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Pakistan and the Global North’s Climate-linked Trade Policy 

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The Debate | Opinion | South Asia

Pakistan and the Global North’s Climate-linked Trade Policy 

With the EU and U.S. increasingly using climate targets as trade barriers, Pakistan risks being left behind in the global trend toward sustainability. But it can also be an opportunity for Pakistan to build climate resilience.

Pakistan and the Global North’s Climate-linked Trade Policy 
Credit: Depositphotos

Climate change has become a harsh reality for the world, with developing economies at the epicenter of its ruins. Historically, developed countries in Europe and North America have contributed more to global temperature rise than less developed countries, yet it is the latter countries that are paying the heaviest price. A classic example was the 2022 climate-induced flash floods Pakistan witnessed. 

Adding fuel to this climate fire is the new wave of trade protectionism that seems to be emerging, with the European Union and the United States at the forefront of many of these energy conflicts. As Pakistan grapples with climate-induced disasters, rising trade tensions are adversely impacting its efforts. However, these challenges posed by EU-U.S. climate-linked trade policies can also serve as crucial imperatives for Pakistan to find an opportunity to move toward building climate resilience.

The EU has begun phasing in the Carbon Border Adjustment Mechanism (CBAM), which is a part of the broader European Green Deal and the fit for 55 plan. The CBAM aims to prevent “carbon leakage” by requiring companies importing goods into the EU to report their emissions. This mechanism, set to be fully implemented by 2026, applies to all countries, including the least developed ones, unlike the EU’s Everything but Arms (EBA) scheme, which offered tariff and quota-free access to imports from these nations.

For Pakistan, the immediate concern is the competitiveness of its businesses on the international stage. Without substantial investment in sustainable and renewable energy, the cost of products from Pakistan’s export industries, especially those relying on coal-based power, will rise significantly over the next decade. This is particularly critical as the EU, the largest bloc destination and second most important trading partner for Pakistan’s exports, is progressively using renewable energy as a trade barrier. 

Initially targeting six sectors – cement, aluminum, hydrogen, iron and steel, fertilizer, and electricity – the CBAM will extend to all industries, including textiles, which form the largest portion of Pakistan’s exports. As the CBAM transitions toward full implementation, it is crucial for Pakistani exporters to understand the timeline and potential obligations. According to the World Bank’s CBAM Exposure Index, Pakistan’s exposure is moderate but notable, especially compared to major exporters like India and China.

The carbon price payable to the EU will depend on the carbon content of goods and the carbon price in the country of origin. This raises questions about the ability of Pakistani companies to measure, report, and verify emissions, and how carbon-intensive their products are compared to competitors. Carbon pricing could play a pivotal role in Pakistan’s domestic policies to mitigate these challenges.

Moreover, global consumer trends are shifting toward sustainability, with a focus on reusing and recycling textiles. EU eco-design requirements are pushing for a reduction in the environmental footprint of manufacturing processes, mandating exporters to establish sorting and recycling hubs, and to minimize the destruction of unsold or returned textiles. Pakistani exporters will need to disclose publicly the amount of product destruction and align their production with dynamic consumer demands.

While this market diversification could mitigate some losses, it risks leaving Pakistan behind in the global trend toward sustainability, potentially hindering its green growth. The stringent compliance costs for EU-based producers may also affect them, creating a complex dynamic that could pose significant risks for sustainable economic development in Pakistan; a perfect recipe for the dependency theory.

In order to stay competitive and resilient, Pakistan must balance its export strategies with robust investments in renewable energy and sustainable practices, but this is only possible when the entire geopolitical situation is understood. 

The United States’ Inflation Reduction Act (IRA), passed in 2022, has become a focal point in a transatlantic rift over electric vehicles (EVs) and green technology. This policy, designed to boost green technology and climate investments through tax credits and subsidies, aims for a 60 percent carbon-free power sector by 2032. However, its emphasis on enhancing U.S. energy security and domestic manufacturing has sparked international criticism, particularly from South Korea, Japan, and India, who are considering retaliatory protectionist measures.

For Pakistan, the IRA can present significant challenges to its energy transition and participation in the global green economy. Like the CBAM, which supports EU’s domestic industries, the IRA’s subsidies and tax credits are aimed at U.S. domestic industries, leading to overproduction of green technology in Europe and the United States. This overproduction in Global North could lower green technology prices, undermining the competitiveness of manufacturing in Pakistan and other developing nations.

Additionally, the IRA could disrupt Pakistan’s export markets. As the U.S. and Europe ramp up their production of green technologies, Pakistan may find it challenging to compete with the influx of cheaper, subsidized products. This situation is particularly concerning for Pakistan’s manufacturing sector, which may struggle to keep pace with the technological advancements and cost reductions driven by IRA-supported initiatives in the Global North. The EU’s unwavering commitment to its green agenda means limited concessions to international partners, which could increase trade disputes and accusations of protectionism. This may drive Pakistan to seek alternative markets with less stringent environmental regulations, such as China, India, and the Middle East.

However, these seemingly adverse circumstances can actually serve as a catalyst for Pakistan to strengthen its climate resilience. By leveraging the pressures and incentives presented by the CBAM and IRA, Pakistan has a unique opportunity to revamp its climate policies, invest in sustainable practices, and align more closely with global environmental standards. This approach not only enhances Pakistan’s export competitiveness but also contributes to a more sustainable and resilient economic future.

To navigate these challenges and seize the opportunities presented, Pakistan’s policymakers must swiftly enact and enforce targeted reforms to incentivize sustainable practices and gain global recognition and competitiveness. 

First, it is imperative to implement fiscal and capacity building  measures. To encourage investments in eco-friendly technologies and processes, Pakistan must implement fiscal measures such as tax incentives and subsidies. These financial incentives can significantly lower the barriers to adopting sustainable practices. Complementing this, capacity-building initiatives are crucial. Training programs focused on energy efficiency, waste management, and environmental stewardship can empower industry stakeholders, equipping them with the necessary knowledge and skills to implement and maintain sustainable practices. 

Next, leveraging public-private partnerships is essential for marketing sustainable Pakistani products and processes on an international scale. These collaborations can help enhance the global competitiveness of Pakistani industries. Strengthening negotiations for responsible contracting clauses between brands and manufacturers can also promote more sustainable practices. 

Additionally, developing robust domestic waste management systems and enhancing data gathering, reporting, and monitoring on key sustainability indicators, such as water, chemical consumption, and carbon emissions, are vital steps toward sustainability. Improving compliance with the EU Corporate Sustainability Due Diligence Directive will further bolster Pakistan’s export potential, ensuring the country can effectively navigate the complexities of new trade-linked climate policies.

And most importantly, proactive engagement and diplomatic efforts are essential to negotiate favorable terms and exemptions under CBAM regulations. The EU and U.S. play a pivotal role in supporting Pakistan’s transition by extending financial and technical support, helping Pakistan adopt greener technologies and practices without compromising economic development. Moreover, advocating for reforms within international trade institutions, such as the World Trade Organization (WTO), to better integrate environmental sustainability into trade rules is crucial. 

By promoting policies that prioritize environmental protection and economic equity, and fostering partnerships that enhance supply chain resilience and sustainability, the negative impacts of these climate policies on developing nations can be mitigated. Strengthening regulatory compliance and enforcement mechanisms is also imperative to ensure adherence to environmental standards, safeguarding Pakistan’s export markets and promoting long-term sustainable growth.

Ultimately, Pakistan’s response to these external pressures will determine its ability to thrive in a rapidly changing global landscape. By embracing sustainability and innovation, Pakistan can not only safeguard its economic interests but also contribute meaningfully to global climate resilience efforts.