Impact of Carbon Border Adjustment Mechanism (CBAM) on Textile Exports of Pakistan

Abstract

The European Union’s Carbon Border Adjustment Mechanism (CBAM) marks a major change in global trade by connecting trade with emissions. This study looks at howCBAMmight affect the textile exports of a developing country like Pakistan. Because there is no detailed data on individual company emissions, the analysis uses existing national and international data on trade, energy use, and carbon emissions from 2003 to 2023. The study creates specific emissions and cost indicators for the textile industry by distributing industrial emissions and applying carbon prices similar to those in the EU Emissions Trading System (ETS). It uses a thorough empirical approach that includes descriptive analysis, correlations, checks for data stability, econometric models in both original and adjusted forms, lagged dynamic models specifications. These results are further supported by machine learning models and future scenario predictions up to 2030, along with Monte Carlo sensitivity analysis to handle the uncertainty around carbon prices and emission levels. The study finds that, in the past, Pakistan’s textile exports haven’t been greatly affected by carbon intensity because there has not been carbon pricing in global trade. However, future simulations show that CBAM could change export trends significantly once carbon costs start to have a real impact, especially if carbon prices rise or enforcement becomes stricter. The results show the risk of uneven effects on developing countries and stress the need for better energy efficiency, accurate emissions tracking, and international policies that support these nations. Overall, the study offers clear insights into how carbon border policies might change trade competitiveness in the future.