Islamabad, May 18, 2025 — In a significant policy shift toward environmental sustainability, Pakistan is poised to impose a carbon levy in the upcoming federal budget for fiscal year 2025-26.
This decision aligns with the government’s broader strategy to reduce dependence on fossil fuels and accelerate the transition to clean energy and electric vehicles (EVs).
Pakistan has reached an agreement with the International Monetary Fund (IMF) to implement this reform as part of a broader structural adjustment program. Authorities have assured the IMF of their commitment to ambitious reforms aimed at reducing carbon emissions and promoting greener alternatives in the energy and transport sectors.
As part of this initiative, Pakistan will introduce a supplementary carbon levy on liquid fuels. This carbon levy will be incorporated into the existing Petroleum Development Levy (PDL) and will initially target gasoline and diesel. A base rate of Rs5 per liter will be implemented and phased in gradually over the next two years. Additionally, fuel oil will be included under the PDL, with both base and supplementary carbon levy rates expected to become effective by the end of June 2025.
The carbon levy will be legally enforced through the Finance Act for fiscal year 2025-26, setting a legislative foundation for the government to increase the levy in future Finance Acts if necessary. By establishing this mechanism, Pakistan aims to internalize the environmental costs of carbon emissions while also encouraging a shift to cleaner energy alternatives.
Aligned with the New Energy Vehicle Policy (NEVP) 2025-2030, the government is also planning a revenue-neutral package within the FY26 budget. This includes a subsidy scheme for electric vehicles and a corresponding supplementary tax on internal combustion engine vehicles. The goal is to ensure that at least 30% of new vehicle sales in Pakistan are electric by 2030.
To support EV infrastructure, Pakistan will adopt a Viability Gap Funding (VGF) framework to attract private investment in charging stations. The framework will offer one-time subsidies and utilize an open bidding process to ensure transparency and competition. The first round of bids is scheduled for launch by February 2027.
With technical and financial support from institutions like the Asian Development Bank (ADB) and International Finance Corporation (IFC), Pakistan is committed to ensuring the VGF framework adheres to global best practices while minimizing fiscal risks.
This multi-pronged strategy marks a decisive move by Pakistan to address climate change through the strategic use of a carbon levy and sustainable energy policies.