Economic Freedom: A No-Regrets Strategy for Reducing Global Energy Consumption

Economic freedom is known to have a profound effect on the efficient allocation of resources. Without subsidies, tariffs, and other government interventions, economic activity operates in the most efficient manner because of competitive pressures to produce more with fewer inputs. This means that energy use per unit of production is decreased with the presence of free markets (Graph 2). Free markets also can lead to a decrease in greenhouse gas emissions per unit of production due to the same competitive pressures that force a more energy efficient production process. On the down side, because any effects of greenhouse gas emissions are global in scope and distant in time, it is unlikely that the competitive pressures of the free market directly lead to reduced greenhouse gas intensity. But it does not really matter that entities in the economy are not specifically reducing carbon emissions because of the close relationship between energy use and greenhouse gas emissions. Scatter plots of international data clearly show that the level of energy intensity of a country is highly correlated with the level of greenhouse gas intensity (Graph 1). A simple regression analysis of these variables indicates that a 1% decrease in energy intensity is associated with a 0.91% decrease in greenhouse gas intensity (Table 1). Therefore, the competitive pressures of the free market that lower energy intensity also lower greenhouse gas intensity as a secondary effect. In addition, the presence of a stable macroeconomic system, inherent in an economically free country, encourages long-term investments. A stable macroeconomic system is characterized by secure property rights and contracts, stable and non-restrictive fiscal policy, stable prices, lack of price controls, and few or no restrictions on investments either within a country