Sustaining exports –decarbonization

Pakistan’s exports-based economy is heavily reliant upon its textile sector. More than 60% of the country’s exports are comprised of textiles and the industry employs 40% of the country’s labour force (International Finance Corporation n.d.). The industry is currently experiencing two crucial scenarios: High production costs due to country’s poor economic performance and extrinsic pressure from the top export destinations in the form of mounting stringent compliance policies. While smooth economic performance is critical for the industry’s even functioning, the latter is the matter of survival.

The European Union (EU) is Pakistan’s top textile export destination, as 80% of the country’s exports to the EU are textiles (European Commission n.d.a) (figure 1). Therefore, any policies implemented by the EU regarding its industrial imports, are also majorly associated with Pakistan’s textile exports.

EU has displayed serious commitment towards tackling climate change and therefore, has taken promising initiatives and legislative reforms to enhance environmental compliance via decarbonization in the industries. In case of Pakistan, EU has mandated the textile industry to comply with the mandatory international conventions on environment and climate change, compulsory for the GSP+ continuation. Further, a recent agreement on the Carbon Border Adjustment Mechanism (CBAM) is another milestone achieved to limit the carbon emissions and prevent carbon leakage. CBAM is a climate measure, that aims to reduce carbon footprint of the dirty products via a system of CBAM certificates. It also makes it obligatory for the EU importers to pay same carbon price as domestic producers under EU Emissions Trading System (ETS). This “will ensure equal treatment for products made in the EU and imports from elsewhere and avoid carbon leakage” (European Commission 2021b).

CBAM is a more stringent climate policy, that aims to enhance global efforts to combat climate change. The recent agreements on CBAM indicate that, with the passage of time, the global efforts to decarbonize manufacturing processes will rise, that will be gradually multiplied to the textile sector. Additionally, the global export market will become highly competitive for the exporters, such as Pakistan, with less stringent climate policies and carbon-intensive products. EU will gradually phase out less compliant and less competitive countries and Pakistan, based on its current industrial decarbonization policies, is not far from experiencing this shock.

The textile sector’s environmental compliance in the increasingly competitive and demanding export markets is crucial, as failure to decarbonization will severely hinder the socioeconomic development and environmental sustainability in Pakistan. This is majorly because, the EU’s preferential status (GSP+) to the textile exports has supported Pakistan to enhance its capabilities to grow in a sustainable manner, diversify its economy and create employment opportunities. It has accelerated the country’s efforts in improving compliance to major human and labour rights and environment and good governance related international conventions.

The industry’s current progress on decarbonization indicates that, it has shown promising commitment to achieve net zero by adopting a green supply chain philosophy. The Net Zero Pakistan initiative, for instance, is Pakistan’s largest net zero coalition and is the only second country-wide program, under Global Race to Zero, after Japan. It is a collaborative effort between non-government organizations, leading textile companies, public institutions and sector experts. The textile companies, in this coalition, commit to set science-based net zero targets, measure and disclose their GHG emissions, decarbonize their value chains and advocate for climate action (Pakistan Environment Trust). The rising coalition building under this initiative has become instrumental in catalyzing the net zero ambition and is increasingly recognized globally as one of the first net zero initiatives from the global south. The progress, however, indicates a slow pace.

The industry needs to take serious consideration of the fact that the mandate from the global community of buyers to decarbonize the textile value chain is rising. Transitioning away from the traditional energy sources to renewable energy sources has become obligatory. It is, therefore, essential for Pakistan’s textile industry to reduce its carbon footprint by transitioning to clean energy sources by adopting long-term and sustainable pathways to decarbonization.

The current efforts to meet the increasing energy demand from the renewables must expand and the existing technical capacity must be strengthened to further utilize solar, wind, thermal and geo-thermal energy sources. This must take place in a very stringent time-frame and requires both the industry and the government to come together to ensure policy coherence by devising rigorous decarbonization frameworks for the industry, that include both financial and technical considerations.

Climate change had severe repercussions on Pakistan’s socioeconomic and environmental sustainability, thus exhausting the already deteriorating national economy. Failure to comply with the increasingly stringent environmental policies of the global buyers and decarbonize the manufacturing processes will worsen the failing economy.

Thus, the textile industry must expedite its current progress and devise more rigorous and long-term climate policies to stay in line with other regional export competitors.

As decarbonization has become non optional, the industry must develop a comprehensive plan and strategy for meeting the global net zero targets in order to protect and expand Pakistan’s exports as well as the profitability of its companies.

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Pakistan's exports to European Union (EU 28)
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                                                      Unit: US Dollar thousand
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                                            Pakistan's exports to European Union (EU 28)
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Label             2013          2014          2015          2016          2017          2018          2019               2020
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Total Exports     6,272,517     7,225,810     6,639,589     6,917,518     7,511,353     8,044,111     8,187,863     7,960,055
Textile's
Exports           4,558,061     5,280,362     5,121,436     5,494,890     5,973,247     6,329,031     6,390,280     6,168,335
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% share of        73%           73%           77%           79%           80%           79%           78%                 77%
Textiles in total exports to EU 
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Figure 1.Pakistan's exports to the EU.
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Source: APTMA
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(The writers are Secretary General and Research Associate – Sustainable Development, APTMA, respectively)

Copyright Business Recorder, 2023