Pakistan Commits to Rs. 5 Carbon Levy on Petrol and Diesel Under IMF Climate Reforms
Published: December 16, 2025 | Business Desk
Pakistan has formally committed to introducing a Rs. 5 carbon levy on petrol and diesel as part of a comprehensive climate reform program agreed with the International Monetary Fund (IMF). This move is linked to the $1.3 billion IMF Resilience and Sustainability Facility (RSF), which aims to strengthen Pakistan’s ability to deal with climate change, natural disasters, and long-term environmental risks.
The decision marks a major shift in Pakistan’s economic, energy, and climate policies, as fuel pricing, electricity subsidies, infrastructure development, and vehicle usage are now being directly connected with climate goals.
What Is the IMF Resilience and Sustainability Facility (RSF)?
The IMF Resilience and Sustainability Facility (RSF) is a special financing program designed to help vulnerable countries tackle climate change, environmental risks, and disaster preparedness.
Under this program:
- Pakistan will receive $1.3 billion in long-term financing
- The reforms will be implemented gradually up to 2027
- Policy changes will focus on energy, transport, water, infrastructure, and finance
The Rs. 5 carbon levy on petrol and diesel is one of the most visible measures under this agreement.
Rs. 5 Carbon Levy on Petrol and Diesel – What Does It Mean?
Under the new commitment:
- An additional Rs. 5 per liter carbon levy will be imposed on:
- Petrol
- High-speed diesel (HSD)
- The levy is separate from:
- Petroleum levy
- Sales tax
- Existing fuel taxes
Why Is This Carbon Levy Being Introduced?
The main objectives are:
- To discourage excessive use of fossil fuels
- To reduce carbon emissions
- To generate funds for climate-related spending
- To align Pakistan with global climate policies
This step reflects Pakistan’s promise to move toward a low-carbon economy.
Impact of Carbon Levy on Fuel Prices in Pakistan
The immediate impact will be:
- Slight increase in petrol and diesel prices
- Higher transportation costs for:
- Goods
- Public transport
- Agriculture inputs
However, the government claims that:
- The levy will be gradual
- Vulnerable groups will be protected through targeted subsidies
Still, fuel price sensitivity in Pakistan means this decision may face public and political resistance.
13-Point Climate Reform Agenda – Key Highlights
Pakistan’s agreement with the IMF includes a 13-point climate reform framework. Some of the most important reforms are explained below.
Mandatory Climate Impact Assessment for Mega Projects
One of the most significant changes is:
- All development projects costing over Rs. 750 million will require a mandatory climate impact assessment
This means:
- Environmental risks must be evaluated before approval
- Projects harmful to climate may be:
- Modified
- Delayed
- Rejected
This policy will directly affect roads, dams, power plants, and urban development projects.
30% Climate Spending in Infrastructure Projects
Under the new rules:
- At least 30% of spending in all infrastructure projects must be climate-related
Climate-related spending includes:
- Flood protection
- Climate-resilient roads
- Green energy components
- Water conservation systems
This reform aims to ensure that public money supports sustainable development.
Climate Budgeting System at Federal and Provincial Levels
Pakistan will introduce a formal climate budgeting system at:
- Federal level
- Provincial level
What Is Climate Budgeting?
Climate budgeting means:
- Identifying how much of the budget supports:
- Climate mitigation
- Climate adaptation
- Tracking climate-related spending transparently
The Ministry of Finance will publish an annual climate budget report.
Electric Vehicle (EV) Subsidies and Targets
Pakistan has committed to promoting electric vehicles (EVs) aggressively.
EV Targets by 2030
- 30% of new vehicles to be electric
- 50% of motorcycles to be electric
Government Support for EVs
- Subsidies for electric cars and bikes
- Incentives for EV manufacturers
- Charging infrastructure development
This policy aims to reduce:
- Fuel imports
- Urban pollution
- Carbon emissions
Changes in Electricity Subsidies Policy
The IMF agreement also includes major reforms in electricity subsidies.
Key Changes
- Subsidies will be:
- Limited to deserving consumers
- Removed for affluent users
- Improved targeting using data systems
- Focus on reducing:
- Line losses
- Electricity theft
This reform is expected to improve energy sector efficiency but may raise bills for middle- and upper-income consumers.
Mandatory Energy Labeling for Appliances
To reduce electricity consumption, Pakistan will introduce mandatory energy labeling for appliances, including:
- Refrigerators
- Fans
- LED lights
- Motors
- Air conditioners
Benefits of Energy Labeling
- Helps consumers choose energy-efficient products
- Reduces electricity demand
- Lowers household power bills
The promotion of energy-saving appliances will continue until June 2027.
Water Use Charges and Irrigation Reforms
Water management is a critical part of Pakistan’s climate reforms.
New Water Charges
Service charges will be introduced for:
- Efficient water use in:
- Sindh
- Khyber Pakhtunkhwa
- Balochistan
Irrigation Revenue Reforms
- Provinces will increase revenue from irrigation systems
- Water tariff adjustment systems will be introduced in:
- Punjab
- Sindh
This aims to reduce water wastage and improve resource sustainability.
Strengthening Disaster Risk Financing
Pakistan is among the most climate-vulnerable countries in the world.
To address this:
- Disaster risk financing will be strengthened
- Better financial planning for:
- Floods
- Droughts
- Heatwaves
- Climate disasters
This will help Pakistan respond faster to emergencies and reduce economic losses.
Climate Risk Assessment for Banks and Financial Institutions
Under the new framework:
- Banks will be required to:
- Assess climate-related financial risks
- Adjust lending decisions accordingly
This includes risks from:
- Floods
- Energy transition
- Environmental regulations
Introduction of Green Finance and Green Taxonomy
Pakistan plans to introduce:
- Green finance instruments
- Green taxonomy
What Is Green Taxonomy?
Green taxonomy defines:
- Which projects qualify as environmentally sustainable
- Standards for green investments
This will help Pakistan attract international climate finance.
Challenges and Public Concerns
Despite long-term benefits, several challenges remain:
- Rising fuel prices due to carbon levy
- Public resistance to new taxes
- Implementation capacity at provincial level
- Political pressure ahead of elections
Experts believe transparent communication and gradual implementation are critical.
Conclusion
Pakistan’s commitment to a Rs. 5 carbon levy on petrol and diesel under the IMF climate reform agenda marks a historic shift in national policy. While the short-term impact may include higher fuel costs, the long-term goals focus on climate resilience, sustainable growth, and disaster preparedness.
If implemented effectively, these reforms can help Pakistan reduce environmental risks, attract green investment, and build a more sustainable future.
Frequently Asked Questions (FAQs)
1. What is the Rs. 5 carbon levy on petrol and diesel?
The Rs. 5 carbon levy is an additional tax on petrol and diesel aimed at reducing carbon emissions and funding climate-related projects.
2. Why did Pakistan agree to this carbon levy?
Pakistan agreed to the levy as part of the IMF’s $1.3 billion Resilience and Sustainability Facility to support climate reforms and disaster resilience.
3. Will fuel prices increase due to the carbon levy?
Yes, fuel prices are expected to rise slightly as the levy will be added to existing fuel charges.
4. What are Pakistan’s electric vehicle targets?
By 2030, Pakistan aims for 30% of new vehicles and 50% of motorcycles to be electric.
5. How will climate reforms affect development projects?
All major projects over Rs. 750 million will require climate impact assessments, and at least 30% of spending must be climate-related.
