Pakistan opposes IMF push for carbon levy on fuel, coal, and vehicles

Pakistan has opposed the International Monetary Fund’s (IMF) proposal to impose a carbon levy on petroleum products, coal, and internal combustion engine (ICE) vehicles, citing concerns over fund utilisation and jurisdictional challenges. 

According to a report published by the Express Tribune, the proposal, aimed at discouraging fossil fuel consumption, was discussed on Friday during negotiations between an IMF team and officials from the Ministry of Petroleum, Ministry of Finance, Ministry of Climate Change, Ministry of Industries, and the Federal Board of Revenue (FBR).

The IMF recommended raising the petroleum levy from Rs60 to Rs70 per litre over three years, starting with an initial Rs3 per litre increase in the first year. The additional revenue, according to the IMF, should be allocated to green energy initiatives. 

Additionally, the IMF suggested increasing federal excise duty on ICE vehicles, treating the additional tax as a carbon levy.

Pakistani authorities expressed reservations about the plan, questioning how the revenue generated under the climate-related levies would be utilised. Concerns were also raised about the potential imposition of a carbon levy on coal, which falls under provincial jurisdiction. 

Unlike taxes shared with provinces under the National Finance Commission, a levy remains outside the distributable pool, but in the case of a carbon levy, half of the revenue must be allocated to the provinces, further complicating implementation.

Despite resistance to the broader carbon levy, the FBR backed an increase in excise duty on cars. Automobiles in Pakistan are already subject to high taxation, with levies accounting for 36% to 45% of a vehicle’s total price, depending on the model. The current taxation structure includes advance income tax, sales tax, federal excise duty, and high registration fees.

Government estimates indicate that 10% of the country’s total carbon dioxide emissions come from the transport sector. The Engineering Development Board is finalising a five-year New-Energy Vehicles (NEVs) policy to transition toward cleaner alternatives. Estimates suggest Pakistan will require at least Rs155 billion in additional funding by 2030 to replace combustion engine cars and motorcycles with cleaner energy options.

Nearly 80% of Pakistan’s imported oil is consumed by the transport sector. While shifting to electric and hybrid vehicles could save foreign exchange reserves, the transition remains costly and would require subsidies, tax exemptions, and new infrastructure to support the shift. 

The IMF has suggested that revenue from the proposed carbon levy be used to make electric two-wheelers and three-wheelers more affordable.

The World Bank has endorsed a carbon tax for Pakistan, stating it would help reduce reliance on imported fossil fuels, which account for one-third of the country’s energy supply and contribute significantly to fiscal pressures. 

Additionally, the government is working on introducing National Vehicle Emissions Efficiency Standards to promote cleaner and more efficient vehicles. However, discussions over implementing a carbon levy remain unresolved as authorities continue negotiations with the IMF.

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