Carbon tax on petroleum products proposed to protect environment

The federal government has proposed a new carbon tax on petrol, high-speed diesel, and furnace oil in the federal budget for the next fiscal year. 

The move aimed to control excessive fuel consumption and generate revenue to protect the environment and green energy programmes.

The proposed levy, which will initially stand at Rs2.5 per litre, is expected to come into effect for financial year 2025-26, increasing to Rs5 per litre in the financial year 2026-27.

In May, the Petroleum Division (PD) formally submitted a summary to the Cabinet Committee for Disposal of Legislative Cases (CCLC), proposing the Rs2.50 per litre carbon levy on these fuel products by the end of June for the upcoming budgetary year (FY26).

This carbon levy will then be increased to Rs5 per litre on the same fuel products in FY27.

This levy is being introduced as part of Pakistan’s agreement with the International Monetary Fund (IMF), which has provided $1.3 billion under its Resilience and Sustainability Facility (RSF).

This facility is specifically designed to help the nation address the pressing challenges of climate change. To legally implement this new charge, the necessary amendments will be made to the Petroleum Act.

Officials familiar with the plans stated that the initial Rs2.50 carbon levy on the three fuel products is expected to generate between Rs6-7 billion per month. Once increased to Rs5, this monthly revenue is projected to rise significantly, reaching Rs12-14 billion.

Crucially, the revenue generated could also be channelled towards a significant reduction in CO2 emissions. This includes creating effective incentives for the adoption and use of electric vehicles (EVs), contributing to the national goal of 30% penetration for new passenger EV sales and 50% for two and three-wheelers by 2030.

Furthermore, by gradually shifting away from imported fuel products, this initiative also aims to reduce balance of payments stability risks for the country.