Standard models of environmental regulation often assume that governments have strong incentives to enforce regulation against offending firms. Any cases of non-enforcement hence often result from a lack of enforcement capacity. In contrast, this paper argues that governments are strategic in their enforcement behavior: they enforce penalties only against some types of firms and some of the time. Building on a game-theoretic model, I show that any government that worries about potential negative economic effects from stringent enforcement hesitates to enforce regulation in equilibrium. This means that a government enforces penalties only against resilient firms and when the country's economy performs well. I test this expectation against original plant-level compliance data from European carbon markets. My findings indicate that operations from firms that are more profitable, pay more taxes and come from more resilient sectors do comply better, but this difference disappears as markets tumble. During economic crises, structural dependence on capital increases, and governments shield even resilient firms from strict penalty enforcement.