Abstract: Policy-making is often shaped by the current state of industrial transformation, with many environmental policies delayed or abandoned due to the perceived challenges of industry-wide implementation. Focusing on the impact of firms’ behavior on policy-making, this study examines environmental policy uncertainty through a three-stage game model involving the government and competing firms. The model examines how the government designs feasible and economically rational environmental policies by referencing firms’ behaviors (e.g., voluntary green transformation, market exit) and analyzes firms’ transformation strategies in response to uncertain environmental policies. The results show that when firms face high transformation difficulty but low unit costs of green production, the government should implement moderately stringent policies with penalties to phase out part of the non-transforming firms and enhance overall social welfare. Uncertain environmental policies will induce firms to behave strategically. When the government moderately takes firms’ behavior into account in introducing stringent policies, competing firms adopt differentiated green transformation strategies. Green firms voluntarily transform and, through their transformation practices, provide a practical basis for stringent policies, thereby gaining greater market share under a stringent policy environment, while non-transforming firms, risking market exit, opt for high-return traditional production practices. When the government places strong emphasis on firms’ behavior in introducing stringent policies, firms are inclined to voluntarily transform to avoid substantial penalties or market exit risks. In contrast, when firms’ behavior is hardly considered in the policy-making process, competing firms prefer to maintain their existing traditional production practices.

Key words: green transformation, policy uncertainty, policy feasibility, strategic behavior