CBAM trade barriers

WHILE Pakistan struggles with the accumulated cost of climate inaction and finds international climate finance elusive, it must now confront an emerging challenge: trade barriers priced according to the carbon embedded in each exported product. The false comfort that this does not touch our key exports to the EU and UK has deferred reforms, with the cost growing steeper by the day. Contradictory policy, misusing carbon levies instead of building a domestic Emissions Trading System (ETS), has made trade even harder.

Since January 2026, EU importers of steel, cement, aluminium, fertilisers and electricity have had to buy certificates for the carbon embedded in their imports, with the first annual declarations due next year. Direct exposure under these sectors is small for Pakistan — roughly 1.2 per cent of total exports, typically a percentage easy to ignore.

CBAM (Carbon Border Adjustment Mechanism), however, is a serious warning. On March 9, 2023, my column on ‘Trade and climate adaptation’ in this paper flagged that Pakistan would need to build carbon labelling and export competitiveness around it, not wait it out. As I wrote then, “they are expected to shift demand towards less carbon-intensive products”. Some three years later, in January 2026, my argument turned from a warning to heed to an opening to seize, urging that CBAM “should be seen as an incentive to accelerate our own decarbonisation”. Two columns, three years apart — but one constant: Pakistan’s institutions have moved slower than the mechanism they were warned about.

Pakistan’s exports to the EU reached $8.86 billion in FY25, up from $8.24bn the year before, with textiles, which accounted for the largest share of that total, driving the growth. That concentration has real addresses: major textile houses in Faisalabad, Lahore and Karachi — employing thousands of workers and supplying top brands in the EU — are directly exposed in the coming scope expansion.

Pakistan’s economic set-up is structured to fund CBAM via citizens’ fuel bills while getting no credit.

In the sectors that CBAM already covers, the exposure affects heavy industry: leading domestic cement makers supply most of that sector’s output, with the steel mills in Karachi making up the remainder. The disproportionately higher share, however, sits in textiles, concentrated in three industrial cities that would absorb the shock first.

Pakistan already collects carbon levies. CBAM allows a deduction: a home-country carbon price already paid can be subtracted from the EU’s border levy. It is the mechanism’s one window of opportunity — a domestic carbon price that is real, product-linked and verifiable. Pakistan’s misplaced levies cannot qualify because they aren’t earmarked; the revenue funds the deficit, not the industries that generated it. They are regressive, taxing fuel and transport consumption rather than signalling to producers. And they carry no product-level accounting, so a generalised fuel levy tells Brussels nothing about the carbon intensity of a bale of cotton yarn or a tonne of billet steel. Without that link, CBAM won’t recognise it as a carbon price.

The cost will fall twice: first domestically into a levy that does nothing for decarbonisation, and then again at the EU border into a certificate purchase. Pakistan’s economic set-up is structured to fund CBAM out of its own citizens’ fuel bills while getting zero credit for it.

The Securities and Exchange Commission has draft ESG [Environmental, Social, and Governance] Disclosure Guidelines and the State Bank is building a national Green Taxonomy. The taxonomy lets a bank tell a green loan from an ordinary one; the guidelines let an auditor certify emissions rather than estimating them. Without both at scale, product-level Monitoring, Reporting and Verification (MRV) data has nowhere credible to be recorded, and any domestic carbon price has no verified base to attach to.

On domestic ETS, the story is older still. In 2018, the climate ministry commissioned a UNFCCC-backed study recommending an ETS for the country’s largest power and industrial emitters — roughly 168 million tonnes of CO2 equivalent. It was never built. What arrived instead was the Carbon Market Policy Guidelines of 2024, aiming at a different problem — a framework for selling carbon credits to international markets under Article 6 of the Paris Agreement, generating revenue from offset projects sold abroad while pricing no carbon at home. Six years after its own study told it what to build, the ministry built something adjacent, and the follow-up never came.

No ministry can close this gap alone. Commerce defends market access and negotiates recognition of any domestic carbon price with Brussels. The climate ministry owns the ETS architecture. Industries and production, and finance and revenue carry the implementation weight, ie, audits with textile associations and SMEs, and the decision on whether levies are earmarked. Energy determines whether industrial power and its transmission are clean and cheap enough to matter on a factory floor. A CBAM strategy that lives in a single ministry’s file will not meet the deadline.

Fixing this requires no new instrument, only the one Pakistan was already told to build, made legible to the mechanism that is about to tax us anyway. First, earmark a fixed share of carbon and climate levy proceeds by law for a dedicated decarbonisation fund to derisk investments. Second, revive the 2019 ETS design-and-build accredited MRV infrastructure at the product level. Third, sequence deliberately: taxonomy and baseline audit first; verification capacity second; financing (concessional green refinance, green sukuk against industrial assets) third; and only then mandatory disclosure. Get the order wrong, and Pakistan builds compliance infrastructure for a carbon price that still doesn’t exist.

None of this is unusual by regional standards. Vietnam did not wait; it used its own EU trade agreement to force pilot emissions trading and SME carbon accounting. Indonesia offers the opposite lesson: a loan-financed energy transition, where debt is now carried alongside the carbon bill — a trap that Pakistan’s fiscal space cannot sustain.

The choice facing Islamabad is not whether to pay for carbon; that was decided before the levies were introduced. The choice is whether that payment counts for anything, at home or in Brussels. Right now, it counts for nothing in either place. September 2027 is when this stops being an abstraction and becomes an invoice, priced at EU default values unless Pakistan shows its own numbers by then. The levies can do double duty. There is not enough time left to pretend that 1.2pc is the whole story.

The writer is a climate expert.

Published in Dawn, August 29th, 2026