Chapter 8.

Institutions Matter

Policy Paper

Free Economies are Clean Economies 2022

Chapter 8.

Institutions Matter


For free, clean economies to thrive, they must have support from strong institutions. Property rights, for instance, do little good if they are not legally enforced and protected. Good governance holds polluters accountable and reduces corruption. As George Mason economist Tyler Cowen emphasizes, “A strong state is distinct from a very large or tyrannical state. A good strong state should see the maintenance and extension of capitalism as one of its primary duties, in many cases its #1 duty.”1

Good governance holds polluters accountable and reduces corruption.

Good governance, freedom from corruption, and a strong rule of law set the rules of the game and enforce them evenly across all parties. A free society also encourages citizens to demand change by protecting a free press, promoting community townhalls, holding ballot initiatives and much more. As the Yale report stresses, “these features of effective governance drive good environmental performance by ensuring environmental laws are uniformly enforced and responsive to new information.”2

Uniform application of the law and responsiveness to new information should be priorities for any country. A level playing field where institutions enforce laws uniformly should prevent corruption and reduce the incentive to lobby for special privileges. Moreover, responsiveness and flexibility are critical to the laws and regulations that protect the environment for all institutions. The pace of innovation and advancements in scientific knowledge far outpace government policy.

Regulatory rigidity creates challenges when laws passed decades ago fail to account for changes in information or technological improvements. A critical component for a healthier environment is having a policy framework that empowers the private sector to innovate and deploy cleaner technologies. In that regard, business freedom is essential. A major component of the Index of Economic Freedom measurement of regulatory efficiency is the “extent to which the regulatory and infrastructure environments constrain the efficient operation of businesses.”3

One example in the U.S. of a well-intended law that now often constrains environmental progress is the National Environmental Policy Act (NEPA). NEPA is more than half a century old. Since it was passed, many federal, state, and local environmental laws have been enacted and amended. The result is a complex web of unclear, overlapping, and complex requirements that slow reviews and stifle investment without providing meaningful environmental benefits.4 Projects that could deliver clean energy, restore healthy ecosystems, and meet the needs of consumers are held up for years in courts or through a molasses-like regulatory process. Despite a broader and louder chorus understanding the need for permitting reform, several politicians and environmental NGOs decry changes as gutting bedrock environmental laws rather than what the changes truly are: modernization. A more flexible, updated process would accelerate projects that reduce emissions and enhance conservation projects.

Flexibility can also help disperse environmentally friendly technologies across the globe faster. An Organization of Economic Cooperation and Development on environmental innovation and transfer found that:

Flexibility of policy regimes not only increases domestic rates of innovation, it also ensures that markets are not fragmented across different countries. With prescriptive regimes the market will be fragmented into different regulatory silos. Given the risks associated with expenditures on research and development, and the economies of scale required to recover such expenditures, it is important that regulatory regimes in ‘source’ countries not constrain the potential markets for any induced innovations. In addition, flexible policy regimes in ‘recipient’ countries allow potential adopters of innovations to access a much wider range of technologies available on international markets.

The more that institutions can adapt with changes in information and focus on outcomes as opposed to outputs, the better off a country’s policies, economy, and environment will be.

  1. Tyler Cowen, “What libertarianism has become and will become — State Capacity Libertarianism,” Marginal Revolution, January 1, 2020,[]
  2. 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,[]
  3. The Heritage Foundation, “Methodology,” 2022 Index of Economic Freedom,[]
  4. Nick Loris et al., “Climate and Freedom Agenda,” Conservative Coalition for Climate Solutions, June 2022,[]

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