EU Regional EKC Clusters

Economists have always been intrigued to understand the complex relationship between economic growth and environment. The debate about a sustainable future, decarbonisation and the circular economy have increased focus on ways to deal for a better transition. European Union has invested highly to deal climate change, considerable amount of policies are introduced to attain a zero carbon society. One such policy is the emission trading system (commonly termed as EU-ETS) introduced after 2005. Various research papers have concluded that EU-ETS have been beneficiary to combat climate change at country-level. We want to understand the impact of EU-ETS on economic growth at European regional level (NUTS-2 level) to do such we use traditional environmental Kuznets curve (EKC) setting. This paper exploits one of the methodologies to unveil heterogeneity to determine groupings from the data. Using a Classifier Lasso framework that applies latent group methodologies to address unobservable heterogeneity, we find three distinct groups which can also treated as environment clusters. We also use European pollution registry database to check for similar heterogeneity and find three distinctive groups or clusters. The results provide a new perspective on potential impacts illustrated in the EKC literature that might be relevant to policy makers