using and after a turning point the rise of economic complexity suppress the pollutant emissions. The panel cointegration test indicates a long-run relationship between economic complexity, energy intensity and carbon emissions. It was also found that a rise of 10% of energy intensity would lead to a 3.9% increase in CO2 emissions. The quadratic model incorporating ECI is validated for the whole panel as well as for six countries (Belgium, France, Italy, Finland, Sweden and the United Kingdom). The graphical representation of the EKC in these countries is discussed. Policy implications are also included.