EU Carbon Tax: Possible Implications for Bangladesh’s Apparel Exports

The European Union (EU) introduced the carbon border adjustment mechanism (CBAM) in July 2021 with a view to incentivize firms exporting to the EU to reduce CO 2 emissions in their production processes and penalize those firms that do not. Initially, as part of the CBAM, a carbon tax was to be imposed on six imported items, including cement, fertilizer and steel, and this was to be effective from 1 January 2026. Whilst apparel is not in this list as yet, the EU plan is to include all products imported into the EU by the time the CBAM comes into full force in 2030. Since apparel is the single most important export item of Bangladesh—accounting for more than four-fifths of the country’s exports—and since the EU accounts for more than half of Bangladesh’s global export of apparel, this new development and the resulting trading scenario are of crucial significance for Bangladesh. It is thus important to understand the likely implications of EU–CBAM for Bangladesh’s exports of apparel to the EU market. The analysis focuses on the state of CO 2 emissions by Bangladesh’s apparel sector and presents an estimation of the carbon tax that may be imposed by the EU on imported apparel from Bangladesh. The article cautions that this could have significant ramifications for Bangladesh’s export competitiveness in the EU market, particularly at a time when Bangladesh will be navigating the challenges of least developed country graduation and the consequent loss of preferential market access in the EU. The article offers a number of policy recommendations to navigate these emerging challenges in this connection, including the need to proactively pursue green energy policies and incentivize carbon-reducing and environment-friendly production processes and practices by Bangladesh’s export-oriented apparel producers. JEL Codes: F18, Q56, Q58, L67, Q42