Is Egypt Ready for the EU Carbon Border Adjustment Mechanism? Evidence from Firm-Level Data

Egyptian firms are a vital case for examining the impact of the EU Carbon Border Adjustment Mechanism (CBAM) in its current transitional phase. CO2 emissions tariffs on imports implemented under the CBAM could threaten export competitiveness of developing countriesincluding Egypt- in the EU market. Thus, 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. Our findings indicate that green management practices matter for Egyptian firms’ probability of adoption of green measures as well as the number of measures they adopt. In contrast, financial constraints negatively impact the probability of undertaking capital-intensive green investments such as machinery and vehicle upgrades. Also, specific targets for carbon emissions and energy consumption exert greater positive effect on the extensive and intensive margins of a firm’s environmental performance than any other green management action. Qualitative analysis supports the quantitative findings on the importance of both managerial and financial factors in determining environmental performance. Egyptian firms in steel, fertilizers, and cement sectors that export to the EU have technically complied with CBAM requirements with the help of government bodies and through hiring consultants and training their employees. In interviews, 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 also 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.