The economics of CBAM

Is the CBAM an altruistic endeavour or a cleverly disguised protectionist tool?

The economics of CBAM


n an era defined by rapid industrialisation and resource overuse, the urgent need for sustainability eventually becomes clear. The Carbon Border Adjustment Mechanism, championed by leading economies, aims to integrate environmental responsibility into global trade. By targeting carbon-heavy imports, the CBAM seeks to ensure that all industries account for their environmental impact.

However, some of its details raise significant concerns. Does it offer developing nations a fair chance, or is it another hurdle to their growth? Where does Pakistan stand in the framework given its distinct set of challenges and potential?

In essence, the CBAM acts as a gatekeeper, monitoring the carbon footprint of various products that cross international borders.

Imagine a scenario where country A has robust environmental regulations. It incurs certain costs to produce goods in an eco-friendly manner. Meanwhile, country B, which lacks such stringent rules, produces similar goods at a lower cost. The disparity in production costs can make country B’s products cheaper and more attractive in the global market, potentially undermining country A’s commitment to sustainability.

To counter this effect, the CBAM imposes a tariff or tax on imports from country B. Analysts and auditors evaluate a commodity’s entire lifecycle, from raw materials to assembly, mapping out the carbon emissions at every stage of production.

This ensures that businesses operating under stricter environmental norms are not unfairly disadvantaged in the global marketplace. While the principle may sound straightforward, the practical implications are manifold. The Global South, comprising mostly developing nations with varied environmental regulations and diverse economic structures, has been presented with a dual-edged sword.

On the one hand, the CBAM presents an opportunity to align with global green initiatives and tap into greener markets. Conversely, it poses the risk of further marginalising economies that are already grappling with a myriad of challenges, from technological gaps to financial constraints.

It is these challenges and opportunities that make the CBAM a focal point of global economic discourse. As we delve deeper into its intricacies, the question arises: Is the CBAM a bridge to a sustainable future or a barrier to equitable economic growth?

As the world grapples with the palpable effects of climate change — from rising sea levels to erratic weather patterns — the discourse surrounding carbon emissions has never been more paramount. Against this backdrop, the CBAM claims to be not just a trade regulation tool, but also as an embodiment of global efforts to stem the tide of environmental degradation.

Central to the argument for the CBAM is the concept of carbon leakage. The term might sound benign, but its implications for global sustainability are huge. Carbon leakage occurs when businesses, in a bid to escape the financial implications of stringent environmental regulations, relocate to jurisdictions where the regulation is more lenient or non-existent. The immediate benefit is clear: reduced production costs. But this comes at a price as it leads to a concentration of pollution in certain regions and effectively neutralises the efforts to reduce carbon emissions.

Imagine a world where countries ardently working towards carbon neutrality see their efforts go in vain because industries simply shift their operations, and with those their emissions, elsewhere. It is like squeezing one end of a balloon only to see the other end bulge out. This can not only undermine the environmental protection efforts of stricter nations but also jeopardises the health and well-being of populations in countries where these businesses relocate.

The CBAM, therefore, has a dual purpose. First, it acts as a deterrent against such relocation, making it economically less attractive for businesses to shift bases for short-term gains. Second, it makes the environment protection an integral component of the global trade regulation.

On the face of it, these adjustments appear to be a conscientious move towards a greener planet. The mechanism fits well into the sustainability narratives of the Global North having advanced industries, technologies, and often the resources to adapt.

However, in the developing world, many economies depend heavily on exports by industries that might not yet be equipped with the latest in green technologies and might not have the capital to retrofit their operations overnight.

The CBAM, while claiming to promote global sustainability, could thus introduce a new form of trade barrier for these nations, potentially stifling their growth and reducing their competitiveness in global markets. It is a conundrum: while the planet clearly needs mechanisms like the CBAM to ensure a sustainable future, its implementation needs to be sensitive to the diverse developmental stages and economic realities of nations worldwide.

No wonder, the introduction of the CBAM has elicited mixed reactions. Its reception in developing countries is particularly ambivalent. For many of these nations, poised at the threshold of economic growth and sustainable development, the CBAM brings a myriad of new challenges.

At the forefront is the specter of protectionism. Is CBAM an altruistic endeavour for a greener planet? Or is it a cleverly disguised mechanism by which developed nations seek to protect their industries and markets? After all, trade history is riddled with instances of noble intentions masking economic self-interest. For developing nations, where exports are often the backbone of the economies, such protective measures can mean thwarted growth trajectories and increased trade vulnerabilities.

Beyond the overt economic implications lies the mammoth task of administration and compliance. To be effective and fair, the CBAM requires a robust system of carbon content assessment and emissions verification. How feasible is this for nations already stretched thin on resources? Developing countries, many of which still grapple with basic infrastructural challenges, will now be tasked with setting up intricate systems to monitor, verify and report carbon emissions across industries. The costs could be staggering.

Then there is the question of fairness. While developed countries have historically contributed the lion’s share of global carbon emissions, developing nations, with their recent industrial growth, are often portrayed as the culprits in the current environmental crisis.

Unless implemented with nuance and understanding, the CBAM could perpetuate this skewed narrative, penalising countries that are only now getting a taste of industrial growth, while older industrial powers continue to enjoy the benefits accrued from their early start. In essence, while the environmental rationale behind the CBAM is sound, its socio-economic ramifications are complex. For developing nations, it presents a tightrope walk between joining global green initiatives and safeguarding their economic interests.

Pakistan stands uniquely positioned in this evolving world. Its textile industry and agricultural sector have historically fuelled its economic growth.

The introduction of CBAM poses significant concerns, especially in terms of costs. If the carbon emissions associated with its exports are not aligned with CBAM standards, products could attract additional charges, reducing their global market attractiveness.

Moreover, the logistics surrounding the CBAM, including intricate carbon accounting and emissions verification, could prove daunting for the regulatory framework in Pakistan. Advanced nations with cutting-edge technology and infrastructure may adapt quickly but for Pakistan the task appears monumental. Effective carbon accounting across all industries could necessitate substantial investments in technology, skills training and foundational infrastructure.

The pivotal question then is not the alignment with global sustainability. It is about creating a roadmap that ensures compliance with environmental sustainability standards while ensuring its economic vitality.

In the face of apprehension, countries like Pakistan can view it as an opportunity for transformative change. The CBAM can be a catalyst, propelling Pakistan to accelerate its shift towards sustainable technologies and carbon markets. Embracing the change can boost industries, ensuring both environmental and long-term economic benefits.

Importantly, Pakistan is not alone in navigating the CBAM complexities. It can join forces with other developing nations and a unified voice can emerge in the CBAM discussions, advocating for both environmental and economic fairness. This can ensure that the shift doesn’t marginalise developing countries.

As CBAM reshapes global trade and environmental policy, Pakistan’s response requires multiple strategies. Capacity-building is crucial as accurate carbon accounting requires investing in trained professionals and technologies. Diplomatically, Pakistan must champion fair CBAM regulations, recognising the challenges of emerging economies. Partnerships with green technology leaders can ease Pakistan’s sustainable transition, allowing knowledge sharing and technology transfers.

The CBAM is not only a trade barrier and should not be viewed as such. It can herald a new sustainable era. With the CBAM nudge, Pakistan can demonstrate that economic and environmental goals can coexist and enhance one another.

The commencement of the green era presents many challenges but also immense potential. The CBAM embodies the merging of economic growth with environmental stewardship. The journey involves mastering carbon accounting, technological adaptation and negotiations. The goal is a harmonious blend of economic and environmental prosperity.

The writer, a research fellow at the Sustainable Development Policy Institute, has a doctorate in energy economics. He can be reached at His X handle: @Khalidwaleed_

The economics of CBAM