Chapter 1.

The Relationship Between Economic Freedom and Environmental Performance

Policy Paper

Free Economies are Clean Economies 2022

Chapter 1.

The Relationship Between Economic Freedom and Environmental Performance


An environmental mantra that nearly everyone can endorse is that each should work to “leave the campground cleaner than when you got there.” As Scout Movement founder Robert Baden-Powell said, “Try and leave this world a little better than you found it.”1

Of course, tidying up a campground is one thing. Many of the environmental problems that society faces, whether air pollution, invasive species, ocean plastics, or global climate change, are much more complex. These challenges span many decades, involve many actors, and require many solutions. They must involve robust discussions of costs versus benefits, trade-offs, and opportunity costs. Action proves difficult when competing priorities are vying for resources, when policymakers must make value judgments, and when rent seekers look out for their interests. Action may prove even more difficult if the economic costs are frontloaded to consumers and taxpayers today, while potential environmental returns may not be realized for many years.

Whatever the environmental threat may be, policies that unleash economic freedom are critical for empowering people to flourish and improve the environment. Policies should embolden the private sector to deliver bottom-up solutions and ensure that public actions are transparent, cost-effective and achieve the desired outcomes.

Whatever the environmental threat may be, policies that unleash economic freedom are critical for empowering people to flourish and improve the environment.

That raises the question: what is economic freedom?

For nearly three decades, the Washington D.C.-based Heritage Foundation has published an Index of Economic Freedom. The Index measures economic freedom by scoring each country in the following categories.

  1. Rule of law: property rights, judicial effectiveness, and government integrity;
  2. Government size: fiscal health, government spending and tax burden;
  3. Regulatory efficiency: business freedom, labor freedom, and monetary freedom; and
  4. Open markets: trade freedom, investment freedom, and financial freedom.

Heritage compiles data, which are publicly available, from sources such as the African Development Bank, the Asian Development Bank, the European Commission, the Economist Intelligence Unit, the International Monetary Fund, the World Bank, various U.S. government agencies, Oxford University’s World Economic Outlook, and the World Economic Forum.2

Countries earn aggregate scores and fall into one of five categories — Free (scores of 80 to 100), Mostly Free (70 to 80), Moderately Free (60 to 70), Mostly Unfree (50 to 60), and Repressed (50 and below). In the 2022 Index, only seven countries received the most elite designation as “Free” nations3 while 27 others fall into the “Mostly Free” category, including the United States.

The most fleeting connections to economic freedom are found in the 57 “Mostly Unfree” countries and the 32 “Repressed” countries. An additional six countries could not be assessed due to the complete societal breakdowns there.4

While the Index of Economic Freedom does not measure environmental performance, the components that make a country economically free are also critical components to a clean environment. One of the most comprehensive measurements of a country’s environmental performance is Yale University’s Environmental Performance Index (EPI). Produced every other year, the EPI similarly scores a country on a 0-100 scale and includes 180 countries in its 2022 report.5

The EPI gives a country a score based on 40 environmental indicators broken down into eleven issue categories. These fall into three broader categories consisting of:

  1. Climate change: climate change mitigation;
  2. Environmental health: air quality, sanitation & drinking water, heavy metals, and waste management;
  3. Ecosystem vitality: biodiversity & habitat, ecosystem services, fisheries, water resources, acid rain, and agriculture.

The report’s technical appendix details how the authors weight each of the eleven issue categories and how the authors weight each of the 40 environmental indicators.6

Using these two indices, we can explore the importance of economic freedom on environmental performance. When correlating the Index of Economic Freedom and the Environmental Performance Index, one finds a strong, positive relationship between economically free economies and clean economies.7

Association Between Environmental and Economic Indices

A comparison between economic indices and the Environmental Performance Index. Click any square to see a scatter plot with the relationship for every country.

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In fact, Yale’s report emphasizes:

Considering the strong association between EPI and Index of Economic Freedom (IEF) scores, the 2022 EPI drivers analysis suggests that democratically-elected governments and free markets are best positioned to respond to environmental challenges and adopt policy preferences that drive countries toward a more sustainable future. Weaker state capacity for legislation and policymaking also explains why wealthy autocracies tend to underperform their democratic peers on the EPI (Iwińska et al., 2019). In the case of developing country democracies, a focus on good governance may enhance environmental gains as economic growth accelerates.

Policymakers striving to maintain economic growth while simultaneously improving environmental performance should note that some countries with high rates of manufacturing and services still achieve top EPI scores. These results show that, while some countries are growing at the expense of environmental health and ecosystem vitality, all countries can make conscious policy choices to protect the environment and thereby achieve more sustainable development.5

Digging deeper into correlations with specific environmental indicators, Yale’s report finds:

The IEF has positive correlation with good performance on Air Quality, Drinking Water & Sanitation, Heavy Metals, and Waste Management. These results offer some support for the hypothesis that economic liberalism and open markets are associated with improvements in environmental quality. Economic liberalism may enable better environmental performance by fostering technological innovation and spurring companies to undertake voluntary sustainability commitments (Ambec et al., 2013), although other research underscores the environmental costs of poorly-regulated industries (Elliott and Esty, 2021).8

Using similar metrics to the Heritage Index, the Vancouver-based Fraser Institute publishes an Economic Freedom of the World ranking.9 In the Fraser Institute’s 2022 report, the authors reviewed 721 empirical papers that used the Economic Freedom of the World Index for its modeling.10 These papers analyzed how economic freedom relates to desirable outcomes for a society, including income, human rights, growth, corruption, and many others.

One variable the authors analyzed is environmental outcomes, which include “CO2 emissions and other measures of pollution as well as environmental outcomes like biodiversity.”9 While the environmental outcome had one of the higher percentages of bad correlations of the twelve dependent indicators, it is important to underscore the normatively good correlation for the environment was 2.5 times higher than the negative ones (41.7% to 16.7%).11

Environmental Performance and Economic Freedom Summary

Average Country Score in the Environmental Performance Index

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Environmental Performance and Economic Freedom

Listed below are several countries that fall in the same quintile for both environmental performance and economic freedom.

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Lowest QuintileMiddle LowMiddleMiddle HighHighest Quintile
Burundi Honduras Spain Taiwan Singapore
Algeria South Africa BahrainUnited KingdomNew Zealand
Equatorial New GuineaBeninPolandEstoniaAustralia
Dem. Rep. CongoTrinidad & TobagoRomaniaDenmarkIreland

Environmental Performance and Economic Freedom

There is a strong correlation (0.655) between a country’s EPI and IEF index scores.

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  1. Guilia Magri, “Leaving the world a little better than you found it: A look into the life of a scout,” Malta Business Weekly, October 20, 2019,[]
  2. The Heritage Foundation, 2022 Index of Economic Freedom, []
  3. Singapore, Switzerland, Ireland, New Zealand, Luxembourg, Taiwan, and Estonia.[]
  4. Afghanistan, Iraq, Libya, Somalia, Syria, and Yemen.[]
  5. Wolf, M. J., Emerson, J. W., Esty, D. C., de Sherbinin, A., Wendling, Z. A., et al. 2022 Environmental Performance Index. New Haven, CT: Yale Center for Environmental Law & Policy,[][]
  6. See Yale EPI technical appendix at[]
  7. Yale’s report finds a similar positive correlation. “Finally, we find that economic liberalism is positively associated with environmental performance. While our results do not give countries carte blanche to pursue laissez-faire economic strategies without regard for the environment, they do cast doubt on the implicit tension between economic development and environmental protection.”[]
  8. Ibid.[]
  9. James Gwartney, Robert Lawson, Joshua Hall, and Ryan Murphy, 2022 Economic Freedom of the World: 2022 Annual Report. Fraser Institute.[][]
  10. As explained in the Fraser Institute report, 1,303 papers cited the index but the analysis was narrowed to 721 papers.[]
  11. Ibid.[]

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