Epsilon Archive for Student Projects

Abstract

The Carbon Border Adjustment Mechanism (CBAM) was introduced by the European Union to prevent carbon leakage and encourage cleaner production globally. While designed as an environmental policy, CBAM imposes new administrative requirements and financial pressures on companies within the EU that import carbon-intensive goods. This study investigates the early financial impact of the CBAM announcement on Swedish firms, specifically examining whether the policy led to a decline in corporate financial performance as measured by the EBIT margin.
Applying a quantitative approach, a Triple Difference (DDD) regression model was used on panel data from 256 Swedish firms between 2019 and 2024, incorporating firm and year fixed effects to control for structural differences and macroeconomic trends.
The empirical results do not support the hypothesis that the CBAM announcement negatively affected financial performance, as the key policy variables are statistically insignificant. While the model shows high overall predictive precision with a low Root Mean Square Error (RMSE) of 0.06 and an Adjusted of 0.579, this power is almost entirely driven by inherent structural differences between firms. The Within of 0.007 reveals that the policy variables and controls explain only 0.7% of the annual fluctuations in profitability within the firms.
The study concludes that the CBAM announcement had an unnoticeable short-term impact on the financial performance of the sampled Swedish firms. This lack of a significant effect is likely due to selection bias toward larger, more resilient parent companies and the difficulty of isolating specific supply chain exposures using broad industry codes. Consequently, future studies should focus on the long-term effects as the policy is fully implemented, preferably by using more granular, firm-level import data and expanding the sample to include smaller, potentially more vulnerable sub-contractors.