The moderating role of urbanisation in the environmental impact of economic complexity and capital formation: Evidence from OECD countries

Abstract

Environmental degradation remains a pressing challenge for high-income countries as they strive to balance economic growth with ecological sustainability. While previous studies have examined various drivers of environmental outcomes, the interplay between economic complexity, capital formation, and energy use has received limited attention. This study investigates how these factors influenced ecosystem vitality in high-income countries over the period of 2000–2022. Drawing on Ecological Modernisation Theory and the Environmental Kuznets Curve framework, this study employs four panel data estimation methods, Panel-Corrected Standard Errors, Driscoll–Kraay Estimators, Poisson Pseudo-Maximum Likelihood, and Feasible Generalised Least Squares, to address cross-sectional dependence, heteroskedasticity, and potential non-linearities. The analysis reveals three key findings. First, while economic complexity improves ecosystem vitality, this benefit weakens substantially in highly urbanised contexts, indicating diminishing returns to knowledge spillovers in dense urban environments. Second, urbanisation significantly reduces the negative environmental impacts of capital accumulation, suggesting that urban agglomeration enables more sustainable infrastructure deployment. Third, the urbanisation–environment relationship follows an inverted U-shape, with environmental pressures peaking at intermediate development stages before improving in advanced urban systems. Additionally, renewable energy adoption consistently improves ecosystem vitality, whereas energy intensity exerts negative effects, highlighting the urgency of comprehensive energy transition strategies. These findings demonstrate that urbanisation acts not as a uniform force, but as a dynamic variable requiring spatially differentiated strategies: governance and infrastructure optimisation in dense urban cores, complexity-driven innovation in peri-urban regions, and energy-intensity regulations across all development stages. These findings point to an integrated policy framework that addresses (1) density-sensitive economic complexity, (2) circular infrastructure investment, (3) institutional capacity building, and (4) multi-scalar energy transitions to better align urban development with environmental sustainability.