From Polluter to Payer: How Carbon Tax Could Drive Reform and Equity in Pakistan

A new technical note from the World Bank’s Pakistan Poverty and Equity Team, in partnership with the International Energy Agency (IEA) and data support from the Global Trade Analysis Project (GTAP), offers a detailed examination of household carbon emissions in Pakistan and how carbon taxation could reshape the country's economic and environmental future. Authored by economists Oscar Barriga-Cabanillas and Christina Wieser, the study highlights the urgent need for effective carbon pricing mechanisms as Pakistan confronts the dual challenges of rising emissions and ambitious development goals. As the country aims for upper-middle-income status, the authors argue that carbon taxation not only helps curb emissions but also presents a potent opportunity to raise much-needed fiscal resources for social spending and green investments.

Pakistan’s Emissions Soar Amid Fossil Fuel Dependence

Over the past two decades, Pakistan’s total carbon dioxide emissions have more than doubled, from 94 million tons in the early 2000s to approximately 200 million tons in 2023. Despite remaining relatively low on a per capita basis, this increase signals a worrying trend as economic growth continues to rely heavily on fossil fuels, especially oil and coal. The energy sector, dominated by imported fuel, is responsible for the bulk of national emissions. Oil accounts for 43 percent of CO₂ emissions, followed by coal at 31 percent. As the economy expands, this carbon-intensive growth model could push per capita emissions to quadruple, unless substantial reforms are implemented. The country has committed to reducing its projected emissions by 50 percent by 2030, 15 percent through domestic action and 35 percent dependent on international financing, requiring deep structural change in energy generation and transport.

Carbon Taxation: A Policy with a “Double Dividend”

The report outlines how carbon pricing mechanisms, both direct (like carbon taxes and emissions trading systems) and indirect (fuel taxes and subsidy reforms), can correct market distortions by embedding the social cost of emissions into prices. This strategy, rooted in the “polluter pays” principle, has the potential to deliver what economists call a “double dividend”: cutting emissions while boosting public revenue. However, Pakistan currently operates with significant subsidies on gasoline, gas, and electricity, which effectively lower the cost of carbon-intensive goods and disincentivize cleaner energy use. The World Bank stresses that eliminating these subsidies in tandem with moderate carbon taxes would be more effective than tax-based approaches alone. These combined reforms could not only reduce emissions but also ease fiscal pressure and make room for investments in climate adaptation and social safety nets.

Household Emissions Mirror Income and Urban-Rural Gaps

Drawing on data from the 2018/19 Household Integrated Economic Survey, the study imputes carbon content across household consumption baskets to reveal deep disparities. The results show that households in the top 10 percent of the income distribution emit four times more carbon than those in the bottom 10 percent. Wealthier households spend six times more and tend to purchase goods with higher embedded carbon, particularly in the non-food and energy categories. Urban households, meanwhile, generate about one-third more emissions than rural ones, largely due to higher energy use and consumption of manufactured goods.

Non-food items account for the largest share of household emissions (44–50 percent), followed by energy, which rises substantially across income groups. In the richest decile, energy accounts for nearly a third of household emissions, up from 15 percent among the poorest. Notably, while rural and urban households have different levels of carbon consumption, their relative shares across food, non-food, and energy remain consistent, suggesting similar consumption patterns but differing access and intensity.

Carbon Tax Impacts Depend on Design, and Equity Matters

The welfare effects of carbon taxation vary across income groups. Gasoline dominates direct energy emissions (83 percent), while electricity comprises 17 percent. For poorer households, electricity plays a more significant role, as private vehicle ownership and thus gasoline use are lower. The study shows that carbon taxes would disproportionately impact wealthier households through direct channels. At the same time, low-income groups would mainly feel the effects through indirect price increases in essentials like food and clothing. This highlights the importance of complementary measures such as revenue recycling, direct transfers, and social protection to shield vulnerable populations.

Examples from British Columbia, South Africa, Mexico, and Chile offer useful models. British Columbia introduced a revenue-neutral carbon tax, returning proceeds via tax cuts and direct payments. South Africa used phased implementation with exemptions to ease the burden. Mexico focused on transparency and distributional monitoring. Chile, though imposing a modest tax, used it to signal future climate commitments. These cases demonstrate that carefully designed policies can address equity concerns while maintaining environmental ambition.

A Path Forward for Pakistan’s Green Transition

The World Bank’s note concludes that while carbon taxation alone won’t solve Pakistan’s climate crisis, it can be a vital component of a comprehensive solution, particularly if paired with subsidy reform, strong institutions, and transparent revenue use. The country’s broader commitments, such as the National Economic Transformation Plan (2024–2029), which aims for 10 percent renewable energy in the mix and a 50 percent reduction in greenhouse gas emissions, signal intent but require practical policy tools to deliver results. By integrating carbon pricing with targeted compensation, phasing implementation, and signaling clear long-term goals, Pakistan can position itself for climate-resilient and inclusive economic growth.

If implemented wisely, carbon pricing could shift behavior across households and industries, reduce pollution, and catalyze green investments, all while strengthening public finances. The window for action is narrow, but with the right mix of fiscal, social, and environmental reforms, Pakistan can not only meet its climate commitments but also forge a more equitable and sustainable future.