Shining the dynamics of the Economic Complexity Index on the European Union's climate change strategy: Evidence from the novel approach of MMQR

Abstract

For the European countries, the issue of combating climate change has become a matter of existence. Therefore, it is of extreme importance to present economic-based evidence for these countries' climate action. One emerging yet underexplored area is the environmental implications of the Economic Complexity Index (ECI), which reflects the knowledge intensity embedded in a country's production structure. Despite its relevance, studies examining the relationship between ECI and environmental degradation (ED) in the European context remain scarce. This paper aims to fill this gap by investigating the impact of ECI on ED between 1995 and 2021, focusing on the European Union countries recognized for their environmental sustainability efforts. For this purpose, the relationship between ECI and two of the pioneer indicators of ED-ecological footprint (EFP) and carbon emissions (CO2)-is assessed through two separate models. To address the dynamic and heterogeneous structure of the relationship, the novel Method of Moments Quantile Regression (MMQR) approach is employed. Empirical evidence suggests that ECI contributes to ED, with a stronger impact observed on CO2 emissions than on EFP. Another key finding is that higher levels of ED limit the negative environmental effects of ECI. However, the robustness of the findings is confirmed using the Driscoll-Kraay (D-K) standard error estimator and also, the symmetric causality test of Dumitrescu-Hurlin (D-H). As global leaders in environmental initiatives, EU countries must guarantee the availability and variety of green financing sources to expedite the transition to sustainable production methods in sectors impacting the ECI index via the European Investment Bank and the EU Innovation Fund. Policymakers can provide favorable tax incentives to industries that implement eco-friendly production methods to lower their expenses, thereby rewarding these industries and fostering acceptance of this strategy among sectors beyond this framework. Achieving higher ECI scores through the integration of renewable energy and green technologies is therefore essential for EU countries striving for a greener and more resilient future.