Pakistan has assured the International Monetary Fund (IMF) it will move toward a greener environment, reducing pollution emanating from the transport system by levying carbon tax in a phased manner over two years, starting with fiscal year 2025-26.
The IMF’s latest country report, issued after the release of the latest tranche under the $7 billion Extended Fund Facility (EFF), states authorities will levy a carbon tax in the budget for the next fiscal year. It would apply to both gasoline and petroleum products and aim to disincentivize the use of fossil fuels, including in electricity generation.
The report states that potential distributional impacts of this levy will be counterbalanced by annual BISP adjustments for inflation. The Resilience Sustainability Funding (RSF) would also help implement the 2025-30 New Energy Vehicle Policy, which seeks to ensure that 30 percent of all new vehicles are electric vehicles by 2030. Achieving this would require a subsidy for electric vehicles combined with a supplementary sales tax on internal combustion engines, calibrated in a revenue-neutral fashion and in line with Pakistan’s Nationally Determined Contribution targets for new EV uptake.
Additionally, authorities will introduce and implement a viability gap funding framework to promote the development of necessary charging station infrastructure through one-off subsidies for the private sector, with modalities to be determined in line with FAD recommendations.
The Fund’s Climate Policy Assessment Tool estimates that these policies would reduce emissions by 9.6 MtCO2e per year relative to the current policy scenario and support Pakistan meeting its NDC commitments. The emission reduction is equivalent to a 4% reduction from the baseline CO2 emission in 2030. Beyond the climate impact, these reforms should significantly reduce the heavy health impact from the high level of pollution in a number of Pakistani cities.
The RSF would also support Pakistan’s green finance agenda by strengthening the enabling environment for green investment. Reforms under the RSF include improving climate-related financial risk management and supervision and adopting and implementing Pakistan’s green taxonomy, currently in development with the World Bank for a projected completion by end-June 2025. This entails the State Bank of Pakistan issuing guidelines for the implementation of climate-related financial risk management and supervision in line with 2022 BCBS principles and applicable to supervised commercial banks.
Further, the Securities and Exchange Commission of Pakistan will develop guidelines based on a phased approach to enable listed companies to disclose climate-related risks and opportunities information, including taxonomy-aligned data. This should support adaptation by allowing banks and private firms to incorporate climate-related risk considerations into their risk management and investment activities.
According to the IMF, steps to build climate resilience will buffer Pakistan from climate-related growth and balance of payments shocks. Importantly, it would also reduce the humanitarian impact such shocks have, most recently evidenced by the catastrophic 2022 floods. In addition, Pakistan’s greenhouse gas emissions, driven by the agriculture and energy sectors, have nearly doubled in 30 years, placing Pakistan among the world’s top emitters. Pakistan’s main source of energy consumption is fossil fuels, with weak energy policies (including, until recently, underpricing, as well as large subsidies) exacerbating inefficient energy use.