The Impact of Climate-Linked Trade Policies on Pakistan’s Economy and Environment
Climate change grapples the world, trade policies are evolving to integrate environmental concerns. Many countries and international organizations are adopting climate-linked trade policies, which impose restrictions or provide incentives based on the environmental impact of traded goods. These policies aim to promote sustainable practices, reduce carbon emissions, and ensure that economic growth aligns with climate action.
For Pakistan, a country with a developing economy with GDP 2.4% in 2024 and significant climate vulnerabilities, these trade policies could have profound implications on both its economy and environment. While climate-linked trade policies present challenges, such as potential trade barriers, they also offer opportunities for Pakistan to modernize its industries, align with global sustainability goals, and reduce its carbon footprint.
A. Understanding Climate-Linked Trade Policies
Climate-linked trade policies encompass a range of regulations that govern the trade of goods and services based on their environmental impact. These can include:
a) Carbon Border Adjustment Mechanisms (CBAMs):
The Carbon Border Adjustment Mechanism (CBAM) is a policy tool that the European Union (EU) has introduced to address carbon leakage and promote sustainable industrial practices. The CBAM will impact Pakistan, especially its textile industry, as a significant exporter to the EU.While Pakistan’s exposure to CBAM is considered moderate compared to other countries, it still poses a significant challenge for its export-oriented economy.To mitigate CBAM impacts, Pakistan needs to implement policies that encourage sustainable practices within its export industries, including investments in green technologies and carbon emission reduction measures.
The government may need to introduce incentives for companies to transition to cleaner production methods to maintain their competitiveness in the global market
b) Environmental Standards:
Pakistan has set many environmental standards, including:
vNational Environmental Quality Standards (NEQS).
These standards cover industrial gaseous emissions, municipal and liquid industrial effluents, and are discharge standards based on pollutant concentrations.
vEnvironmental Monitoring Reports.
Industrial units in category A must submit monthly reports on start-up and upset conditions. Category B industrial units must submit quarterly reports on liquid effluents and gaseous emissions.
vEnvironmental Magistrates
These magistrates can levy fines of up to PKR 500,000, plus an additional PKR 1,000 for each day of continued contravention. They can also order the offender to pay compensation for any losses, bodily injury, or damage to health or property.
vEnvironmental Samples Rules, 2001
vEnvironmental Tribunal rules, 1999
vHazardous Substances Rules, 2003
vHospital Waste Management Rules, 2005
vPollution Charge for Industry (Calculation and Collection) Rules, 2001
vProvincial Sustainable Development Fund (Utilization) Rules, 2003. Countries may impose stricter environmental standards on imported goods, requiring that they be produced in ways that minimize pollution or reduce deforestation.
c) Sustainable Supply Chains:
Many global businesses and countries are increasingly demanding that supply chains comply with sustainable practices, including the use of renewable energy, reduced carbon emissions, and sustainable raw materials.
Pakistan has implemented several initiatives to create sustainable supply chains, including:
vIndustry 4.0 technologies
Pakistan has adopted technologies like AI, automation, and IoT to transform its supply chains and manufacturing. For example, Khaadi uses digital tools to improve inventory management, reduce waste, and optimize raw material use.
vDigital platforms
The Pakistan Textile Exporters Association (PTEA) has collaborated with stakeholders to introduce digital platforms to reduce the environmental impact of textile manufacturing.
vGreen supply chain management (GSCM)
GSCM practices can help organizations reduce energy and logistics costs, improve customer satisfaction, and enhance their reputation and goodwill.
vSustainable sourcing
Nestle Pakistan ensures that their ingredients are produced in a way that minimizes negative impacts and makes a positive contribution to the planet.
Sustainable supply chains (SSC) are an essential part of supply chain management literature. They link firms’ supply chains to their main goals, as well as environmental, social, and economic aspects
d) Green Trade Agreements:
These agreements promote trade in environmentally friendly goods and services, such as renewable energy technologies, and can include tariffs on goods that contribute to environmental degradation.Pakistan is still in the early stages of embracing green trade agreements, the country has taken several steps to integrate environmental concerns into its trade and economic policies.
Pakistan has committed to various multilateral environmental agreements (MEAs) that indirectly contribute to green trade. These include global treaties focused on environmental conservation, climate change, and sustainable development, such as:
vParis Agreement (2016):
vConvention on Biological Diversity (CBD)
vMontreal Protocol (1987)
At a regional level, Pakistan has explored green trade opportunities within South Asian cooperation frameworks, such as the South Asian Association for Regional Cooperation (SAARC). Although formal green trade agreements are still limited, there have been discussions on enhancing cooperation in sectors like renewable energy, water management, and climate change adaptation. These discussions lay the groundwork for future green trade agreements in the region.
Pakistan has started incorporating green aspects into its bilateral trade relations. Notably:
vChina-Pakistan Economic Corridor (CPEC)
vEuropean Union Generalized System of Preferences Plus (GSP+)
Pakistan has recognized the need to integrate environmental considerations into its national trade policies to align with global sustainability trends. Key initiatives include:
vStrategic Trade Policy Framework (STPF)
vRenewable Energy Trade Initiatives
Pakistan’s Trade Ambitions Under Global Green Agreements
Pakistan’s long-term trade ambitions align with the global push toward green trade agreements. By integrating sustainability goals into its economic policies, the country aims to:
vExpand Trade in Renewable Energy
vEnhance Exports of Organic and Sustainable Agricultural Products
vPromote Eco-Friendly Textiles
B Economic Impacts of Climate-Linked Trade Policies on Pakistan
Climate-linked trade policies can significantly affect Pakistan’s economy, particularly in sectors reliant on exports, such as textiles, agriculture, and manufacturing. Below are some of the key economic impacts:
a. Impact on Exports.
Pakistan is heavily reliant on exports, particularly to the EU and the United States. If countries like the EU implement Carbon Border Adjustment Mechanisms (CBAMs), Pakistani exporters, particularly in energy-intensive industries like textiles and cement, may face additional tariffs. This could increase the cost of Pakistani products, making them less competitive in global markets.International trade may become more difficult for countries that don’t comply with climate change rules. Global buyers have linked purchases from Pakistani producers to climate compliance reporting, and all producers must adopt reporting practices by 2026.
b. Cost of Compliance:
Meeting the environmental standards imposed by climate-linked trade policies could require significant investments in cleaner technologies, energy-efficient processes, and sustainable practices. For many industries in Pakistan, the cost of upgrading infrastructure to comply with these standards may be prohibitive, especially for small and medium-sized enterprises (SMEs).
c. Opportunities for Green Trade:
On the flip side, climate-linked trade policies also provide opportunities for growth in green industries. Pakistan can capitalize on the demand for sustainable goods and services, such as organic agricultural products, eco-friendly textiles, and renewable energy technologies. Investing in green trade initiatives could open up new markets and create jobs in sustainable sectors.
d. Foreign Direct Investment (FDI):
Climate change vulnerability and climate policies can impact foreign direct investment (FDI) in a number of ways, including:
v Climate change vulnerability
Countries that are more vulnerable to climate change may receive less FDI. This is because multinational firms may consider a country’s climate change vulnerability as a locational disadvantage when deciding where to invest.
v Climate policies
Countries with more active climate policies may receive more green FDI. This is especially true in the energy and manufacturing sectors, and when the country has binding policies like taxes and regulations.
v Climate-related risks
The frequency of extreme weather events and the implementation of climate change mitigation policies have increased in recent decades. This can lead to a reduction in FDI. However, some evidence suggests that firms that are more exposed to climate risks may react more negatively to physical climate risk.
v Climate FDI
Climate FDI can help developing countries scale renewable energy investment, build climate-resilient infrastructure, and adapt to climate impacts. However, developing countries still need to receive $1.7 trillion per year in renewable energy investment, which they only received $544 billion in 2022.
. By adopting cleaner technologies and improving environmental standards, Pakistan could attract foreign direct investment (FDI) aimed at developing sustainable industries, boosting its economy.
C. Environmental Impacts of Climate-Linked Trade Policies
Climate-linked trade policies not only impact the economy but also have significant environmental implications. They can encourage Pakistan to adopt more sustainable practices, reducing pollution and mitigating climate risks. Key environmental impacts include:
i. Reduction in Carbon Emissions:
As industries in Pakistan face increased pressure to comply with international environmental standards, there is an opportunity to reduce carbon emissions by shifting towards cleaner energy sources. Renewable energy projects such as wind, solar, and hydropower could play a crucial role in this transition.
ii. Promotion of Sustainable Agriculture:
Pakistan’s agricultural sector is a major part of its economy but also a significant contributor to environmental degradation through unsustainable farming practices. Climate-linked trade policies that promote sustainable agricultural products could drive reforms, encouraging practices like crop rotation, organic farming, and the reduction of chemical inputs, ultimately improving soil health and reducing pollution.
iii. Waste Management and Recycling:
With growing global demand for sustainable supply chains, climate-linked trade policies can incentivize better waste management and recycling efforts in Pakistan. Industries would be encouraged to adopt circular economy practices, where waste is minimized, and materials are reused or recycled, reducing environmental pollution.
iv. Deforestation and Land Use:
Pakistan faces deforestation and land degradation challenges. Climate-linked trade policies that focus on reducing deforestation or promoting sustainable land use can help preserve natural ecosystems and biodiversity. For instance, adhering to international standards for sustainable timber production and land use management can reduce environmental damage.
D. Challenges and Opportunities
While climate-linked trade policies offer opportunities for Pakistan to align with global environmental goals, they also present several challenges:
1) Lack of Infrastructure:
Pakistan currently lacks the infrastructure required to meet the environmental standards set by climate-linked trade policies. Investments in cleaner technologies, energy efficiency, and waste management systems are urgently needed.
2) Economic Burden on Industries:
The cost of compliance can be high, especially for sectors like textiles and manufacturing, which are critical to Pakistan’s economy. The government will need to provide support to these industries in transitioning to greener technologies.
To fully benefit from climate-linked trade policies, Pakistan will need to build capacity in terms of skills, knowledge, and technologies. Training programs, government incentives, and international partnerships will be crucial to achieving these goals.
3) Opportunity for Leadership:
By embracing climate-linked trade policies, Pakistan has the opportunity to become a leader in green industries within the region. For instance, expanding its renewable energy sector and promoting sustainable agriculture could put Pakistan at the forefront of green trade in South Asia.
E. Conclusion
Climate-linked trade policies are reshaping global trade dynamics and presenting both challenges and opportunities for countries like Pakistan. While the country’s economy faces potential risks, such as increased costs and trade barriers, the shift toward sustainable practices offers a chance to modernize industries, reduce environmental degradation, and align with global sustainability trends.
For Pakistan, navigating these changes will require investment in clean technologies, improvements in infrastructure, and a commitment to environmental protection. If successful, the country could not only mitigate the environmental impacts of its industries but also become a regional leader in green trade, positioning itself for a more sustainable and resilient future