Does Economic Freedom Matter For CO2 Emissions? Lessons From Africa

The increase in the concentrations of carbon dioxide (CO2) in the atmosphere has become one of the major issues worldwide. This increase has also drawn the attention of many financial and economic researchers to empirically investigate the determinants of CO2 emissions and environmental quality. However, many studies ignore the influence of economic freedom when investigating the determinants. This gap in the literature has motivated this study to examine the environmental impacts of economic freedom and whether these effects differ across various income groups. This study also offers what we know as the first study on the effect of unemployment rate on environmental quality. In order to strengthen the explanatory power of the estimation results, we employ electricity power consumption and GDP per capita as our control variables. Using the system generalized method of moments (GMM) estimator with a panel dataset for 24 African countries over 1995 – 2013 period, our results show that increases in economic freedom, proxied by trade freedom index, business freedom index, freedom from corruption and fiscal freedom index, increase environmental quality, measured using CO2 emissions. Our finding that fiscal freedom exerts a negative effect on CO2 emissions remained unchanged with the sample split into different income groups (low income, lower-middle, and upper-middle income countries). This suggests that tax reduction policies can be implemented to reduce CO2 emissions. At the same time, our further analyses, which are based on the different income groups, show that the effects of business freedom, freedom from corruption, and trade freedom on CO2 emissions differ across the various income groups. Specifically, the results indicate significant negative impacts of freedom from corruption and business freedom on CO2 emissions only for upper-middle income countries, while trade freedom is significantly negative only for lower-middle income countries, implying that the impacts of the variables depend on the income levels of the countries. The results also show that unemployment rate has no significant negative effect on CO2 emissions in lower-middle and upper-middle income countries, yet it significantly reduces CO2 emissions in low income countries. Thus, in order to have a robust understanding of the effects of economic freedom and unemployment rate on CO2 emissions, it is important to use a panel of more homogeneous economies. Our findings suggest that country-specific (or country-income based) environmental policies should be encouraged in order is to win the war against CO2 emissions and by extension environmental degradation.