HOW THE CARBON BORDER ADJUSTMENT MECHANISM (CBAM) AFFECTS PAKISTANI EXPORTS TO THE EUROPEAN UNION

Abstract

This paper examines the impact of carbon pricing and the European Union’s Carbon Border Adjustment Mechanism (CBAM) on Pakistan’s trade with the EU. Using annual time-series data (1999–2023) and employing the ARDL and Error Correction Model (ECM), the study analyzes the short- and long-run relationships between trade volume, carbon emissions, renewable energy, energy use, and carbon prices. Results indicate that trade volume positively correlates with carbon emissions and carbon prices but negatively with renewable energy consumption and CBAM tariffs. Findings suggest that while carbon pricing can improve trade efficiency, CBAM may constrain Pakistan’s exports. The study underscores the need for Pakistan to align its trade and energy policies with global low-carbon transition strategies to sustain competitiveness.