Pakistan's Climate Support Levy Is Small, Regressive in Form and Still Worth Keeping

From 1 July 2025 Pakistan began charging a Climate Support Levy on petroleum products. Introduced in the Finance Act 2025 after being proposed in the budget as a carbon levy, it is set at Rs2.5 per litre on petrol, high-speed diesel and furnace oil for fiscal year 2025-26, with furnace oil also charged at an equivalent rate per tonne. The rate is scheduled to rise to Rs5 per litre in 2026-27. It sits on top of the petroleum levy, which already raises large sums for the federal budget, and the general sales tax and customs duties that apply to fuel.

The levy was part of Pakistan's commitments under its IMF programme and, in particular, the Resilience and Sustainability Facility, which supports climate-related reforms. It has been criticised from two directions: by those who say any new fuel tax burdens households already struggling with high prices, and by those who say Rs2.5 is too small to change behaviour and is simply a revenue measure with a green label. At Rs2.5 per litre, the levy is small relative to the price of fuel.

With petrol prices in the range of Rs250 to Rs270 per litre in mid-2025, it represents roughly one per cent of the retail price. Pakistan's energy tax structure has long been driven by revenue needs rather than by the relative social costs of different fuels. Fuel taxes are often regressive in their immediate effect, because poorer households spend a larger share of their income on energy and transport. The Finance Act does not, as far as public descriptions go, ring-fence the levy's revenue for climate purposes.

If the levy is to become a real price signal, its future path should be published several years ahead, so that households, transporters and vehicle buyers can plan. The levy applies to furnace oil, which is still used in some power plants. The Climate Support Levy is a modest first step that will not, at Rs2.5 per litre, change fuel use much.