Pakistan hesitant on IMF’s proposed carbon levy for clean energy transition

Pakistan has expressed reservations about implementing a carbon levy, a key proposal by the International Monetary Fund (IMF). The IMF has recommended this tax as part of its conditions for a $1 billion loan under the Resilience and Sustainable Facility (RSF), which aims to support climate-vulnerable nations in disaster preparedness and energy transition.

During initial discussions to finalize the RSF—focused on disaster resilience—government officials raised concerns about the levy’s potential impact on business growth. The IMF delegation is currently in Pakistan to negotiate climate-related conditions for the loan, marking a shift from the usual balance-of-payments-focused financial assistance. A detailed session on the carbon tax is scheduled for today (Tuesday).

One of the proposed conditions includes imposing a carbon levy on fossil fuel-powered vehicles, specifically internal combustion engine (ICE) vehicles. The transport sector contributes roughly 10% of Pakistan’s carbon dioxide emissions, and transitioning to cleaner alternatives will require substantial investment. The Ministry of Industries is drafting a five-year policy for New Energy Vehicles (NEVs), estimating that at least Rs 155 billion will be needed by 2030 to replace conventional vehicles with clean energy alternatives.

Pakistan currently imports nearly 80% of its oil for the transport sector. A shift to cleaner vehicles could lower emissions and reduce foreign exchange expenditures. However, the transition is costly, necessitating subsidies to make new vehicles and infrastructure more affordable. For instance, electric two-wheelers are up to twice as expensive as conventional motorcycles, while new-energy three-wheelers cost 123% more. The government aims to ensure that by 2030, up to 90% of new two- and three-wheeler purchases are powered by renewable energy.

To encourage this transition, the government is considering incentives such as exempting new-energy vehicles from federal excise duties, reducing sales tax, and offering zero withholding tax on NEV purchases. Additional proposals include bank financing for vehicles worth up to Rs 10 million, free registration, and toll-free access for new-energy cars. Plans also include establishing approximately 750 charging stations by 2030.

The IMF and World Bank view the carbon tax as essential for Pakistan’s fiscal health, promoting a move away from fossil fuels. A World Bank report suggests that such a tax could widen the tax base by including informal economy producers while improving efficiency and driving renewable energy adoption.

The government has yet to make a final decision on the carbon levy, with approval required from Prime Minister Shehbaz Sharif. A clearer position is expected by the end of the week. Additionally, the new IMF facility will emphasize the gradual removal of subsidies for electric tube-wells, natural gas subsidies for fertilizers, and reforms in Pakistan’s sugar industry.