Globalization spatial spillover effects and carbon emissions: What is the role of economic complexity?

This paper employs the spatial panel model to explore the interaction between globalization and economic complexity on CO2 emissions. To capture different potential mechanisms of diffusions, this paper builds hybrid W matrices based on trade distance and geographical distances. Further, to reduce small sample bias and capture “true interactions” across countries, the multiple imputation algorithm is used to address missingness pattern. This approach can efficiently enhance data quality and inferences validity. Furthermore, to distinguish the spatial spillover accurately, cross-sectional averages are used to solve the issue caused by the omission of common factors or shocks that affect differently the different spatial units. Results show that there is a positive spatial spillover of CO2 emissions from neighboring countries to the local country. Furthermore, the results show that globalization on its own has no significant effect on CO2 emissions in the local country but decreases CO2 emissions in neighboring countries. More importantly, when taking economic complexity into account, high level of economic complexity may decrease the negative indirect impact of globalization on carbon emissions. The more complex countries are to the economic structure, the less is the negative impact of globalization on carbon emissions in spatially related countries. These findings highlight that the role of economic complexity and spatial spillovers effects are imperative to be considered. Based on this study, several policy recommendations are provided.