Going green while getting lean: Decomposing carbon and green total factor productivity

While research on carbon productivity is growing rapidly, the role of structural change in green transition remains unexplored due to the scarcity of firm-level emission data. This study addresses this gap by utilizing unique register-based greenhouse gas emission data from Finland's energy-intensive manufacturing firms for 2000-2019. Applying a structural change productivity decomposition, we break down the sector's carbon productivity and green total factor productivity into four components: contributions from non-switching continuing firms, industry-switching continuing firms, the effects of entry and exit, and resource allocation. The findings highlight the important role of structural change in the sector's productivity. Non-switching continuing firms emerged as the key drivers of both carbon and green total factor productivity growth. The contribution of entry and exit was negative during the financial crisis, while inefficient resource allocation significantly hindered productivity growth throughout the study period. These findings emphasize the importance of public subsidies targeted at environmentally efficient firms to enhance their competitiveness under challenging market conditions. Furthermore, the establishment of a stable yet positive carbon price would incentivize less-productive firms to adopt environmentally friendly technologies.