Navigating the Potential Impact of the Carbon Border Adjustment Mechanism on Pakistan’s Exports: Sectoral Implications and Future Challenges

This study assesses the potential impact of the European Union (EU)'s Carbon Border Adjustment Mechanism (CBAM) on Pakistan’s exports. Starting in 2026, CBAM’s definitive phase will initially target high-emission sectors, so Pakistan’s exports may not be immediately affected. However, the gradual expansion of CBAM’s coverage to textiles and agricultural products could significantly decrease demand for Pakistani goods as EU importers seek lower-carbon alternatives. Using historical export growth rates, this study projects Pakistan’s exports to the EU from 2024 to 2036 under scenarios with and without CBAM implementation in the agricultural, manufacturing, and industrial sectors.
Sectoral emission intensities are estimated using greenhouse gas emissions data from Climate Watch and data from the Asian Development Bank’s input-output tables. By incorporating carbon pricing and Pakistan’s long-run price elasticity of demand for exports, we estimate that CBAM implementation in 2026 could result in a decline of USD
308 million in exports, reaching USD 479 million by 2036. This corresponds to reductions of 2.26 percent in manufacturing, 10.4 percent in agriculture, and 21.1 percent in industrial exports. Additionally, Pakistan’s export share to the EU, currently 29 percent, may decline by 2 percent in 2026. Our analysis suggests that the actual impact could be more severe if demand elasticity increases, carbon pricing rises, or if more countries implement similar mechanisms. To mitigate these risks, policymakers must establish a domestic carbon pricing system and transition toward environmentally sustainable production practices.