Economic complexity, institutional quality, and climate risk: A multidimensional analysis

This study utilizes the Panel Vector Autoregressive (PVAR) and dynamic panel threshold models, using data from 112 countries from 2014 to 2021. Climate risks’ response to an institutional quality shock is negative in the first three periods, followed by a persistent positive adjustment from the fourth to approximately the seventh period, before stabilizing and converging to zero. This dynamic is consistent with institutional theory and the environmental Kuznets curve mechanism, whereby improvements in institutional quality initially reduce climate risks through stronger regulatory enforcement and monitoring capacity, but subsequently facilitate economic expansion and industrial activity that temporarily increase environmental pressure before convergence to equilibrium. Furthermore, the quantity of the institutional quality threshold is -0.0894. Below the threshold, institutional quality has a positive impact on climate risks, while above the threshold, this effect becomes negative. Economic complexity increases climate risks in all cases, but this effect becomes stronger when institutional quality is higher. Policymakers should enhance institutional quality and reinforce environmental regulations to ensure that rising economic complexity contributes to mitigating climate risks.