Economic Freedom and Air Quality

We estimate the direct causal effect of the quality of economic institutions, as measured by the Economic Freedom of the World Index, on two indicators of air pollution (fine particulate matter concentrations and carbon dioxide emissions) while controlling for income, political institutions, and possible endogeneity in the income-pollution relationship. Our results provide strong evidence of a negative relationship between economic freedom and particulate matter. More precisely, a permanent increase of one point in the economic freedom index reduces particulate matter concentrations by 9% in the long run. Our results do indicate a negative relationship between economic freedom and carbon dioxide, but the relationship is less robust. We argue the difference in robustness of the results makes intuitive sense given the nature of each externality: The impacts of particulate matter are local and immediate, whereas for carbon dioxide they are global and intergenerational. Our results also illustrate the importance of including economic freedom when studying the income-pollution relationship, as many studies in the past which omitted economic freedom have concluded that political institutions are very important, but in our analysis the effects of political institutions are not statistically significant. Our results also suggest that at low levels of income, increases in income lead to large decreases in particulate matter, until the relationship reverses and particulate matter increases very slightly with income. We do find evidence of an inverted “u” shape between carbon dioxide and income, but the peak is at a relatively high income level