Nonlinear dynamics between economic diversification and carbon emissions across transition phases in Saudi Arabia

Saudi Arabia is pursuing two major goals simultaneously: reducing carbon emissions significantly and expanding its economy beyond oil, as part of Vision 2030. But despite these efforts, it still ranks among the countries with the highest per capita carbon emissions. Existing empirical studies rarely examine how the environmental footprint of diversification evolves across different stages of this transition. This paper addresses that gap by analyzing how the relationship between economic diversification and emissions changes across different stages of the transition. Using the Economic Complexity Index within a Multiple-Threshold ARDL (MTARDL) framework from 1995 to 2020, we examine how diversification affects emissions in different phases, while taking into account factors like income levels, electricity use, trade, and financial development. The results show that the relationship between diversification and emissions is not constant—it varies across stages. In the early stages, diversification has little effect on emissions. As it progresses, emissions temporarily decline because of improved efficiency. However, in the later stages, emissions start to increase again, mainly because of the scale of new economic activities. The increase in emissions in the final stage is economically modest, suggesting that while emissions do go up, the effect isn’t extremely strong. In the long run, income growth follows a pattern similar to the Environmental Kuznets Curve, meaning that as income rises, emissions initially increase but may eventually decrease. However, trade openness and electricity use are linked to higher emissions over time, which shows the importance of making sure that trade expansion and power sector development are supported by low-carbon technologies and standards. These results show that the success of Vision 2030 will depend on careful policy sequencing. Diversification efforts must be directed toward sectors that are environmentally sustainable and knowledge-intensive. Furthermore, leveraging green finance can mitigate the risk of locking into carbon-intensive industries during subsequent phases of economic development.