Pakistan Hesitates on IMF’s Carbon Levy Proposal Amid Climate Loan Talks
ISLAMABAD: Pakistan has expressed reservations about implementing a carbon levy, a measure the International Monetary Fund (IMF) is advocating to generate funds for promoting new energy vehicles under its resilience framework. This proposal emerged during preliminary discussions on finalizing the Resilience and Sustainable Facility (RSF), a $1 billion IMF loan designed to enhance climate preparedness in vulnerable nations.
Government officials remain skeptical about the carbon levy due to its potential impact on industry growth, according to sources familiar with the talks. A more detailed discussion on the matter is scheduled for Tuesday.
An IMF delegation is currently in Pakistan to negotiate a set of resilience policies required for securing climate-related funding. Unlike previous IMF programs that primarily addressed balance-of-payment crises, this initiative aims to address climate adaptation strategies. The negotiations align with recommendations from the World Bank’s Country Climate and Development Report, which highlights existing policy gaps that Pakistan must address.
One of the proposed conditions involves imposing a carbon levy on fossil fuel-powered vehicles, particularly those with internal combustion engines. Government estimates indicate that the transport sector accounts for approximately 10% of the country’s total carbon dioxide emissions. A shift to cleaner energy vehicles would require significant investment and infrastructure development.
The Ministry of Industries is working on a five-year New Energy Vehicles (NEVs) policy, which estimates that at least Rs155 billion will be needed by 2030 to facilitate the transition from conventional combustion engine vehicles to environmentally friendly alternatives. Since nearly 80% of Pakistan’s imported oil is consumed by the transport sector, switching to cleaner energy sources could help conserve foreign exchange reserves.
However, transitioning to green transportation is costly and would necessitate subsidies to lower vehicle prices, tax incentives, and new infrastructure development. Traditional two-wheeler motorcycles are up to 100% cheaper than electric alternatives, while three-wheelers powered by new energy sources are estimated to be 123% more expensive. The government’s target is for 90% of new two- and three-wheeler purchases to be renewable energy-based by 2030.
For four-wheelers, new energy vehicles are projected to be 65% more expensive than their fossil-fuel counterparts. The government aims to have at least 30% of new car purchases using advanced green technology by 2030.
The Ministry of Industries is considering multiple incentives, such as zero federal excise duty, reduced sales tax rates, and the removal of withholding tax on NEVs, regardless of battery size. The expected revenue losses from these incentives could be offset through the proposed carbon levy. Additional measures under consideration include increasing the maximum allowable bank financing for NEVs from Rs3 million to Rs10 million, free vehicle registration, and toll exemptions on highways. Furthermore, the government plans to establish 750 new charging stations by 2030.
Global financial institutions are urging Pakistan to introduce a carbon levy on conventional fuel-powered vehicles to help finance the infrastructure required for sustainable transport solutions. According to the World Bank, a carbon tax would benefit Pakistan by reducing reliance on imported fossil fuels, which impose a significant financial burden on the economy. Such a tax could also encourage businesses and consumers to adopt cleaner energy sources.
The World Bank suggests that a carbon tax would broaden the country’s tax base by integrating currently untaxed informal sector producers—who make up an estimated 35% to 50% of the economy—into the tax system. Unlike traditional tax methods, a carbon tax could be implemented relatively easily with minimal administrative costs. A gradual introduction, coupled with mechanisms to protect low-income groups, could ensure a smoother transition.
Currently, 51 manufacturers in Pakistan hold licenses for various transport vehicle production. Government incentives could help establish the necessary infrastructure to support green transport. Additionally, Pakistan plans to introduce National Vehicle Emissions Efficiency Standards to encourage the adoption of cleaner and more efficient vehicles.
During negotiations, Pakistan’s Energy Ministry briefed the IMF on ongoing initiatives to develop the necessary infrastructure. However, no final decision has been made regarding the carbon levy. Government officials indicated that any commitment to the IMF on implementing the tax would require approval from Prime Minister Shehbaz Sharif, with a clearer position expected by the end of the week.
Apart from the carbon levy, the new IMF facility aims to phase out subsidies in various sectors, including the gradual removal of electricity subsidies for tube wells, the reduction of natural gas subsidies for fertilizer production, and reforms in the sugar sector. Proposed sugar industry changes include eliminating licensing restrictions on new mills and removing import duties and export subsidies for sugar.
As discussions progress, Pakistan’s leadership faces a critical decision on balancing economic growth with environmental responsibility while securing much-needed climate funding from the IMF.
