Carbon pricing systems are fast taking centre stage in trade policy as the world economy turns towards climate responsibility.The European Union’s Carbon Border Adjustment Mechanism (CBAM), a legislative tool meant to level the cost of carbon between home EU businesses and overseas exporters, is leading this change.
The CBAM is forcing a reckoning by pricing the carbon embedded in imported goods: countries cannot pursue economic growth apart from environmental compliance.
In developing economies such as Pakistan, the consequences are very severe.An additional layer of trade restriction is introduced by the CBAM, where market access is contingent on carbon intensity in addition to price and quality.For exporters without reliable emissions data or low-carbon production techniques, this puts them under a lot of competitive pressure.
For small and medium businesses (SMEs), compliance expenses, such as carbon audits, emissions monitoring, and certification, can be particularly burdensome.Without aggressive steps, CBAM might effectively function as a trade barrier, putting important industries like cement, steel, and textiles in danger of losing market share.
Applying to five emissions-intensive industries — cement, iron and steel, aluminium, fertilisers and electricity – the CBAM is in its transitional phase (2023–2025).
Unless an equivalent carbon price has been paid at the source, importers in the EU will be obliged by 2026 to buy CBAM certificates reflecting the carbon content of these products.
This ‘adjustment’ is an economic signal rather than only a technical one; it indicates how future trade flows will be shaped by comparative advantage and relative emissions.
The policy has generated a lot of discussion worldwide.While some applaud it as a required fix to carbon leakage, others call it climate protectionism.
Still, CBAM is fast accelerating a trend already under way: the emergence of carbon markets.Over 73 carbon pricing instruments are now operational globally, covering 23 per cent of world greenhouse gas emissions and generating over $95 billion in revenue in 2022, per the World Bank’s State and Trends of Carbon Pricing 2023.To stay competitive, emerging nations ranging from Chile to China are either enhancing or implementing emissions trading systems.
Only 1.3 per cent of Pakistan’s exports to the EU, mostly in the form of steel and cement, are currently subject to the mechanism, meaning that the country’s direct exposure to CBAM is still minimal.However, the comfort is fleeting.
Beyond 2026, the EU has indicated that it intends to broaden CBAM to cover chemicals, polymers, and possibly textiles.For Pakistan, where textiles make up about 60 per cent of all exports and 28 per cent of trade with the EU, this is concerning.
The implications for Pakistan’s export-driven economy could be significant if it is included.The inclusion of textiles in CBAM by 2027 would result in carbon-related taxes on about 28 per cent of Pakistan’s EU exports, which is the share that textiles represent.
For example, with an average EU carbon price of 85 euros/ton, even a modest carbon intensity might result in annual compliance costs of millions of euros, primarily affecting small and medium-sized exporters and jeopardising Pakistan’s established trade position in European markets.
Pakistan does not have to choose between the environment and the economy.The choice is between exclusion and adaptation.CBAM is a timely reminder to a nation that needs to start considering carbon as an economic factor that will influence trade and industry for many years to come, rather than just environmental liability
The risks to the economy are numerous.Pakistani exporters will not be protected from CBAM-related fees without a domestic carbon pricing system or verifiable emissions data.These fees could seriously hurt competitiveness at the current EU carbon prices, which range from 75 euros to 100 euros per ton of CO .
Smaller businesses with narrow profit margins might be priced out of the EU market entirely.Furthermore, Pakistani SMEs may be disproportionately impacted by the administrative burden of compliance, which includes carbon auditing, emissions tracking, and MRV (Monitoring, Reporting, and Verification).
Experiences from countries like Jordan and Costa Rica illustrate the financial challenges associated with MRV system setup.Jordan invested heavily in digital infrastructure to establish emission registry systems, enhance NDC target compliance, and ease integration into carbon markets.Similar to this, high transaction costs during the initial verification stages of Costa Rica’s REDD+ agroforestry projects had an impact on the overall performance and volume of anticipated emission reductions.Based on these examples from developing countries, MRV system implementation can raise SMEs’ operating expenses by 5-7 per cent, which is a significant burden for Industries that are currently making ends meet.Many of these industries would find it financially impossible to continue accessing EU markets under the CBAM regime without focused assistance.
However, this challenge also presents an opportunity.Policy reform and industrial upgrading may be accelerated by CBAM.
Pakistan needs to embrace the global shift rather than fight it.A credible and phased response could not only help safeguard exports but also unlock access to new revenue streams via voluntary carbon markets and climate finance.
In response, nations like Vietnam and Indonesia have already started testing their own national carbon pricing schemes and bringing their MRV frameworks into compliance with global norms.Pakistan needs to do the same.Under its Nationally Determined Contributions (NDCs), the government has previously stated its intention to investigate carbon pricing tools; however, implementation has stalled.
Inaction is now a more expensive option due to CBAM.
Pakistan needs to take a proactive approach that consists of the following to lessen future trade shocks and guarantee a fair industrial transition.There is a need to establish national carbon baselines for essential export industries, such as textiles, steel, and cement.Implement MRV systems that comply with EU regulations, perhaps via carbon registries run by the industry.Test carbon pricing models in high-emission sectors, such as carbon levy or emissions trading pilots.
Provide SMEs with access to clean technologies, capacity-building, and concessional financing.And utilise voluntary carbon markets to draw in green investment and produce carbon offsets.
The stakes are obvious.As trade becomes more environmentally conscious, delays will cost more than just missed climate targets; they will also result in lost market access, decreased export earnings, and a decline in global competitiveness.
Pakistan does not have to choose between the environment and the economy.The choice is between exclusion and adaptation.
CBAM is a timely reminder to a nation that needs to start considering carbon as an economic factor that will influence trade and industry for many years to come, rather than just environmental liability.Crucially, those who are early movers of carbon compliance and market readiness will benefit.
A nation’s ability to draw in foreign direct investment (FDI) in climate-smart manufacturing is enhanced by its implementation of reliable MRV systems, emissions trading schemes, and green industrial supply chains.Multinational purchasers and investors are actively looking for low-carbon sourcing locations to fulfil their own climate pledges.
With prompt reforms, Pakistan may gain access to international supply chains, voluntary carbon markets, and green funding while simultaneously protecting its exports and using carbon compliance as a competitive advantage.
Delays are not neutral; rather, they are a choice to lag behind in a world rapidly embracing carbon accountability.In addition to being strategic, adaptation is necessary for industrial modernisation and long-term trade resilience.
The writer is associated with the Sustainable Development Policy Institute, Islamabad (SDPI).The article does not necessarily represent the views of the organisation..
