Close ties: How trade dynamics and environmental regulations shape international dependence on oil

Cappelli F., Carnazza, G. 2025 – Energy Policy

The energy crisis triggered by the war in Ukraine has brought a structural reality into sharp focus: The European Union (EU) remains highly exposed to – and dependent on – imports of fossil fuels. More specifically, the issue is not merely the volume of oil imports as such, but also, and above all, the countries through which our energy security is mediated.

In a recent article, “Close ties: How trade dynamics and environmental regulations shape international dependence on oil”, published in Energy Policy, Federica Cappelli and Giovanni Carnazza investigate these mechanisms by combining complex network theory (so-called network analysis) with an econometric approach applied to the 27 EU Member States over the period 1999-2019. More specifically, the aim of the analysis is to understand the determinants of greater or lesser dependence on oil imports by jointly considering three groups of factors: the structure of trade relations, environmental policies, and technological innovation. From a methodological perspective, the authors employ a GLS panel-data model to account for the fact that European countries are not independent of one another and that the error terms may be correlated. At the same time, they introduce lagged explanatory variables to mitigate reverse causality. Finally, the robustness of the findings is tested by using alternative models and methodologies.

The underlying idea is that energy dependence is not simply the outcome of prices and demand, but rather the product of two persistent constraints. The first is technological lock-in: infrastructures, skills, habits, and past investments make it costly and slow to replace fossil-fuel-based systems, even when better alternatives are available. The second – and often underestimated – is trade lock-in: when a country becomes entrenched in privileged supply relationships with major exporters, diversification becomes difficult and the effects of geopolitical shocks tend to be amplified.

To measure these phenomena, the study reconstructs the entire crude oil trade network and calculate three specific centrality indicators. First, import dependence is proxied by weighted in-degree centrality, which measures the overall value of a country’s imports from the global network. Second, the presence of privileged relationships with influential nodes is captured by eigenvector centrality, which tends to increase when a country is more strongly connected to exporters that are central within the system. Finally, import concentration is measured through the Herfindahl-Hirschman Index, which we also recast in a novel geopolitical form, weighting it by the political instability of supplier countries. To further investigate the characteristics of the international crude oil import network, a chord diagram is included, considering the trade linkages among 27 EU countries and the rest of the world as a whole (denoted by W). In Figure 1 the arcs represent countries, the chords represent trade flows, and the width of each arc measures that country’s share of total imports.

The initial results are clear-cut. On the one hand, energy intensity – i.e., the amount of energy used per unit of GDP – pushes countries towards greater dependence, and this represents the quantitative legacy of technological lock-in. On the other hand, the second centrality indicator shows that countries with closer trade ties to major oil exporters are more vulnerable from an energy-security perspective. This reflects the operation of trade lock-in, which tends to rigidify national-level choices.

The most relevant part of the analysis, however, concerns the effectiveness of environmental policies in reducing energy dependence. In this respect, the analysis distinguishes between demand-pull instruments, which act on prices and energy demand, and technology-push instruments, which reduce the costs of innovation. Among the former, the Implicit Tax Rate on Energy and the share of environmental tax revenues in GDP are negatively associated with energy dependence: on average, greater fiscal stringency on energy translates into lower import values, consistently with a disincentive effect on consumption and a shift towards cleaner energy mixes. Among the latter, the role of public R&D expenditure in the energy sector emerges robustly, and even more so does the ability to turn such expenditure into concrete innovative outcomes.

A crucial point emerging from the analysis is that innovation alone is not enough. What also matters is the productive structure of the economy. The reduction in dependence brought about by innovation is in fact stronger in countries that enjoy a comparative advantage in the export of low-environmental-impact technologies. In other words, innovation has a meaningful effect on energy dependence only when it is scaled up through production and secures market shares internationally: the transition is not only environmental, but also competitive.

Finally, the authors find no evidence of the green paradox, according to which, if economic agents anticipate more stringent climate policies in the future, fossil-fuel producers may bring forward extraction to sell before demand falls or restrictions tighten. On the contrary, the results lend greater support to the divestment effect hypothesis, whereby credible and stringent policies depreciate the capital and rents associated with fossil fuels, shifting expectations and investments towards clean technologies and, overall, reducing oil demand.

In the current European policy debate, this contribution suggests two operational messages. First, energy security cannot be achieved simply by increasing the number of suppliers, but by reducing the likelihood of trade lock-in with geopolitically sensitive and unstable nodes. In this sense, diversification must be interpreted in light of the characteristics of the countries that make up the trade network. Second, the most effective climate policy is one that combines pricing and fiscal consistency with public investment in innovation and industrial capacity. Otherwise, the energy transition may fail to put an end to energy dependence, merely shifting it from imports of fossil fuels to imports of technologies and components. Looking ahead, coordinated EU policies supporting R&D, value chains, and low-carbon exports could simultaneously reduce oil dependence and geopolitical vulnerability.