Firms’ renewable energy adoption and energy taxes: How institutional quality matters

This paper investigates the relationship between environmental energy taxes and firm-level renewable energy adoption, addressing existing literature gaps by providing microeconomic evidence and analyzing the moderating role of institutional quality, the effectiveness of formal and informal institutions in shaping incentives and reducing uncertainty in economic interactions. Using World Bank Enterprise Survey data (2018–2020) across a large cross-country sample of firms, the empirical analysis finds that energy taxes are, on average, positively associated with firms’ renewable energy adoption, supporting the Porter Hypothesis. However, the extent of this impact depends on specific firm and country characteristics: it is significantly stronger for large corporations, as well as for firms in higher-income countries and those in environments with superior environmental performance, respectively, while remaining uniform across both manufacturing and service sectors. Additionally, energy taxation upgrades internal capabilities by stimulating R&D and strategic climate planning. Crucially, institutional quality operates through a dual pathway: it exerts a standalone direct influence that encourages firms' renewable adoption, while simultaneously acting as an indirect moderator that makes fiscal policy signals credible. The incentive effect of energy taxes is strictly contingent upon governance, becoming pronounced under higher levels of voice and accountability, control of corruption, and the rule of law. These findings carry clear policy implications, indicating that fiscal instruments and institutional reforms may need to proceed jointly, as energy taxation alone may fail to stimulate green adoption without robust institutional structures.