Sequencing Green Fiscal Policies: Implications for Firm Productivity

Governments around the world face a major challenge: how to support the green transition in ways that are both effective and fiscally responsible. Among the tools available to policymakers are environmental taxes, subsidies, and investment tax credits. These instruments aim to reduce pollution, promote innovation, and encourage the adoption of clean technologies. The accumulation of their various use led to a policy mess. Despite growing interest in these tools, we still lack clear evidence on how they work—especially when combined – and most importantly how they affect firm productivity. Are they mutually reinforcing or do they sometimes cancel each other out? Which sequential combinations are best for firms and the environment? And what happens when governments decide to remove them?

This project tackles these questions by studying how different green fiscal policies affect company behaviour and performance. Using a unique large dataset of millions of observations from firms operating across Spain, merged from different sources, the project will examine three core areas: (1) how combinations of taxes, subsidies, and tax credits interact to influence firm productivity; (2) how the order in which environmental taxes are introduced affects firms' ability to adapt and invest; and (3) how the removal of a major tax credit in 2015 impacted firms that relied on it, and how the removal effect differed across different firms.

A key strength of this research lies in the dataset itself. Unlike previous studies that relied on anonymised data without geographic detail, our dataset includes the precise location of firms. This allows us to use differences in regional environmental policies across Spain as a kind of natural experiment—helping us to move beyond correlation and identify real cause-and-effect relationships. Ultimately, this project will help decision-makers design smarter environmental policies which combine both the environmental goals and maintain firm productivity. By understanding which policies work best, in what combination, and for which types of firms, we can spend public money more wisely while accelerating the green transformation of the economy.