Is economic freedom a panacea for environmental sustainability? Global and regional evidence

Environmental degradation continues to escalate globally, significantly threatening the world economy. The need to design and implement appropriate policies to address environmental degradation (CO₂ emissions) has resulted in many studies examining the socioeconomic and institutional factors that affect CO₂ emissions. While previous studies have examined various factors influencing CO₂ emissions, there is limited evidence on how economic institutions impact it. This study explores the influence of economic institutions on CO₂ emissions using panel data from 119 countries from 2000 to 2021 using the two-stage GMM and Lewbel 2SLS techniques as the analytical approaches. The results reveal that economic institutions effectively reduce CO₂ emissions globally by 0.9%. The results further indicate that economic institutions are limited in reducing CO₂ emissions in the lower quantiles, but in the middle quantiles, economic institutions have a moderate effect in reducing CO₂ emissions. However, at the higher quantiles, economic institutions significantly reduce CO₂ emissions. Regionally, the effects of economic institutions on CO₂ emissions are heterogeneous. The results show that economic institutions significantly reduce CO₂ emissions in Europe and Central Asia, Middle East and North Africa, East Asia and Pacific, Latin American and Caribbean, and North America but increase CO₂ emissions in South Asia and Sub-Saharan Africa. These conclusions hold even after addressing endogeneity with the Lewbel 2SLS approach. The study recommends that policies promoting economic institutions are essential to mitigate CO₂ emissions in achieving SDGs 7 and 13.