Towards a climate neutral European Union: the impact of environmental public policies on SMEs carbon energy phase-out

This study examines how environmental taxation and fossil fuel subsidies influence manufacturing SMEs’ intention to adopt renewable energy (RE) in the European Union (EU). While the RE transition is a priority of the EU Green Deal, limited research examines how misaligned policies affect firm-level adoption. Drawing on path dependence theory, we conceptualise environmental taxation as a factor supporting firms’ shift away from carbon-based trajectories and fossil fuel subsidies as path-maintaining factors. We also assess whether firms’ prior investments in resource efficiency moderate these effects. Using data on 2,438 manufacturing SMEs across 27 EU countries and applying a multilevel mixed-effects probit model with Heckman correction, we find that environmental taxation significantly increases RE adoption intentions, particularly among firms already committed to sustainability, while fossil fuel subsidies have no significant effect. These results highlight the importance of aligning firms’ internal commitments with external pressures, providing both policy and managerial implications.