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.