The European Union’s (EU) introduction of the carbon boundary adjustment mechanism (CBAM) is a significant development in global trade and climate policy.

Under CBAM, starting in 2023, importers to the EU must report carbon emissions for certain carbon -intensive goods such as steel, cement, fertilizer, aluminum, electricity and hydrogen. By 2026, CBAM will be fully integrated with the EU emissions trading system (ETS), which requires importers to buy carbon certificates for goods exceeding EU emission limits, which effectively offset carbonomic costs. By 2030, CBAM’s scope will be expanded to include all industries, including textiles – Pakistan’s largest export sector.

The consequences of CBAM extend to all major export countries that depend on carbon -intensive industries. Exorts of steel and aluminum manufacturers experience increased costs in the EU due to CBAM and in the United States due to President Trump’s customs (US tariffs have no connection with carbon emission), potentially interfering with trading patterns and global supply chains.

However, President Trump and the EU are not the only ones to introduce duties. The United Kingdom is developing a similar carbon boundary adjustment tax, which is expected to adapt closely with the EU’s mechanism. Canada has actively considered comparable policies, and signals from China also reveal that it will develop its version of CBAM. The global trend is thus clear: Carbon intensity is now a key consideration in international trade policies that encourage a global shift against carbon prices and greener supply chains.

Currently, only approx. 1.23% of Pakistan’s exports to the EU in the sectors originally covered by CBAM. Its primary exports to the EU, such as textiles and clothing, are not immediately affected. However, CBAM’s scope can be expanded to include these sectors after 2026. Energy -intensive manufacturing practices, dependence on fossil fuels and ineffective resource management can make Pakistani exports less competitive, unless significant environmental compliance measures are adopted. This puts pressure on exporters to cut their carbon footprint to maintain access to the EU (and all other) market (s).

A practical strategy to avoid paying carbon taxes in the EU is to implement domestic carbon prices. Incidentally, Pakistan is considering introducing a domestic carbon tax or tax. The International Monetary Fund (IMF) has recommended a carbon tax as a means of strengthening revenue and as a political measure to secure funds through its resilience and sustainability facility. The IMF estimates that a carbon tax of $ 25% of CO2 could generate approx. 1.2% of Pakistan’s annual GDP, which simultaneously discourages emissions through financial incentives.

Conceptually, a carbon tax assigns a monetary value to emissions, compelling companies and individuals to reduce their carbon imprint and adopt cleaner technologies. It is in accordance with the principle of ‘pollutant payer’ and ensures environmental responsibility while generating funds for sustainable development projects and promoting environmental equity.

Nevertheless, Pakistan’s carbon tax policy is still uncertain, especially with regard to its adaptation to wider climate goals against purely revenue -driven motivations. In a scenario where solar energy consumption is advised not to maintain capacity payments for fossil fuel -based power producers, doubts about the effectiveness of such a tax in really reducing emissions.

Further details of Pakistan’s carbon tax await the completion of a staff agreement (SLA) with the IMF. Early indications suggest potential taxes on fossil fuels (diesel, gasoline) and internal combustion engines that can raise energy prices and costs for vehicle registration.

Regardless of the form such a tax takes, its effective implementation and compliance with CBAM requirements requires extensive preparation. Pakistan is currently lacking the institutional capacity and technical expertise needed to monitor and verify emissions effectively. Exporters need reliable monitoring, reporting and verification systems (MRV) together with international certifications such as ISO 14065 to accurately measure their carbon footprint.

Concerns of economic competitiveness remain significant as many Pakistani industries are already struggling with high energy costs. A poorly designed carbon tax can further burden companies without effectively reducing emissions, especially if detergents are not available. Transparent and well -structured policies are important to ensure that tax -driven meaningful environmental courses without disproportionate harms or consumers.

Administrative capacity is another concern. Pakistan’s tax machines are already struggling with existing taxes, so enforcing a carbon tax can be difficult. Clear rules for what is taxed and at which rate is needed with steps to prevent evasion and to protect households with lower income from higher energy costs.

While the prospect of paying a carbon tax is acceptable, its effectiveness depends a lot on how revenue is used. A credible policy would explicitly ring fences to the green economy and meet Pakistan’s nationally determined contribution (NDCs). However, there is justified concern that carbon taxation revenue may instead broke up against fiscal deficits without sufficiently supporting climate adaptation and reflection efforts.

Despite these challenges, a well -structured carbon tax could significantly benefit Pakistan. Studies show that a carbon tax of about $ 20 per Tonnes could reduce Pakistan’s emissions by up to 36% by 2050. The tax could generate significant public income, funding of renewable energy infrastructure, sustainable projects and social initiatives. Reduced consumption of fossil fuel would also reduce import bills, improve air quality and provide better public health results, which indirectly supports foreign exchange reserves.

In order to be CBAM-compatible and effectively implement a domestic carbon tax, Pakistan should adopt strategic measures. It is important to integrate the carbon tax into a wider carbon price strategy that adapts to Pakistan’s climate obligations, such as upcoming NDCS 3.0 (third iteration of our nationally determined contribution). Engaging stakeholders, including industries and civil society, will ensure transparency and gather broad support.

Transparency in terms of income is crucial. Obviously, communication that carbon tax proceeds will finance renewable energy, energy efficiency and cleaner industrial practice will build public confidence and directly support the green transition and mitigate any regressive effects.

Supporting key industries for reducing emissions is also very important to become CBAM compatible. Larger export sectors require technical assistance and financial incentives to introduce clean energy, efficient machines and cleaner production processes. Such transitions improve their competitiveness in markets that are still more sensitive to carbonprints.

Ensuring international support is equally important. Utilization of diplomacy to obtain technical assistance, technology transfers and climate financing from the EU, China and other international actors can facilitate Pakistan’s shift to greener industries.

Likewise, capacity building and attention initiatives are also important for successful implementation. Training of officials in climate and trade issues together with educating companies on CBAM and upcoming carbon prices will accelerate emergency preparedness and investment in sustainable practice.

Climate policy and trade are now connected; The EU’s CBAM makes it clear that sustainability is no longer optional, but a requirement for growth. Pakistan, very vulnerable to climate change and dependent on carbon -intensive industries, must recognize this development as catalysts for urgent to change against a green economy.

While challenging, such a transition provides opportunities to modernize the industry, attract sustainable investment and protect future market access.

This is not about pleasing foreigners; It is about future -proofing of our own finances, which ensures that our economic course is in line with the reality of a warming world.

Disclaimer: The views expressed in this piece are the author’s own and does not necessarily reflect Pakinomist.tv’s editorial policy.

The author leads the Sustainable Development Policy Institute (SDPI) and is a member of the Advisory Board of Asian Development Bank Institute. He tweets/posts @abidsuleri