Role of economic complexity and government intervention in environmental sustainability: Is decentralization critical?

Abstract

While climate change mitigation agenda and energy governance are the central concerns of climatologists and energy-environmental scientists, the mainstream literature seems silent on whether a decentralized governance structure is desirable for complex economic systems and governmental intervention approaches to realize sustainable environments. To frame this critical research gap, we investigate the contribution of fiscal decentralization in moderating the influence of economic complexity and government intervention on energy and carbon efficiency in the presence of real GDP per capita. We employ a panel method of moments quantile regression (MQR) on data from selected seven fiscally decentralized OECD countries over the 1995-2018 period. The empirical results uncovered that economic complexity causes a drop in energy efficiency (at 1, 5, and 10% significance levels), with a more magnified effect in countries with low environmental sustainability levels. Conversely, our findings exerted that government intervention discourages energy and carbon intensity (at diversified significance levels as per probability scores of 0.01, 0.05, and 0.10), with heterogeneous degrees of impact across diversified model specifications. Regarding direct influence, our outcomes exhibited that expenditure and revenue decentralization aid in energy and carbon efficiency. Concerning moderation effects, expenditure and revenue decentralization successfully rejuvenate the environmental sustainability effects of economic complexity and government intervention (at 1 and 5% significance levels). Finally, our study gauged that the EKC phenomenon exists among the sampled OECD members, indicating that economic growth in the region will be the driving force behind the region's long-term environmental sustainability. Estimation results are robust to the alternative dependent variable, carbon intensity and alternative econometric technique, ordinary least squares with Driscoll-Kraay standard errors. A fiscally decentralized paradigm is desirable from a policy standpoint for government intervention in complex economies to realize environmental sustainability goals.