Examining the role of pro-market institutions in facilitating global energy transition

This study examines how pro-market institutions, as measured by the Economic Freedom Index and its five dimensions, affect renewable and non-renewable energy use in 141 countries between 2000 and 2021. To address endogeneity in institutional variables, the Dynamic System Generalised Method of Moments, Kinky Two-Stage Least Squares, and Moment-on-Moment Quantile Regression are employed. The results show that premarket institutions increase renewable energy use and reduce reliance on non-renewables by 1.8 % and 5.7 %, respectively. This relationship holds when analysing the individual dimensions of the Economic Freedom, including legal systems and property rights, freedom to trade internationally, sound money, regulation, and government size. However, the effects are not uniform across regions and income groups. In South Asia and Sub-Saharan Africa, pro-market institutions are associated with reduced renewable energy output and increased nonrenewable energy use, whereas the opposite effects are observed in other regions. Similarly, while pro-market institutions support renewable energy output and reduce fossil fuel dependence in high- and upper-middle income countries, they have negative effects in low- and lower-middle-income countries. These findings highlight the heterogeneous nature of institutional impacts and suggest that energy and institutional reforms should be context-specific to effectively support global energy transition goals.