Pakistan is entering the age of carbon taxation, but not through a clean, coherent and legislatively defined carbon pricing framework. It is arriving through fragments: the Petroleum Development Levy, supplementary carbon levies on fuels, the Climate Levy, taxes on internal combustion engine vehicles, energy price pass-through and incentives linked to electric vehicles under the IMF’s Resilience and Sustainability Facility.
In substance, Pakistan is already taxing carbon. In design, however, it is missing the most important part of the policy: recycling revenue back into citizens, clean alternatives and a productive transition.
A carbon tax is not merely a revenue instrument. It is meant to change prices, discourage carbon-intensive consumption and create fiscal space for cleaner choices. But in Pakistan, where energy prices quickly affect transport, food, farming, industry and household inflation, a carbon tax without recycling becomes politically fragile and socially regressive. The state collects in the name of climate, but citizens experience it as another layer of extraction.
The IMF’s third EFF review and second RSF review confirm that climate-related fiscal instruments are now part of Pakistan’s reform architecture. The RSF supports climate resilience, green mobility, transport decarbonisation and energy-sector reforms aligned with national climate commitments. It also identifies carbon levies, vehicle feebates, EV charging infrastructure, renewable energy investment and better electricity subsidy targeting as part of the transition pathway. The direction is correct. The missing link is institutional design.
Pakistan must stop using carbon taxation as a fiscal crutch. IMF findings show strong PDL collections helped offset tax revenue shortfalls. When petroleum levies substitute for broad-based taxation, carbon pricing loses its environmental purpose and becomes revenue collection with a green label.
Every carbon-related rupee should also be traceable. Pakistan needs a Carbon Revenue Recycling Statement in the annual budget that shows how much was collected, where it was spent, and what social and emissions outcomes were achieved.
Third, the first claim on carbon tax revenue should be for low-income households. Carbon taxation affects fuel prices directly, but its second-round effects are wider. Diesel moves vegetables, wheat, milk, construction material, medicine and labour. Petrol moves households and small businesses. Higher fuel prices quickly travel through the economy like an uninvited guest at every dining table. Therefore, recycling must begin with protection. A fixed share of carbon revenues should be transferred through BISP as a Climate Dividend for vulnerable households, indexed to fuel price movements and targeted using the NSER database.
This would not be charity. It would be macroeconomic stabilisation. The IMF programme already recognises the need to expand social protection and strengthen the targeting of vulnerable consumers. It also notes that Pakistan is proceeding with electricity subsidy reform under RM12, replacing tariff differential subsidies and cross-subsidies with a targeted subsidy framework for low-income consumers via BISP. The same architecture can be used for carbon tax recycling. If the state can target electricity subsidies through BISP, it can also recycle carbon revenues through BISP. The delivery pipe is being built; the policy question is what we decide to pour through it.
Fourth, carbon revenue should make clean alternatives affordable. A fuel tax without mobility alternatives is not climate policy; it is punishment for dependence. Pakistan cannot ask citizens to consume less petrol while leaving them with expensive EVs, weak public transport and limited charging infrastructure. The RSF reform matrix includes a supplementary carbon levy through the PDL on gasoline and diesel, as well as a revenue-neutral scheme combining EV subsidies with a supplementary tax on internal combustion engine vehicles under the New Energy Vehicle Policy. This is the right conceptual move, but it must be scaled and protected from fiscal leakage.
The priority should be two-wheelers, three-wheelers, fisherfolk, buses and delivery fleets, not elite electric cars. Pakistan’s mobility transition must begin where Pakistan actually moves. A carbon tax that helps a wealthy household import an EV is poor economics dressed in a green sherwani. A carbon tax that helps a rickshaw driver or fisherfolk shift to electric power, enables a working woman to buy an electric scooter and allows cities to replace diesel buses with electric ones is climate justice with wheels. The former is a subsidy to status; the latter is a transition strategy.
Carbon tax recycling should also support distributed energy and battery storage. Pakistan’s energy crisis is not simply a supply problem. It is a capacity-payment problem, a demand-timing problem, a grid-modernisation problem and a fuel-import problem. Recycling carbon revenue into general expenditure will not solve these structural contradictions. Investing it in rooftop solar, battery storage, grid upgrades, smart meters and transformer capacity can reduce peak demand, cut fuel imports and make electricity reforms more politically acceptable.
This is especially important as Pakistan is expected to align energy prices with costs while protecting vulnerable consumers. The most sustainable way to do this is to reduce the cost structure itself. Rather than only subsidising consumption, Pakistan should support assets that lower future bills. Solar panels, batteries, efficient appliances and smart meters are not giveaways; they are tools for reducing fiscal risk. A household with a small solar-plus-storage system is less vulnerable to tariff shocks than one dependent on monthly subsidies.
Industry must also be part of the recycling framework. Carbon taxation raises costs for logistics, freight and energy-intensive production, while exporters face growing demands for carbon disclosure and greener supply chains. A portion of carbon revenue should therefore support energy audits, efficient equipment, waste-heat recovery, electrification, solar-plus-storage for SMEs and carbon accounting systems. The goal should be to turn carbon taxation from a cost burden into a competitiveness strategy.
Seventh, carbon revenue should not be fully ring-fenced away from fiscal stability, but the fiscal share must be capped. Pakistan’s debt problem is real. Circular debt is real. The need for fiscal consolidation is real. But if all carbon revenues are swallowed by the general budget, public trust will evaporate. A fair formula would allocate 40 per cent to household climate dividends, 25 per cent to clean mobility and public transport, 20 per cent to distributed energy, BESS and industrial decarbonisation, 10 per cent to adaptation and disaster-risk financing and 5.0 per cent to administrative systems, MRV and evaluation. The exact percentages can be debated, but the principle should be non-negotiable: most carbon revenue must finance the transition that justifies the tax.
Finally, Pakistan needs a Carbon Tax Recycling Act or at least a dedicated schedule in the Finance Bill. It should define eligible revenues, create a transparent ledger, mandate annual reporting, require distributional analysis before increasing rates and publish expected emissions and welfare impacts. Parliament should review it annually. Provinces should be linked through climate-relevant spending frameworks. The Ministry of Finance should not treat carbon revenue as ordinary money. It should treat it as public trust money collected under a climate mandate.
The verdict is straightforward. Pakistan should not reject carbon taxation. It should reject unrecycled carbon taxation. A well-designed carbon tax can reduce emissions, cut oil imports, support EVs, modernise the grid, protect poor households and prepare exporters for a carbon-constrained global economy. A poorly designed one will raise fuel prices, fuel resentment and vanish into the fiscal black hole. Without recycling, the state merely taxes the problem. With recycling, the financing starts.
The writer has a doctorate in energy economics and servesas a research fellow at the Sustainable Development Policy Institute (SDPI). He tweets/posts @Khalidwaleed_ and can be reached at: [email protected]
