Is Egypt ready for the EU Carbon Border Adjustment Mechanism (CBAM)? Evidence from firm-level data

Egyptian firms are a vital case for examining the impact of the EU CBAM in its current transitional phase. CO2 emission tariffs on imports implemented under the CBAM could threaten the competitiveness of Egyptian exports in the EU market. This study examines Egyptian firms’ performance in greening their production process and the determinants of their environmental measures using data from the World Bank Enterprise Survey. We conduct three regressions to examine the impact of financial and managerial determinants on the extensive margin of green performance, on the intensive margins of green measures, and on the probability of undertaking green “capital-intensive” investment. We also employ the instrumental variable two-stage least squares (IV 2SLS) regressions and propensity score matching (PSM) to account for endogeneity bias due to reverse causality and selection bias problems. Our findings indicate that while green management practices enhance the extensive and intensive margins of green performance, financial constraints inhibit the undertaking of capital-intensive green investments. Also, specific targets for carbon emissions and energy consumption exert a greater positive effect on the extensive and intensive margins of a firm’s environmental performance than any other green management action. Qualitative analysis from focus group discussions with Egyptian firms in steel, fertilizers, and cement sectors exporting to the EU supports the same quantitative findings. Firms have technically complied with CBAM requirements with the help of government bodies and through hiring consultants and training their employees. They emphasized their need to establish reliable monitoring, reporting, and verification systems for their carbon emissions and to secure concessional long-term finance to undertake their decarbonization plans. They are willing to engage in the trading of carbon certificates in the Egyptian exchange on the newly developed voluntary carbon market. Even as they are actively responding to CBAM, firms acknowledged their need to diversify their export destination markets so as not to depend primarily on the EU.