Dr John Rae established the final section of the north-west passage linking the Atlantic and Pacific oceans via the north of Canada, a route which has become known as the Rae Strait.
He also discovered the fate of the lost crew of Sir John Franklin’s expedition which was lost trying to chart the passage.
Members of Orkney Islands Council unanimously granted the posthumous honour to Dr Rae on Tuesday.
It followed a nomination by council leader James Stockan who sought the support of fellow councillors to recognise Dr Rae.
His motion was timed to tie in with the 200th anniversary of the explorer’s home town of Stromness becoming a “burgh of the barony” in 1817.
The freedom of Orkney is a rare honour which has only been bestowed 10 times since 1948 and the arctic explorer is the first to receive the honour since 1990.
Despite the explorer’s achievements, his reputation was tarnished because of his findings about the Franklin expedition which included suggestions the crew turned to cannibalism.
The Franklin expedition left England in 1845 but none of the 129 people returned home.
Mr Stockan said the controversy meant that Dr Rae was never given the credit he deserved for his achievements, saying he had been “vilified” because of his findings.
He said: “We are looking to set the record straight and honour one of our greatest explorers.
“His achievements should be celebrated and we want to remind people of a hero from Orkney.”
Dr Rae travelled to Canada to work as a surgeon for the Hudson’s Bay Company, after leaving his native Orkney to study in Edinburgh.
Dr Rae is buried in the grounds of St Magnus Cathedral in Kirkwall, with a memorial inside the church.