Pakistan resists IMF’s carbon levy

ISLAMABAD:

Pakistan on Friday pushed back against the International Monetary Fund (IMF)’s demand to impose a carbon levy on petroleum products, coal, and internal combustion engine cars, which the global lender is advocating to discourage the use of fossil fuels.

The IMF has proposed that the existing petroleum levy be increased from Rs60 per litre to Rs70 per litre over three years, starting with Rs3 per litre in the first year, according to government sources. The additional revenue generated from the levy may be used for activities to promote green energy, according to the proposal.

Sources said the IMF also wants the existing federal excise duty rates on internal combustion engine (ICE) cars to be increased, with the additional duty being treated as a carbon levy.

Discussions were held on Friday between an IMF team and Pakistani officials from the Ministry of Petroleum, Ministry of Finance, Ministry of Climate Change, Ministry of Industries, and the Federal Board of Revenue.

On the same day, the government appointed Ali Pervaiz Malik as the new Petroleum Minister, while his predecessor, Dr Musadiq Malik, was appointed as Climate Change Minister.

Sources said Pakistani authorities were not receptive to the IMF’s demand and raised concerns about the use of funds generated in the name of climate protection, as well as federation-provincial issues.

There were also concerns about imposing a carbon levy on coal, which falls under provincial jurisdiction, they added.

Unlike a tax, which is shared with the provinces under the National Finance Commission, collections from a levy remain outside the distributable pool. However, in the case of a carbon levy, half of the revenue must be allocated to the provinces, according to sources.

Sources also said the FBR supported the proposal to increase federal excise duty rates on cars. Cars in Pakistan are already heavily taxed, with taxation accounting for 36% to 45% of the total price, depending on the variant.

The government currently imposes advance income tax, sales tax, federal excise duty, and hefty registration fees on new cars.

The IMF had also raised the issue of a carbon levy last month during negotiations for the Resilience and Sustainability Facility (RSF), an IMF loan package designed to support climate-vulnerable nations. Pakistan is seeking over $1 billion from the IMF under this facility.

Finance Minister Muhammad Aurangzeb stated this week that disbursements under the RSF will be linked to actual climate-related spending by the country.

One of the resilience conditions is the imposition of a carbon levy, which the lenders want Pakistan to apply to internal combustion engine vehicles and fossil fuels.

According to government estimates, 10% of total carbon dioxide emissions originate from the transport sector, and a shift to cleaner vehicle sources will require massive funding and efforts.

The Engineering Development Board is in the process of finalising a five-year New-Energy Vehicles (NEVs) policy. The ministry’s initial estimates indicate that Pakistan will need at least Rs155 billion in additional funding by 2030 to replace combustion engine cars and motorcycles with clean-fuel-based alternatives.

Nearly 80% of Pakistan’s imported oil is consumed by the transport sector. Converting to cleaner energy vehicles could save foreign exchange reserves, but the transition is expensive and will require subsidies to lower vehicle costs and promote new infrastructure, including tax waivers and concessions, sources said.

The IMF’s proposal suggests that revenue from the carbon levy should be used to offset the high cost of two-wheeler and three-wheeler electric vehicles.

According to the Engineering Development Board, traditional two-wheeler motorcycles are up to 100% cheaper than new-energy two-wheelers, while new-energy three-wheelers are up to 123% more expensive.

Prime Minister Shehbaz Sharif’s government aims to ensure that by 2030, up to 90% of new purchases of two- and three-wheelers are based on renewable energy sources.

New technology-based four-wheeler cars are estimated to be 65% more expensive than combustion engine vehicles. The government aims for at least 30% of new car purchases by 2030 to be based on new technologies, sources said.

According to the World Bank, a carbon tax could be beneficial to Pakistan’s development from multiple perspectives. Pakistan imports nearly one-third of its energy in the form of oil, coal, and re-gasified liquefied natural gas (RLNG) at enormous cost, contributing significantly to the country’s chronic fiscal stress, it added.

Pakistan recently signed a $1.2 billion deal to buy Saudi oil on deferred payments. The facility was secured to meet balance of payments needs and will be used to purchase Saudi oil.

The government is also planning to introduce National Vehicle Emissions Efficiency Standards aimed at promoting newer, more efficient vehicles.