Spillover effects of economic complexity on load capacity factor in the EU: a spatial econometrics perspective

This study employs spatial econometric methods to examine the effects of economic complexity, renewable and fossil energy consumption, and globalization on the load capacity factor of 25 European Union countries between 1995 and 2021. Addressing a critical gap in existing literature, this research is the first to examine the spillover effects of the load capacity factor and the influence of neighboring countries' economic complexity on the local country's environmental quality. The use of spatial econometric techniques is crucial in this context, as it allows for a deeper understanding of how independent variables in neighboring countries may affect the dependent variables in the local country. This study is novel in testing the Load Capacity Curve (LCC) hypothesis using the Economic Complexity Index (ECI) as a multifaceted indicator of economic development. The study also provides a unique analysis of the LCC hypothesis in a context that has not been previously explored, namely the European Union, and is the first to investigate the transmission of environmental shocks among neighboring countries. The results reveal a positive relationship between ECI and environmental quality but do not support the LCC hypothesis. The spatial econometric estimates reveal that the load capacity factor has substantial spillover effects among EU countries. The direct and indirect coefficients indicate that globalization and fossil energy reduce environmental quality in neighboring countries, whereas renewable energy improves it. The spatial estimates indicate that environmental shocks are transmitted to neighboring countries. Based on these findings, several policy recommendations are discussed.