Sectoral economic complexity and environmental degradation: a sectoral perspective on the EKC hypothesis

Abstract

As rising CO2 emissions drive global environmental concerns, addressing climate change and ensuring sustainable development requires a nuanced understanding of the relationship between economic development and environmental degradation. This study introduces the sectoral complexity index (SCI) to measure and analyze the sophistication of individual economic sectors and examines their influence on CO2 emissions across 127 countries from 1995 to 2020. By refining the environmental Kuznets curve (EKC) hypothesis through a sectoral lens, the research uses a cross-sectional quantile regression to capture sector-specific environmental dynamics at varying stages of economic development. The results reveal heterogeneous patterns across sectors and income groups. Key industries, such as Iron & Steel, Machinery, Metal Products, and Mining & Quarrying show reduced CO2 emissions with increased sophistication. Notably, the Iron & Steel and Machinery sectors exhibit a strong transition to lower emissions at the upper-middle-income level, while such transitions in the Metal Products and Mining & Quarrying sectors occurs at the high-income level. These results underscore the sectoral and income-specific dynamics of the environment-economy relationship, highlighting the importance of targeted policies that promote technological innovation and green energy transition in energy-intensive sectors. By offering deeper insights into the interplay between economic development and environmental sustainability, this research contributes to the discourse on the environment–economy relationship and informs policy strategies aimed at fostering sustainable economic development.