Europe’s Carbon Border Adjustment Mechanism (CBAM) has moved from policy experiment to trade reality. Since January 2026, the European Union’s definitive CBAM regime has placed a carbon cost on the embedded emissions of selected imports.

For Pakistan, the immediate direct exposure remains limited because CBAM currently covers cement, iron and steel, aluminium, fertilisers, electricity and hydrogen rather than textiles, the country’s dominant export to Europe. But the strategic signal is broader: competitiveness will increasingly depend not only on price and quality, but also on how products are made and whether firms can verify their carbon footprint.

That matters because Europe remains central to Pakistan’s trade. In 2025, bilateral trade in goods between Pakistan and the EU reached €12.2 billion, while the EU accounted for 14.1 per cent of Pakistan’s total trade. Pakistan also remains the largest beneficiary of the EU’s GSP+ scheme. The challenge is therefore not simply to preserve market access, but to ensure that Pakistan’s production base can operate in a trading environment where climate and industrial policy are increasingly intertwined.

CBAM is already turning carbon into a commercial variable. The EU published CBAM certificate prices of around €75 per tonne of CO2 for the first two quarters of 2026. Importers using actual emissions data will need verified information from producers outside the EU, while the first declarations covering 2026 imports are due in September 2027. Cleaner production will matter, but so will the ability to measure, document and verify embedded emissions.

Cooperation can drive the development of renewable-energy equipment, digital monitoring technologies and carbon-accounting capabilities

Pakistan’s vulnerability therefore lies not only in carbon-intensive production, but also in weak systems for carbon accounting, traceability and certification. Firms unable to demonstrate their emissions performance may face higher compliance costs or lose ground to suppliers that can. The EU is also considering extending CBAM to selected downstream products, reinforcing the direction of travel toward deeper carbon scrutiny in trade.

Pakistan’s energy transition creates an important opening. By November 2025, the country had imported around 51.5 GW of solar modules from China, including roughly 18 GW during FY25 alone. Imports have continued into 2026, although monthly volumes have fluctuated with changes in taxation, inventories and market conditions.

Much of Pakistan’s solar transformation has been enabled by China’s dominant solar-manufacturing ecosystem. Yet importing clean technology is only one part of the transition. The larger opportunity is to convert this rapidly expanding domestic market into investment, local technological capability and cleaner energy inputs for export-oriented industries.

This is where the China-Pakistan Economic Corridor (CPEC) 2.0 can become relevant. The first phase of CPEC was associated largely with infrastructure, energy and connectivity. The next phase offers greater space for industrial cooperation, technology and investment. China’s 15th Five-Year Plan places strong emphasis on advanced manufacturing, digital and intelligent transformation, new energy and green development. These priorities align closely with the capabilities Pakistan will need in a carbon-conscious trading system.

The opportunity should therefore go beyond local assembly of solar panels or batteries. Pakistan could use CPEC-linked cooperation to develop renewable-energy equipment, energy-efficient machinery, battery systems, digital monitoring technologies and carbon-accounting capabilities. Special economic zones could serve as demonstration sites for cleaner export manufacturing, combining renewable power, efficient logistics, testing and digital traceability. Chinese firms would gain a platform for deeper industrial cooperation, while Pakistani producers would acquire technologies needed to compete in more regulated markets.

But this requires policy coordination at home. Energy, trade and industrial policy can no longer operate separately. Pakistan needs phased carbon-reporting frameworks for exporters, accredited verification and testing capacity, support for energy-efficiency upgrades and incentives that reward cleaner production rather than simply subsidising assembly. Exporters also need technical assistance to develop firm-level emissions inventories before such requirements become unavoidable.

Pakistan should not assume that CPEC automatically creates a carbon advantage. Investment will flow only where clean power is reliable, regulation is predictable, logistics are efficient and environmental data are credible. The objective should be to use CPEC 2.0 to build those capabilities rather than merely expand imports of clean equipment.

CBAM should not be treated only as a European compliance problem. It is an early indication of how climate policy is becoming embedded in global trade. Pakistan’s response should begin inside its factories with cleaner energy, greater efficiency and credible carbon accounting. If China-Pakistan cooperation can move from importing clean technologies toward building low-carbon industrial capacity, CBAM could become more than a trade risk. It could become a catalyst for the next stage of Pakistan’s export competitiveness.

The writer is a research associate at the Centre of Excellence – CPEC and specialises in trade, investment & industrial cooperation. Email: sapna.vk@pide.org.pk

Published in Dawn, The Business and Finance Weekly, September 21st, 2026