The European Union’s (EU) introduction of the Carbon Border Adjustment Mechanism (CBAM) is a significant development in global trade and climate policy.
Under the CBAM, starting in 2023, importers to the EU must report carbon emissions for certain carbon-intensive goods, such as steel, cement, fertiliser, aluminium, electricity and hydrogen. By 2026, CBAM will be fully integrated with the EU’s Emissions Trading System (ETS), requiring importers to purchase carbon certificates for goods that exceed EU emission limits, effectively equalising carbon costs. By 2030, the CBAM’s scope will expand to include all industries, including textiles — Pakistan’s largest export sector.
The repercussions of the CBAM extend to all major exporting nations relying on carbon-intensive industries. Exporters of steel and aluminium manufacturers are experiencing increased costs in the EU due to CBAM and in the US due to President Trump’s tariffs (US tariffs have no link with carbon emission), potentially disrupting trade patterns and global supply chains.
However, President Trump and the EU are not the only ones who are introducing tariffs. The UK is developing a similar carbon border adjustment tax, expected to align closely with the EU’s mechanism. Canada has been actively considering comparable policies, and signals from China also reveal that it will develop its version of CBAM. Thus, the global trend is clear: carbon intensity is now a central consideration in international trade policies spurring a global shift toward carbon pricing and greener supply chains.
At the moment, only about 1.23% of Pakistan’s exports to the EU are in the sectors initially covered by the CBAM. Its primary exports to the EU, such as textiles and clothing, are not immediately affected. However, the CBAM’s scope may expand to include these sectors post-2026. Energy-intensive manufacturing practices, reliance on fossil fuels and inefficient resource management may render Pakistani exports less competitive unless substantial environmental compliance measures are swiftly adopted. This puts pressure on exporters to cut their carbon footprint to retain access to the EU (and all other) market(s).
One practical strategy to avoid paying carbon taxes in the EU is implementing domestic carbon pricing. Incidentally, Pakistan is considering introducing a domestic carbon tax or levy. The International Monetary Fund (IMF) has recommended a carbon tax as a means to bolster revenues and as a policy measure to secure funds through its Resilience and Sustainability Facility. The IMF estimates that a carbon tax of $25% of CO2 could generate approximately 1.2% of Pakistan’s annual GDP, simultaneously discouraging emissions through financial incentives.
