In this paper, we investigate the environmental regulation-productivity nexus for 18 OECD countries over the years 1990–2015 and discuss its main policy challenges. Our findings support the hypothesis that environmental policies generate positive productivity returns through innovation as suggested by Porter and Van Der Linde (1995). We find that environmental policies have a productivity growth-promoting effect. Both market and non-market based policies exert a positive but differentiated impact both on labour and multifactor productivity growth. As for specific policies, green taxes display the largest effect on multifactor productivity although with potentially negative redistributive effects. We also find that environmental regulation exerts an indirect positive impact on productivity growth fostering capital accumulation especially in high ICT intensive countries.