The European Union (EU) introduction to Carbon Border Adjustment Mechanism (CBAM) is a significant development in global trade and climate policy.
Under CBAM, starting in 2023, European Union importers should report some carbon-intensive items such as steel, cement, fertilizer, aluminum, electricity and hydrogen. By 2026, CBAM will be fully integrated with the Emission Trading System (ETS) of the European Union, which requires importers to buy carbon certificates for more goods than the Emissions limits of the European Union, effectively equaling carbon costs. By 2030, CBAM will expand to include all industries, including textiles – Pakistan’s largest export area.
CBAM results extend to all major exporting countries relying on carbon-intensive industries. Exporters of steel and aluminum manufacturers are experiencing cost increase in the European Union due to CBAM and President Trump’s tariff (no link with carbon emissions of US tariffs), possibly disrupt business patterns and global supply chains.
However, President Trump and the European Union are not only those who are presenting tariffs. The UK is developing a uniform carbon border adjustment, which is expected to closely align with the mechanisms of the European Union. Canada is actively considering comparable policies, and signs from China also show that it will develop its own version of CBAM. Thus, the global tendency is clear: the intensity of carbon is now a central idea in international trade policies that make a global change towards carbon pricing and greenery supply chains.
Currently, about 1.23% of Pakistan’s exports to the European Union are only in areas covered by CBAM. Its primary exports to the European Union, such as textiles and clothes, are not immediately affected. However, CBAM may expand to include these areas after 20126. Energy-intensive manufacturing practices, fossil fuel dependence and disable resource management can provide less competitive to Pakistani exports unless adequate environmental compliance measures are rapidly adopted. This puts pressure on exporters to cut its carbon footprint to maintain access to the European Union (and all other) markets (s).
A practical strategy to avoid paying carbon taxes in the European Union is implementing domestic carbon pricing. Incidentally, Pakistan is considering starting a domestic carbon tax or levy. The International Monetary Fund (IMF) has recommended carbon tax as a means of increasing revenue and as a policy measure to secure money through its flexibility and stability facility. The IMF estimates that a carbon tax of $ 25% of CO2 may generate about 1.2% of Pakistan’s annual GDP, as well as discourage emissions through financial incentives.
Ideological, a carbon tax emissions offer businesses and individuals to reduce their carbon footprints and adopt cleaner technologies. It aligns with the principle ‘polluting payment’, ensuring environmental accountability while generating funds for sustainable development projects and promoting environmental equity.
Nevertheless, Pakistan’s carbon tax policy is uncertain, especially about its alignment with a purely revenue-operated motivations vs. In a scenario where fossil fuel-based power producers are discouraged to maintain solar energy use to maintain capacity payments, actually raise doubts about the effectiveness of such taxes in reducing emissions.
More information about Pakistan’s carbon tax waits to finalize an employee-tier agreement (SLA) with the IMF. Early indications suggest possible taxes on fossil fuel (diesel, gasoline) and internal combustion engines, which can increase energy prices and vehicle registration costs.
Whatever such tax, its effective implementation and compliance with CBAM requirements require extensive preparation. Pakistan currently has a lack of institutional capacity and technical expertise required to monitor and verify emissions. Exporters will need reliable monitoring, reporting and verification (MRV) systems with international certificates such as ISO 14065 to accurately measure their carbon footprints.
Concerns about economic competition are important, as many Pakistani industries are already struggling with high energy costs. A poorly designed carbon tax carried businesses forward without effectively reduce emissions, especially if cleaner options are unavailable. Transparent and well -structured policies are required to ensure meaningful environmental progression of tax drives without damaging industries or consumers.
Administrative ability is another concern. Pakistan’s tax machinery already struggles with the existing levy, so it can be difficult to implement carbon tax. What is done and at what rate is required to prevent the theft and mold houses with low energy costs.
While the possibility of paying carbon tax is acceptable, its effectiveness depends a lot on how revenue is used. A reliable policy will clearly ring the fund to defeat the economy and fulfill Pakistan’s national level contribution (NDCS) at the national level. However, there is a concern that revenue from carbon taxation may raise the fiscal deficit without adequate support to climate adaptation and mitigation efforts.
Despite these challenges, a well -structured carbon can greatly benefit Pakistan. Studies indicate that a carbon tax of about $ 20 per tonne can reduce Pakistan’s emissions by 36% by 2050. Tax renewable energy can fund infrastructure, permanent projects and social initiatives. Reduction in fossil fuel consumption will also reduce the import bill, improve air quality, and produce better public health results, indirectly supports foreign exchange reserves.
CBAM- To comply and effectively implement domestic carbon tax, Pakistan should adopt strategic measures. It is necessary to integrate carbon tax in a broad carbon pricing strategy that aligns Pakistan’s climate commitments, such as upcoming NDCS 3.0 (third repetition of our national level contribution). Attaching stakeholders, including industry and civil society, will ensure transparency and gather wide support.
Transparency about revenue use is important. Apparently, stating that carbon tax income will fund renewable energy, energy efficiency and cleaner industry, create public belief and support green infection directly, reducing any regressive effects.
It is also very important to support major industries in reducing emissions. Major export areas require technical assistance and financial incentives to adopt clean energy, skilled machinery and cleaner production processes. Such infections increase their competition in markets sensitive to carbon footprints.
Getting international support is equally important. Taking advantage of technical support, technology transfer and climate finance from the European Union, China and other international actors can facilitate change in Pakistan’s greenery industries.
Similarly, capacity building and awareness initiatives are also important for successful implementation. Along with educating businesses on CBAM and upcoming carbon pricing, training officers will accelerate preparations and investment in permanent practices in climate and business issues.
Climate policy and trade are now connected; The CBAM of the European Union makes it clear that stability is no longer alternative, but the need for development. Pakistan, highly vulnerable to climate change and carbon-intensive industries, these developments should be identified as a catalyst for immediate transition to a green economy.
Challenging, such an infection provides opportunities to modernize the industry, attract permanent investment and protect future market access.
It is not about pleasing foreigners; This is about our own economy about future proofing, ensuring that our economic trajectory is warmly aligned with the reality of the world.
Disclaimer: The attitude expressed in this piece belongs to the author’s own and not necessarily reflecting the editorial policy of Jio.TV.
The author is the head of the Sustainable Development Policy Institute (SDPI) and is a member of the Advisory Board of the Asian Development Bank Institute. That tweet/post @Abidsulari
