Pakistan to introduce carbon tax in FY26 as part of climate reform drive

Pakistan has pledged to adopt a phased carbon tax beginning in fiscal year 2025–26 to curb emissions from fossil fuels and move toward a greener economy, according to a report released by the International Monetary Fund.

The new carbon levy, part of the upcoming 2025–26 Finance Act, will be implemented over two years on petrol, diesel, and fuel oil. The move aims to discourage fossil fuel consumption, particularly internal combustion engine (ICE) vehicles and fuel oil used in electricity generation.

To mitigate the tax’s impact on low-income groups, authorities plan to adjust the Benazir Income Support Program's Unconditional Cash Transfers (BISP UCT) annually for inflation.

The carbon tax is part of a broader climate agenda supported by the IMF’s Resilience and Sustainability Facility (RSF), which will also help implement Pakistan’s 2025–30 New Energy Vehicle (NEV) Policy. The policy seeks to ensure that 30% of new vehicles sold by 2030 are electric, in line with Pakistan’s Nationally Determined Contributions (NDCs).

Under the NEV Policy, the government will introduce a subsidy scheme for electric vehicles and impose a supplementary sales tax on ICE vehicles, calibrated to be revenue-neutral. A viability gap funding framework will also be created to support the private sector in developing EV charging station infrastructure, with the design to align with IMF Fiscal Affairs Department recommendations.

The IMF’s Climate Policy Assessment Tool (CPAT) projects that these policies would collectively reduce Pakistan’s emissions by 9.6 million metric tons of CO₂ equivalent (MtCO₂e) annually by 2030, or 4% below the current baseline, helping the country meet its NDC targets. The reforms are also expected to alleviate the severe health impacts caused by urban pollution.

The RSF will further support Pakistan’s green finance agenda by creating an enabling environment for sustainable investment. Planned reforms include enhanced climate risk management for financial institutions and adoption of a green taxonomy, which is being developed with the World Bank and expected by June 2025.

The State Bank of Pakistan (SBP) will issue guidelines for climate-related financial risk management in line with 2022 Basel Committee on Banking Supervision (BCBS) principles. The Securities and Exchange Commission of Pakistan (SECP) will also develop phased guidelines for listed companies to disclose climate-related risks and taxonomy-aligned data.

The IMF report highlights that investing 1% of GDP annually in climate-resilient infrastructure for five years would halve the long-term economic damage caused by natural disasters, enabling quicker economic recovery. It would also significantly reduce the humanitarian toll of climate events, as seen during Pakistan’s devastating 2022 floods.

Pakistan’s greenhouse gas emissions have nearly doubled over the past three decades, primarily driven by agriculture and energy sectors. The country remains heavily reliant on fossil fuels, with energy inefficiency exacerbated by past underpricing and extensive subsidies.