The Impact of Institutions on Economic and Environmental Performance: Evidence From Europe

Within the Environmental Kuznets Curve framework, we investigate whether the effect of institutions on environmental quality differs among the Western Balkans, the other European post-socialist states, and Western Europe. We estimate both direct and indirect effects of institutions on air pollution for each respective sub-sample and for the whole European region (45 countries during 1996-2014). The negative direct effect is greater for non-post-socialist states, compared to post-socialist ones. Regarding the indirect effect, improving the quality of economic institutions induces an increase in the scale of economic activity, leading to an increase in CO₂ emissions per capita. Estimated elasticities of CO₂ emissions with respect to institutions, for all sub-groups, uncover a total positive effect, which is larger for Central-eastern and South-eastern European states. Improving the quality of institutions should go hand in hand with stricter formation and implementation of policies designed to decouple economic growth from CO₂ emissions.