Middle-income countries are currently undergoing massive structural changes towards more industrialized economies. In this paper, we carefully examine the impact of these transformations on the environmental quality of middle-income countries. Specifically, we examine the role of sector value addition to GDP on CO2 emission nexus for middle-income economies controlling for the effects of population growth, energy use, and trade openness. Using recently developed panel methods that consider cross-sectional dependence and allow for heterogeneous slope coefficients, we show that energy use and growth of industrial and service sectors positively explain CO2 emissions in middle-income economies. We also find that population growth is insignificantly associated with CO2 emission. Hence, our paper provides a solid ground for developing a sustainable and pro-growth policy for middle-income countries.
Keywords: CO2 emission; Energy use; Middle-income countries; Output; Trade.