Unraveling the environmental Kuznets curve: the influence of economic diversity, energy efficiency, and industrial dynamics on carbon emissions in developing economies

A new path of economic development among emerging and developing nations has a distinct impact on the environment than seen in the past. The current study attempts to examine how these growth patterns in the developing world have impacted the degradation of the environment. This study contends that merely considering GDP per capita and the proportion of manufacturing in GDP fails to encapsulate the complete growth dynamics of developing and emerging countries. Consequently, such an approach does not adequately reflect the impacts of environmental degradation. As a result, the economic complexity index (ECI) is introduced to the model to reflect the full effects of new growth trajectories on CO₂ emissions by using the Panel Fully Modified OLS (PFMOLS) model of 67 emerging and developing countries during 1996–2020. The results indicate that the complexity of developing and emerging economies, on the one hand, raises CO₂ emissions, likely through expanding economic activities (the scale effect). Moreover, ECI reduces CO₂ emissions by moving the economy toward more high-tech and environmentally friendly technologies and industries and favorable changes in the energy mix (the efficiency effect). Overall, the empirical outcomes emphasize that the final impact of ECI on the environment was negative in most samples, indicating an improving impact of economic complexity on environmental degradation, reflecting that the “efficiency effect” outweighed the “scale effect.” The findings imply that technology and knowledge transfer are essential for energy efficiency and sustainability.