Years as fixed effects allow the outcome to have a different average in each year; the fixed effects allow the intercept of the regression to vary by year.
Years as instruments overcome endogeneity in the treatment variable. Remember what needs to be true about instruments:
- They need to impact (be correlated with) the treatment variable and
- They can only impact the outcome via the treatment variable (they don't belong in the equation of interest by themselves).
To use years as instruments, they can't be in the main specification. This implies that the average outcome must be the same in every year. Put another way, the outcome can't be directly impacted by time (though you might be able to include a linear time trend in lieu of year fixed effects in the main specification to incorporate time).