Pakistan’s Push for Climate-Resilient Budgeting Amid EU Carbon Pressures: A Path to Sustainable Exports?

Professor Lubna Naz of Institute of Business Administration Karachi, delivered a warning that reverberated far beyond academic walls. “The European Union will bind Pakistan’s textile sector to carbon footprint thresholds by 2027-2030,” she told a January 2026 panel on decentralizing climate action. “If it happens, our major exports may suffer—and we’ll pay a heavy price.”

Her words cut to the heart of a dilemma now gripping Pakistan’s economic policymakers: how to reconcile surging climate vulnerabilities with trade realities that keep the nation afloat. Textiles account for approximately 60% of Pakistan’s exports, with the EU absorbing $9.0 billion worth of Pakistani goods in 2024 alone—making Pakistan the largest beneficiary of the EU’s GSP+ preferential trade scheme. Yet Europe’s Carbon Border Adjustment Mechanism (CBAM)—already targeting steel, cement, and fertilizers since October 2023—threatens to impose stringent carbon limits on textiles within the next four years, potentially offsetting the very trade benefits Pakistan has cultivated.

For the first time in history, Pakistan’s Finance Ministry has responded with an unprecedented directive: all federal ministries must submit pro-climate budget proposals for fiscal year 2026-27. Advisor to the Finance Minister Khurram Schehzad framed the move as existential, stating this marks “the first time” climate considerations will shape budget planning across government. But can green budgeting close a $348 billion climate investment gap by 2030—and save Pakistan’s textile lifeline in the process?

The EU’s Carbon Gauntlet: What CBAM Means for Pakistan’s Textile Dominance

The Carbon Border Adjustment Mechanism represents a fundamental shift in how the European Union approaches climate-linked trade policy. Launched in its transitional phase in October 2023, CBAM initially targets six carbon-intensive sectors: cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen. By 2026, the mechanism enters its definitive regime, requiring EU importers to purchase carbon certificates reflecting the embedded emissions in their goods—certificates priced according to the EU’s Emissions Trading System allowances.

Currently, only 1.3% of Pakistan’s exports to the EU fall under CBAM’s scope, primarily steel and cement products. However, the European Commission has signaled its intention to expand the mechanism to cover additional sectors, including chemicals, polymers, and critically for Pakistan, textiles. As one recent analysis notes, “Beyond 2026, the EU has indicated that it intends to broaden CBAM to cover chemicals, polymers, and possibly textiles. For Pakistan, where textiles make up about 60 per cent of all exports and 28 per cent of trade with the EU, this is concerning.”

The threshold mechanism is particularly punishing: importers bringing more than 50 tons of covered goods annually into the EU must register as authorized CBAM declarants and purchase certificates matching their products’ carbon footprint. For Pakistan’s textile sector—characterized by high emission intensity due to reliance on fossil fuel-based energy and outdated machinery—this could translate into substantial cost increases that erode competitive advantages.

The timing couldn’t be worse. Pakistan’s textile exports have shown fragile recovery, growing just 0.93% to $16.655 billion in fiscal year 2023-24 after a steep 14.63% decline the previous year. Meanwhile, competitors like Bangladesh, Vietnam, and India are already implementing carbon pricing mechanisms and measurement, reporting, and verification (MRV) systems to prepare for CBAM compliance—moves that could position them favorably while Pakistan falls behind.

Pakistan Climate Change Budget FY2026-27: A Historic Fiscal Pivot

Against this backdrop, Pakistan’s Finance Division has issued its Budget Call Circular for FY2026-27, projecting 5.1% GDP growth and 6.5% inflation while introducing a groundbreaking climate dimension. For the first time, the budget incorporates Climate Budget Tagging (CBT), classifying over 5,000 cost centers across federal ministries under adaptation, mitigation, and supporting categories. This tagging has been integrated into the government’s Integrated Financial Management Information System (IFMIS), enabling real-time tracking of climate-sensitive expenditures.

The Pakistan green budgeting reforms extend beyond mere accounting. The government has introduced Form-III C screening mechanisms ensuring every federal subsidy aligns with national climate objectives before disbursement—a requirement also mandated under the IMF’s Extended Fund Facility program. Minimum thresholds now guarantee that at least 8% of current expenditures and 16% of Public Sector Development Program allocations are climate-tagged, representing a structural commitment to environmental accountability.

Pakistan’s first climate-focused budget allocates PKR 603 billion to mitigation efforts, targeting clean energy transitions, sustainable agriculture, and emission reductions across sectors. Yet the scale of the challenge dwarfs these initial commitments. According to UN analysis, Pakistan faces a climate finance gap of $40-50 billion annually—money needed for everything from flood protection infrastructure to renewable energy buildout. With climate-related disasters already costing the economy an estimated 1.03% of GDP per event without proper risk financing mechanisms, the urgency is palpable.

“The language is different,” explained Kashmala Kakakhel, an independent climate finance specialist, describing Pakistan’s steep learning curve in accessing international climate funds. “The way you curate the entire proposal is very different. The climate rationale is very different.” This procedural complexity helps explain why, despite the existence of a $2 trillion global climate finance market encompassing the Green Climate Fund, Global Environment Facility, and specialized facilities, Pakistan has struggled to mobilize resources at the scale required.

Pakistan Climate Finance Gap: Bridging the $348 Billion Chasm

The mathematics are sobering. Pakistan’s Nationally Determined Contributions outline $348 billion in climate investment needs through 2030—encompassing renewable energy infrastructure, climate-resilient agriculture, disaster preparedness systems, and green industrial transitions. Even with optimistic projections, domestic resource mobilization and traditional development finance cannot close this gap without innovative approaches.

Enter Islamic climate finance, a potentially transformative mechanism for a nation where faith-aligned financial instruments command broad public legitimacy. The Asian Development Bank’s analysis highlights how green sukuk (Islamic bonds) and climate-aligned Islamic financing structures could unlock billions in capital from regional Islamic financial institutions and sovereign wealth funds. WAPDA’s 2024 green euro bond issuance demonstrated proof of concept, though scaling such instruments requires robust regulatory frameworks and credible certification processes.

Yet institutional fragmentation hampers progress. “It’s just like a mismatch of jigsaw puzzle pieces,” observed Abid Qaiyum Suleri of the Sustainable Development Policy Institute, describing coordination challenges between federal and provincial authorities. “They will have their own projects. They will have their own priorities.” This siloed approach risks duplicating efforts, missing synergies, and failing to present coherent proposals to international climate funds that increasingly demand comprehensive national strategies.

The post-2022 flood period catalyzed some reforms. Pakistan launched its National Adaptation Plan in 2023 and published a National Climate Finance Strategy in 2024. The Planning Commission approved Climate Risk Screening Guidelines requiring all public investments to undergo climate-proofing assessments—critical steps toward the systematic integration Prof. Naz and others advocate. But implementation remains uneven, with technical capacity constraints particularly acute at provincial and district levels where climate impacts manifest most acutely.

EU Green Regulations Pakistan 2027: The Textile Sector at the Crossroads

For Pakistan’s textile manufacturers, carbon border adjustment Pakistan exports represents both an existential threat and a potential catalyst for long-overdue modernization. The sector’s emission intensity stems from multiple sources: coal and gas-fired power generation supplying energy-intensive processes, aging machinery operating below optimal efficiency, water-intensive dyeing and finishing operations, and limited adoption of circular economy principles in fiber sourcing.

Large conglomerates like Interloop Limited (which exported PKR 147 billion worth of textiles in FY2024), Style Textile, and Artistic Milliners have already begun sustainability transitions, investing in solar installations, water recycling systems, and certification programs meeting international environmental standards. However, these industry leaders represent a fraction of Pakistan’s textile ecosystem. Hundreds of small and medium enterprises operating with thin margins and limited access to capital face insurmountable barriers to rapid decarbonization without targeted support.

The GSP+ equation further complicates matters. Pakistan’s zero-tariff access to EU markets under the Generalized Scheme of Preferences Plus currently saves exporters billions in duties annually—a benefit that could be partially or entirely offset by CBAM certificate costs if textiles enter the mechanism’s scope as anticipated. One analysis suggests that inclusion of textiles in CBAM by 2027 would result in “carbon-related costs potentially neutralizing Pakistan’s preferential trade advantages,” forcing a fundamental reassessment of export competitiveness.

Professor Naz’s panel question resonates: what are the government’s accreditation plans? Without a national carbon registry, standardized emissions measurement protocols, and internationally recognized verification processes, Pakistani exporters cannot demonstrate compliance even if they invest in cleaner production. This creates a chicken-and-egg dilemma where investments in decarbonization may not yield market access if proper certification infrastructure doesn’t exist.

Carbon Border Adjustment Pakistan Exports: Risks, Opportunities, and Regional Responses

The risks are clear and quantifiable. Should CBAM extend to textiles at current emission intensities, Pakistan could face:

• Export revenue losses estimated in the billions as EU buyers shift to lower-carbon suppliers or domestic production
• Competitive disadvantage against regional rivals already implementing carbon pricing and building MRV capacity
• Investment flight as multinational brands recalibrate supply chains toward CBAM-compliant jurisdictions
• Employment shocks in a sector employing approximately 38% of Pakistan’s industrial workforce, predominantly lower-skilled workers with limited alternative opportunities

Yet crisis breeds opportunity. The same carbon pressures could accelerate Pakistan’s renewable energy transition, create new markets for eco-certified products, and position forward-thinking manufacturers as preferred partners for sustainability-conscious brands. Some potential pathways include:

Renewable Energy Scale-Up: Pakistan’s abundant solar and wind resources remain largely untapped for industrial use. Falling renewable costs now make distributed generation economically viable for textile clusters, offering both emissions reductions and energy security. The government’s recent focus on renewable energy in its NDC 3.0—incorporating specific targets for solar and wind capacity additions—provides policy support, though financing mechanisms and grid integration challenges require attention.

Technology Transfer and Innovation: The Diplomat’s analysis of climate-linked trade policy notes that “mechanisms to share emission reduction technology would be more effective” than punitive carbon tariffs alone. Pakistan could negotiate technology partnerships with European textile machinery manufacturers, potentially accessing cleaner production technologies at concessional terms through development finance institutions.

Green Premiums and Market Differentiation: A growing segment of EU consumers actively seeks sustainable products, willing to pay premiums for verified low-carbon textiles. Pakistani manufacturers achieving credible certification could capture this market segment, potentially offsetting CBAM costs through higher prices—though this requires investment in both production improvements and marketing.

Regional Learning: Competitor nations offer instructive examples. India recently expanded its carbon market to include petroleum refineries, petrochemicals, textiles, and secondary aluminum—explicitly building “CBAM Resilience” into industrial policy. Vietnam and Indonesia have launched national carbon pricing pilots. Even Turkey’s focus on electric arc furnaces in steel production demonstrates how sector-specific technological choices can dramatically reduce carbon intensity. Pakistan’s delayed response creates catching-up challenges but also allows learning from others’ successes and failures.

Policy Pathways Forward: What Pakistan Must Do Now

Transforming carbon constraints into competitive advantages requires coordinated action across multiple fronts. Based on international best practices and Pakistan’s specific circumstances, several priority interventions emerge:

Establish National Carbon Infrastructure: Pakistan needs a centralized carbon registry tracking emissions across industries, particularly export sectors. This registry should employ internationally standardized protocols (ISO 14064, GHG Protocol) ensuring EU recognition. The Planning Commission’s Climate Risk Screening Guidelines provide a foundation, but implementation must extend beyond project approval to operational monitoring.

Accelerate Sector-Specific Decarbonization Roadmaps: Rather than generic climate targets, Pakistan requires detailed transition plans for textiles, cement, steel, and other CBAM-vulnerable industries. These roadmaps should identify specific technological interventions (energy-efficient machinery, renewable power integration, process optimization), quantify costs and emission reductions, and sequence investments strategically. The National Climate Change Policy’s regular review mechanism provides an institutional home for such planning.

Mobilize Blended Climate Finance: Closing the $40-50 billion annual gap demands innovative financing combining public resources, development finance, green bonds, Islamic climate instruments, and private capital. Pakistan’s recent approval for a $1.4 billion IMF climate resilience facility represents a start, but scaling requires strengthening institutional capacity to design fundable projects meeting international climate fund criteria.

Build SME Capacity for Compliance: Large textile exporters can afford carbon audits, emissions monitoring, and certification—small enterprises cannot. Government-sponsored technical assistance programs, perhaps partnered with industry associations and international development agencies, could provide subsidized carbon accounting services, technology assessments, and compliance roadmaps for SMEs. Without such support, CBAM risks becoming a regressive mechanism favoring large players while eliminating smaller competitors.

Strengthen EU-Pakistan Climate Dialogue: Rather than viewing CBAM purely as an external imposition, Pakistan should engage proactively in EU climate policy discussions. The European Commission’s textiles strategy acknowledges supporting developing countries in green transitions. Pakistan could negotiate technical assistance, preferential access to EU climate technology, and potentially transitional measures recognizing countries making good-faith decarbonization efforts even if absolute emission levels remain elevated.

Integrate Climate into Trade Negotiations: Future trade agreements should explicitly incorporate climate provisions—not as barriers but as frameworks for mutual support. Pakistan’s trade offices, currently focused on traditional market access issues, need climate expertise to navigate this evolving landscape where environmental performance increasingly determines commercial access.

Turning Carbon Constraints into Export Resilience

Pakistan stands at a crossroads that Professor Naz articulated so starkly in Karachi. The convergence of climate vulnerabilities and carbon-linked trade regulations creates genuine risks to an export sector that remains the economy’s lifeblood. Yet this same pressure could catalyze the modernization, innovation, and sustainability transitions that Pakistan’s textile industry has deferred for decades.

The Pakistan climate change budget FY2026-27 represents a historic first step—acknowledgment that fiscal policy and climate action are inseparable in an era of European Green Deals and carbon border adjustments. Climate Budget Tagging, ministerial mandates for pro-climate proposals, and integration of environmental screening into subsidy allocation all signal genuine political commitment. But ambition must meet execution.

The $348 billion question—whether Pakistan can mobilize the investment required for climate resilience while maintaining export competitiveness—has no easy answer. It demands governmental coordination that transcends bureaucratic silos, private sector investment despite uncertain returns, international partnerships balancing support with accountability, and public understanding that short-term costs yield long-term sustainability.

For Pakistan’s textile exporters eyeing European markets nervously as 2027 approaches, the message is clear: adaptation is not optional. The only choice is whether to scramble reactively when CBAM expansion hits or to invest proactively in the cleaner, more efficient, climate-resilient production systems that increasingly define global competitiveness.

As Khurram Schehzad’s unprecedented budget directive demonstrates, Pakistan’s government has recognized the stakes. Now comes the harder work: translating recognition into action, climate tags into tangible emissions reductions, and constraint into catalyst. The path from carbon vulnerability to export resilience exists—but the window to walk it is narrowing with each passing fiscal year.

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For more information on Pakistan’s climate adaptation efforts and financing challenges, see Dawn’s coverage of the climate funding gap and Business Recorder’s analysis of CBAM implications.