It is no secret that Pakistan has been battered by an economic crunch for decades now. The investment climate is in the doldrums, as evidenced by the low investment-to-GDP rate and declining LSM growth.
People, if they fortunately somehow circumvent the hatchet of poverty, are squandering into hot assets like dollars, gold, real estate, etc. Industries are declining, with a low export base, high import dependence, archaic markets, trade imbalances, policy gaps and a weak institutional and business environment, all leading to constant CAD, trade deficits and import-driven growth — provided adequate liquidity.
And now, with time, the spectre of economic distress is reinforced by another hydra: the climate crisis. Pakistan ranks as the fifth most climate-vulnerable country in the world and was the most vulnerable in 2022, per germanwatch. In 2024, it ranked as the third most polluted country, with a PM2.5 average of 73.7 micrograms per cubic meter of air, unchanged from the previous year (World Air Quality Report). Consequently, $348 billion is needed for climate finance by 2030 (World Bank), while $1.2 trillion in potential losses is projected by 2050 due to climate impacts. So yes, perhaps these facts scream one thing: Pakistan is in the middle of an albatross climate crisis, and something meaningful must be done to pull it out of this predicament.
Regardless, the climate crisis is a global pandemonium and unfortunately, it is excruciating. Consider this: At the time of the 2015 Paris Agreement, the world aimed to limit global warming to 1.5 C, however, less than a decade later, in 2024 global temperatures crossed this threshold above pre-industrial levels for the first time, marking a pivotal point in the global effort to address climate change. This stark reality paints a picture highlighting the need for decarbonisation. In 2023, the global decarbonisation rate was just 1.02 per cent, requiring a twentyfold increase to cap warming at 1.5 C or a 6.9 per cent annual rate to meet the 2 C Paris target (PwC’s Net Zero Index 2024).
Against this backdrop, with sustainability now mainstreamed in both public consciousness and national policies, the EU recently introduced CBAM to curb the release of GHG emissions from industries. Since industries are major contributors to overall emissions, CBAM supports European industry decarbonisation — a byproduct of the ‘Fit for 55’ legislative package announced in July 2021, aimed at reducing emissions by 55 per cent relative to 1990 levels — while preventing carbon leakage, whereby production relocates to countries with weaker climate regulations to avoid costs. CBAM maintains a level playing field, enabling the EU to decarbonise without losing competitiveness.
A recent SDPI study, ‘Carbon Border Adjustment Mechanism (CBAM): An Opportunity for Industrial Decarbonization in Pakistan’, indicates that CBAM could cost developing countries an estimated $10.2 billion, with Zimbabwe and India among the most exposed. CBAM began on October 1, 2023, with a three-year transition period requiring EU importers to submit quarterly emissions reports. Tariffs will be phased in from 2026, with full implementation by 2034. Initially covering cement, iron, steel, aluminium, fertilizers, electricity and hydrogen, its scope may expand to include all EU ETS-covered products.
The report further highlights that the EU, which accounted for 15.3 per cent of Pakistan’s trade in 2023, is tightening renewable energy standards, impacting exports. While only 1.23 per cent of Pakistan’s exports currently fall under CBAM, the potential inclusion of textiles — a key sector — poses a significant challenge. Initially targeting six industries, CBAM will eventually extend to all sectors, including textiles. Pakistan faces moderate but serious exposure, as added carbon costs threaten export competitiveness. Compliance may require direct carbon taxes or investment in cleaner technologies, imposing financial strain on key industries.
Pakistan’s industries, with higher carbon intensities due to outdated technology and heavy reliance on fossil fuels — over 98 per cent of its energy comes from polluting sources—face significant export challenges under CBAM. However, this also presents an opportunity for Pakistan to prioritise industrial modernisation, improve energy infrastructure and enhance technical education while developing a stable and secure business environment is crucial for long-term growth.
The absence of a robust carbon accounting mechanism across the textile supply chain, presents itself as a major hurdle. Without accurate emissions tracking and verification, meeting CBAM requirements will be challenging.
Similarly, Pakistan’s steel industry, already uncompetitive due to limited production and the dominance of China and India, faces additional setbacks under CBAM. Although reliance on scrap steelmaking reduces carbon intensity vis-a-vis primary steelmaking, dependence on fossil fuels remains a key barrier to decarbonisation.
Transitioning to renewable energy would require a costly and logistically complex 70-80 per cent shift in the sector’s energy mix. High electricity tariffs further erode competitiveness, and CBAM-related fees could increase export costs, potentially pushing industries toward off-grid solutions rather than improving the national grid. Pakistan’s lack of renewable energy integration also exposes its exports to penalties, while the absence of financial incentives, policy support and climate finance limits industries’ ability to adopt cleaner technologies.
A lack of awareness and expertise in carbon accounting leaves industries underprepared for CBAM enforcement by 2030. While the SECP provides voluntary sustainability reporting guidelines, mandatory compliance is needed to align with international standards. Sectors like textiles and rice, which are vital to Pakistan’s exports, also remain inadequately prepared. Without standardised carbon measurement systems, global competitiveness is at risk, making technological advancement and policy reform essential for long-term sustainability.
To address these challenges, Pakistan must enhance industrial sustainability and ensure compliance with global carbon standards, particularly CBAM. This requires capacity building through international collaborations with organisations like UNDP and OICCI to educate stakeholders on carbon accounting and net-zero goals.
Strengthening institutional frameworks, such as the Responsible Business Help Desk, can provide industry support for emissions reduction. The government should introduce a domestic carbon pricing mechanism with incentives such as tax rebates and grants for energy-efficient technologies. A model for this approach is Canada’s carbon pricing system where industries are offered rebates for meeting emission targets. As a result of the carbon tax, annual emissions in British Columbia, a province of Canada, are 5-15 per cent lower than they would otherwise have been.
Given that textiles account for 60 per cent of exports, targeted decarbonisation programmes, including renewable energy subsidies and a standardised carbon accounting framework, should be prioritised. A national regulatory body should oversee carbon compliance, set emission targets and facilitate carbon credit trading, while mandatory third-party verification and a public registry of compliant firms will ensure transparency.
Pilot projects within the textile industry will help refine CBAM implementation and a national decarbonisation roadmap for the steel sector, emphasising renewable energy adoption and climate finance access, will strengthen export competitiveness. This plan should focus on increasing the use of renewable energy in steel production to 70-80 per cent by 2027, reducing Scope 2 emissions and aligning CBAM standards.
Pakistan must also mandate sustainability reporting for major industries, promote CBAM compliance through public-private partnerships, and support SMEs with tailored guidance. Grid decarbonisation, integrated tariff reforms and diplomatic engagement with the EU will be critical for long-term competitiveness. Leveraging technology transfer and international financing mechanisms can accelerate industrial sustainability. A holistic, cross-sectoral approach integrating energy, trade, and environmental policies is necessary to align Pakistan’s exports with global sustainability standards.
Considering all this, Pakistan stands at the crossroads of economic vulnerability and climate imperatives. While CBAM presents challenges, it also offers a pathway to modernisation and competitiveness. By integrating policy reforms, green investments, and robust carbon accounting, Pakistan can turn this obstacle into an opportunity. A decisive shift toward sustainability is not just necessary but vital for long-term economic resilience and global relevance.
Furqan Ali is a Peshawar-based researcher who works in the financial sector.
Arfa Ijaz is an environmental engineer and a research assistant at the Sustainable
Development Policy Institute (SDPI.
Ayesha Naeem is a research assistant at SDPI.