Environmental policies and firm productivity: Reconciling aggregate effects in the EU

Empirical evidence on the productivity effects of environmental regulation remains inconclusive, with mixed findings across studies. Using a large-scale panel of EU firms from 2013 to 2022, this paper examines how environmental policy stringency affects firm-level productivity. Productivity is estimated from production functions and regressed on policy stringency, measured using the OECD Climate Actions and Policies Measurement Framework, in a dynamic distributed-lag panel framework. Baseline estimates point to small and often statistically insignificant aggregate effects that are highly sensitive to macroeconomic conditions, reflecting policy-macro co-movement. Decomposing sectoral policies by instrument type suggests potentially offsetting effects, which attenuate once policy-macro co-movement is accounted for. Allowing for sectoral heterogeneity, however, reveals pronounced differences across industries, with more negative responses in input-intensive and regulation-exposed sectors and more positive ones in less exposed, more flexible sectors. These findings indicate that aggregate estimates mask economically meaningful heterogeneity across sectors and policy instruments, thereby helping to reconcile the mixed empirical evidence.