In a significant move towards climate action, the International Monetary Fund (IMF) has initiated discussions with Pakistan regarding the introduction of a carbon levy and a potential $1.5 billion climate finance package. These talks, which commenced on February 24, 2025, aim to support Pakistan’s sustainability efforts while ensuring economic stability.

Carbon Levy: A Step Toward Sustainable Development

One of the key proposals in the discussions is the implementation of a carbon levy in Pakistan’s upcoming fiscal budget. The proposed levy, which could be added to the existing petroleum levy, may increase fuel prices by up to Rs20 per liter.

The primary objective of this initiative is to generate revenue for green development projects. If implemented, the funds would be directed towards sustainability programs, infrastructure upgrades, and environmental initiatives, reinforcing Pakistan’s commitment to climate-friendly policies.

IMF’s Resilience and Sustainability Facility (RSF)

Pakistan is also looking to secure additional funds under the IMF’s Resilience and Sustainability Facility (RSF). Established in 2022, the RSF provides concessional, long-term financing to assist countries in tackling climate-related challenges. If approved, this funding would raise Pakistan’s total IMF support from $7 billion to approximately $8.5 billion.

Challenges in Public Sector Development

The Pakistani government has acknowledged that financial limitations have constrained the Public Sector Development Programme (PSDP). This has led to delays in crucial projects, budget overruns, and infrastructure maintenance issues. The introduction of a carbon levy is expected to ease these financial pressures by generating additional revenue for climate-related initiatives and development projects.

Ongoing Discussions and Future Prospects

IMF officials will continue deliberations in Islamabad until February 28, 2025. The discussions will cover various climate finance policies, including incentives for electric vehicles, subsidies for renewable energy, and broader environmental programs. A follow-up IMF mission is scheduled for early March to assess Pakistan’s financial landscape and the feasibility of these climate strategies.

The outcome of these negotiations will play a crucial role in shaping Pakistan’s economic and environmental future. With mounting global concerns about climate change, the country’s ability to implement sustainable policies while maintaining fiscal stability will be closely watched by international stakeholders.