PAKISTAN’S textile industry is in dire straits. Last month, textile exports dropped to a 17-month low. Recently, Kohinoor Spinning Mills, a publicly listed company, temporarily shut down its operations due to, among other reasons, high production costs resulting from a poorly performing economy. But things are about to get much worse in the coming years. Pakistan’s textile industry is not ready for a trade barrier that is in the making in the Global North.

Last week, an agreement was reached by the EU on the Carbon Border Adjustment Mechanism (CBAM), one of the more serious displays of commitment towards tackling climate change in a targeted manner. With the impending climate crisis, countries such as the EU member states and the US have become more determined in their effort to not just reduce emissions within their own borders, but to also prevent ‘carbon leakage’. Carbon leakage is a phenomenon whereby firms relocate to countries with less stringent policies on carbon to continue manufacturing powered by unclean energy sources.

The CBAM is an important milestone in the fight to curb emissions for two reasons. First, it reduces the competitiveness of products with a higher carbon footprint by imposing a penalty via a ‘CBAM certificate’. The ‘dirtier’ a product, the more the CBAM certificate costs. Second, and more importantly, it helps contain the issue of carbon leakage by requiring firms that import goods into the EU to procure CBAM certificates for offsetting the carbon price paid in the seller’s country to the carbon price as dictated by the EU Emissions Trading System. Under the ETS, a trading market exists with an upper limit placed on emissions associated with certain industries. Allowances for emissions are purchased on the ETS trading market, with the aim to lower the carbon footprint of the industrial sector through competition.

The CBAM goes a step further than the ETS market; it encourages carbon emissions reductions at a global scale by directly targeting carbon leakage. Only countries with equally stringent climate policies, such as the US, will be exempt from buying CBAM certificates under the policy. Therefore, CBAM aims to safeguard global climate efforts by preventing manufacturing of goods from being transferred from the EU to countries with lax climate policies. In effect, countries with carbon-intensive products will find themselves less competitive with EU as a buyer. This will create an impetus for such countries to decarbonise their means of production. Currently, CBAM applies to iron and steel, cement, aluminium, fertilisers, electricity and hydrogen, with the aim of gradually including all varieties of goods within the scope of the ETS by 2030. This ‘phasing in’ will give countries and industries time to devise policies and develop the capacity to become compliant with CBAM requirements.

Pakistan must decrease the carbon footprint of its textile industry.

For Pakistan, it is the need of the hour to capitalise on this recent development and to establish an effective framework for emissions reductions associated with its textile manufacturing processes. It especially needs to decrease the carbon footprint of its textile industry within the next decade because, while the energy basket in Pakistan is skewed towards fossil fuels, many textile mills have captive power plants that are also powered through dirty fuels. To reduce emissions associated with textile manufacturing, the industry needs to transition from fossil fuels to cleaner sources of power generation such as wind and solar energy. But energy transitions of such scale require rigorous planning, substantial financial investment and are fraught with legal and political challenges. So it is crucial for policymakers to create a conducive environment for the textile in­­d­ustry to shift to­­wards sustainable energy sour­ces in a smooth and timely manner.

The textile industry employs nearly 40 per cent of Pakistan’s industrial labour force. Any hit to the textile industry will translate into job losses for industrial workers on a non-trivial scale, exacerbating Pakistan’s socioeconomic woes. Moreover, textiles comprise 80pc of Pakistan’s exports to the EU; Pakistan may find itself at a significant disadvantage to countries that have cleaner means of supporting their textile sector. At present, India, one of Pakistan’s main competitors in the textile trade, is gearing towards large-scale emissions reduction targets by using ambitious pro-renewables policies. And while Pakistan is gradually moving towards a cleaner energy resource base, the transition needs to be sped up. Failure to decarbonise Pakistan’s energy sector in time will cause it to simultaneously endure the devastation from climate change and suffer the economic ramifications of well-intentioned climate policies. With CBAM in place, Pakistan’s textile industry may become the first casualty of inaction.

The writer has worked with the US Department of Energy’s National Renewable Energy Lab as a Fulbright scholar.

Published in Dawn, December 22nd, 2022