A step towards energy efficiency in G7 countries: analyzing the role of economic complexity and shadow economy on energy intensity

Abstract

Due to the environmental impacts caused by increasing energy consumption, energy efficiency has become an important policy objective for various countries and governments. While many studies have explored the determinants of energy intensity, the question of how economic complexity and the shadow economy affect energy efficiency has received inadequate attention. This paper connects these issues by studying the direct and complementary effects of economic complexity and the shadow economy on energy efficiency in G7 countries. The empirical findings indicate that both economic sophistication and the shadow economy exert adverse impacts on energy intensity. However, each factor has a harmonizing effect on the other’s influence on energy intensity. While the expansion of the shadow economy reduces the harmful effect of economic complexity on energy intensity, economic sophistication diminishes the damaging impact of the shadow economy. Therefore, the effect of either economic complexity or the shadow economy on energy intensity depends on their interactions and their influence on total energy use. These findings provide governments with policy implications for handling the interrelations between these economic, social, and energy issues.