The conversation around the European Union’s Carbon Border Adjustment Mechanism in Pakistan suffers from two equal and opposite errors. On one side is near-total ignorance at the factory floor, where the term ‘embedded emissions’ still sounds like an academic curiosity. On the other is an exaggerated panic that treats CBAM as an immediate existential threat to every export sector. Both positions are flawed and dangerous.
The reality sits in a narrow but decisive space between them. Pakistan does not export large volumes of steel, cement or fertilisers to Europe. The country is not about to lose billions overnight because of direct CBAM tariffs on these sectors. That fear is overstated. But dismissing CBAM on that basis is equally misguided. The real exposure lies elsewhere, in the structure of Pakistan’s export economy and in the direction global trade is heading.
The textile sector, which forms the backbone of Pakistan’s exports to Europe, is not directly covered in the first phase of CBAM. Yet it is deeply entangled in what CBAM represents. European buyers are no longer looking only at the final product. They are tracing emissions across supply chains, from yarn to dyeing to finishing, and even further upstream into energy use and raw materials. In that sense, CBAM is less a list of sectors and more a signal of how trade itself is being rewritten.
To understand this shift, one must look at how the European Union is operationalising CBAM. The recent European Commission TAXUD webinar on May 7, 2026 made it clear that the system is moving from theory to strict methodology. The requirement is straightforward in principle but demanding in practice. Actual embedded emissions must be calculated using a standardised framework. Approximations will gradually lose acceptance.
This introduces the concept of the functional unit, which anchors emissions to a specific output. A tonne of clinker, a tonne of aluminium, a defined quantity under a CN code. The importance of this idea goes beyond CBAM sectors. It establishes a universal logic of carbon accounting that will inevitably extend to other industries, including textiles. Once buyers begin asking for emissions per unit of fabric or garment, the same discipline will apply.
The methodology also streamlines production processes to prevent selective reporting. Once a process is defined, it cannot be split into cleaner and dirtier routes for convenience. This is particularly relevant for the Pakistani industry, where energy sources can shift depending on availability and cost. A factory running on grid electricity one week and furnace oil the next cannot present these as separate narratives. The emissions profile must reflect reality in its entirety.
Multifunctional processes introduce further complexity. Many industrial installations produce multiple outputs, and emissions must be allocated across them according to defined rules. This is not just a technical requirement. It demands a level of internal accounting that most firms in Pakistan have not yet developed.
Even where the European Union has relaxed certain boundaries, such as excluding low-emission finishing processes in steel and aluminium, the effect is not leniency but focus. The emphasis shifts upstream, toward the most carbon-intensive stages. This pattern will likely repeat as carbon accounting expands into other sectors.
The treatment of precursors adds another layer. Inputs from different suppliers or time periods must be averaged or specifically assigned if justified. This requires traceability across supply chains. For a textile exporter, this could mean tracking the carbon footprint of yarn sourced from multiple mills or chemicals procured from different vendors.
At the centre of all this are two documents that will define compliance. The monitoring plan and the emissions report translate methodology into practice. They guide verification and serve as the basis for audits. Without them, participation in carbon-regulated markets becomes nearly impossible.
These developments point to a larger truth. CBAM is not simply a border tax. It is a framework for enforcing carbon transparency across global trade.
Now consider Pakistan’s position within this evolving system. The country is already under economic strain, with a persistent energy crisis shaping industrial behaviour. Electricity tariffs remain volatile, gas supply is uncertain and many manufacturers rely on expensive and carbon-intensive alternatives. This is not an environment where emissions are systematically measured or managed. It is an environment where survival often takes precedence over efficiency.
In such conditions, the immediate risk is not that Pakistan will be shut out of Europe due to direct CBAM costs on steel or fertilisers. The risk is more gradual and more structural. It lies in the erosion of competitiveness in sectors that depend on European markets, particularly textiles.
European buyers are increasingly integrating carbon metrics into procurement decisions. A Pakistani exporter that cannot provide credible emissions data or demonstrate a pathway toward decarbonization will face subtle but significant disadvantages. Orders may shift to competitors who can offer greater transparency or lower carbon intensity. Prices may be negotiated downward to account for perceived carbon risk. Over time, these pressures accumulate.
This is where the danger of complacency arises. The phrase ‘hunooz Delhi duur ast’ captures a cultural tendency to delay action until consequences are unavoidable. In the case of CBAM, such a delay would be costly. By the time carbon requirements fully extend into textiles, the systems needed to comply will take years to build. Waiting until the last moment would mean entering the race after it has already been decided.
At the same time, framing CBAM as external aggression from the Global North is equally unproductive. While there are legitimate debates about fairness and historical responsibility, the immediate concern for Pakistan is pragmatic. The rules are being set, and access to markets will depend on meeting them. Refusing to engage does not change the outcome.
The more useful approach is to treat CBAM as both a constraint and a catalyst. The constraint is clear. Carbon will increasingly carry a price, whether directly through mechanisms like CBAM or indirectly through buyer requirements. The catalyst lies in how this pressure can drive domestic reform.
Pakistan needs to begin with the foundations of carbon governance. Monitoring, reporting and verification systems must be developed at scale. Industries need the capacity to accurately and consistently measure their emissions. This is not just a compliance exercise. It is the basis for any meaningful engagement with carbon markets.
From there, the case for a domestic Emissions Trading System becomes compelling. An ETS would allow Pakistan to price carbon internally, creating incentives for efficiency while keeping financial flows within the country. Instead of paying for CBAM certificates abroad, industries could operate within a domestic framework that rewards lower emissions.
For the textile sector, this could be transformative. Energy efficiency improvements, renewable energy adoption, and process optimisation would translate directly into economic gains. Firms that invest early would not only meet emerging requirements but also position themselves as preferred suppliers in a carbon-conscious market.
The transition will require coordination. Government institutions must provide policy direction and regulatory support. Industry associations must act as intermediaries, translating complex methodologies into practical guidance. Exporters must invest in internal systems and expertise.
This is not an overnight shift. It is a process that will unfold over years. But the direction is clear, and the cost of inaction is rising. The key is to avoid both extremes. Pakistan does not need to panic as if CBAM will collapse its export economy tomorrow. But it also cannot afford the comfort of delay. The challenge is to act with clarity, neither exaggerating the threat nor underestimating its implications.
CBAM is, in many ways, a test of economic adaptability. It asks whether countries can align their industrial systems with a world where carbon is measured, priced and regulated. For Pakistan, the answer will depend not on rhetoric but on preparation.
If the country moves early, builds capacity and integrates carbon considerations into its industrial strategy, it can turn this moment into an advantage. If it hesitates, relying on outdated assumptions about trade, the consequences will emerge slowly but decisively.
The window for action is still open. But it will not remain so indefinitely.
Pakistan does not need alarmism. It needs awareness, discipline and a clear sense of direction. CBAM is not a distant storm on someone else’s horizon. It is a changing tide – and the question is whether Pakistan learns to navigate it or continues to drift.
The writer works at the Alternate Development Services (ADS) and can be reached on LinkedIn @MashhoodUrfi
