Greener horizons: Economic freedom as a catalyst for the global energy transition

Abstract

Major advanced and emerging economies are setting targets to achieve an ambitious net zero emission target plan by 2050 to address climate change and ensure sustainable development. However, achieving this transition requires significant structural changes not only in energy mixes but also in the quality of economic and political institutions. In this paper, we investigate how economic freedom – as a key measure of institutional quality – influences the momentum of energy transition. To do so, we utilise panel data consisting of 35 advanced economies and 32 emerging and developing economies for the period from 2000 to 2020. Employing a series of panel data estimation techniques that address the common empirical issues, including endogeneity and heterogeneity, we find that countries with greater economic freedom tend to outperform in transitioning to a low-carbon economy. The findings suggest that promoting economic freedom is crucial as it allows policymakers to utilise incentive schemes based on market-based policies, including carbon pricing and R&D subsidies for renewable energy developments.