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Role of economic complexity and environment policy stringency in mitigating the carbon footprint: evidence from Global South

RSA Blog
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In the last two decades, there has been a considerable shift in the patterns of global growth in terms of trade and investment from the “Global North” towards the “Global South” economies particularly Brazil, China and India. However, as a flip side, these upsurged developments and growth are imposing the environmental cost across the globe particularly in these nations which have left a considerable carbon footprint on the planet. Global South has contributed significantly to carbon emissions over the past 30 years due to its high energy intensity and usage of fossil fuels, accounting for roughly 63% of all greenhouse gas emissions today.


On the contrary, these economies are under the “energy poverty crisis” and the government is undertaking the fiscal policy measures by subsidizing the production and consumption of fossil fuels. However, such polices have disproportionately benefit the better off and create overall market distortions that result in wasteful energy consumption. Under these circumstances, the government’s need to impose stringent environmental laws, construct an emissions permit system, or levy Pigouvian taxes in order to reduce carbon emissions and maintain a greener ecosystem for generations to come.


Role of stringent environment policy in mitigating the emissions


These policies are characterized by the establishment of specific targets and standards aimed at driving reductions in CO2 levels, encompassing various strategies such as tradable permits, carbon pricing mechanisms, incentives for renewable energy adoption, and regulations governing industrial emissions. Through the implementation of these regulations, governments endeavor to incentivize stakeholders to transition toward cleaner technologies, reduce energy consumption, and adopt practices that effectively mitigate carbon emissions. Furthermore, the implementation of stringent environmental policies serves to cultivate heightened public awareness regarding the adverse environmental impacts of CO2 emissions. This increased awareness often translates into notable changes in individual and collective behaviours, fostering the adoption of energy-efficient practices, reductions in fossil fuel consumption, and robust support for sustainable initiatives within communities.


Others are skeptical about the effectiveness of these policy instruments in mitigating carbon footprint in economies, especially amongst the developing or emerging economies. They assert that such policies and regulations for mitigating carbon emissions may result in a counterproductive effect of increased emissions also known as “Green Paradox”. These regulations don’t affect the supply side of fossil fuel production; instead, they primarily address the demand side of externalities, or the consumption of fossil fuels. The underlying argument is that environmental policy declarations have a period of delay before they are implemented. This delay will enable owners of fossil fuels to anticipate that higher environmental levies might reduce demand for their resources. As a result, these environmental regulations push these resource owners to extract more of their resources more rapidly. The producers of fossil fuels perceive that these environmental rules will make their assets worthless, thus they are more inclined to increase production of fossil fuels in order to exacerbate global warming rather than mitigating it.


Does higher economic complexity make any difference?


In order to pull apart the differing effects, it is necessary to understand the determining factors of carbon emissions given that the relationship between environmental policy coherence and CO2 emissions is ambiguous. Recently, there has been a significant focus on the economic complexity alongside the idea that technology innovation holds the potential to reduce global emissions. Economic complexity is defined as a specific structural change in the production structure as it moves towards technological advancement and knowledge-based production processes. Classical development theories link economic progress to knowledge and technology advancements, structural changes, and the diversity and complexity of the ensuing products and services. It indicates a greater capacity for producing and exporting more complex, higher-value-added products.


Given this backdrop, we have studied higher economic complexity may be a mediating factor in the relationship between environment stringency and carbon emissions if the Global South economies of Brazil, China, India, Indonesia, South Africa and South Korea are on a growth trajectory and producing more complex products resulting in relatively higher value-added for each unit of emission, and their production uses newer and more energy-efficient technologies, it might lead environment stringent policy to have a negative impact upon carbon emissions.


Our key findings reveal a nuanced dynamic: while increased stringency initially correlates with heightened emissions, economic complexity mitigates this impact, showcasing a diminishing impact of stringent policies on emissions. Stringent environment regulations should be implemented in tandem with the structural changes towards producing complex high-end products involving more energy efficient technology in “Global South” economies, Brazil, China, India, Indonesia, South Africa, and South Korea to reduce the carbon footprint significantly. As a policy recommendation, these nations along with other developing economies should put more stress on embedding environmentally friendly technology in the production structure and diversify its product mix and exports.  This further can mitigate carbon footprint in the presence of stricter environment laws and regulations by fostering efficiency and embedding environmentally friendly technology in diversified exports.  Our research aims to contribute to the understanding of the interplay of environmental policy stringency, economic complexity, and CO2 emissions, offering valuable insights into crafting effective policies that balance environmental sustainability with economic growth in Global South economies.



Dr. Nupur Nirola, ( Assistant Professor at the Jindal School of International Affairs, O.P. Jindal Global University, India. She is an applied macroeconomist with research interests in regional growth economics, institutional economics and fiscal federalism framework. She has works published in international journals like Annals of Regional Science, Heliyon, Economic Change and Restructuring.


Arth Agarwal is a final year undergraduate student and a research intern at the Centre for Security Studies, Jindal School of International Affairs, O.P. Jindal Global University, India. He is a recipient of the Emile Boutmy Scholarship (Issued by Sciences Po, Paris) and has been published on various issues like Leadership Dynamics in The Global South and meteoric rise of the Chinese Geopolitical/Geoeconomic Apparatus.


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