How diversification in energy and economic sectors influences environmental quality: International evidence

Abstract

Diversification in economic and energy sectors has been proven to contribute enormously to economic development. However, given the sustainability targets, the effectiveness of those strategies in alleviating environmental deterioration is ambiguous. This research examines how economic complexity and energy diversification could affect the levels of carbon emissions among economies that are in different phases of economic growth. Applying a novel panel quantile regression to a sample of 66 economies from 1995 to 2018, dividing into high-income, upper-middle-income, and lower-middle-income subgroups, allows us to reveal and compare the heterogeneous impacts across different levels of carbon emissions and income levels. The empirical results reveal that the environmental impacts of both economic complexity and energy diversification are not only heterogeneous across quantiles of carbon emissions but also vary among high-, upper-middle-, and lower-middle-income countries. While economic sophistication improves environmental sustainability in high- and upper-middle-income countries, it exacerbates ecological degradation in lower-middle-income countries. While energy diversification benefits environmental quality across all quantiles of carbon emissions in both upper and lower-middle-income countries, a harmful effect of energy diversification is only found in some high-income economies. Our research findings suggest that although energy and economic diversification could be a viable path for upper-middle-income countries to attain sustainability targets, these strategies should be combined with other environmental protection strategies to demonstrate desirable environmental benefits in high-income and lower-middle-income countries.