In a landmark move to address climate change and reduce fossil fuel consumption, the Pakistan government has introduced a new “Carbon Levy” of Rs2.5 per litre on petrol, high-speed diesel (HSD), and furnace oil starting from the fiscal year 2025-26. This levy will increase to Rs5 per litre in the following fiscal year 2026-27, according to the budget documents released on June 10, 2025.
The Carbon Levy is imposed in addition to the existing Petroleum Development Levy (PDL), which currently stands at Rs78 per litre on petrol and Rs77 per litre on diesel, making petroleum products more expensive for consumers.
The government expects to generate approximately Rs46 to Rs48 billion in revenue from this levy in the first year, which will nearly double to Rs95 billion in the next fiscal year.
Finance Minister Muhammad Aurangzeb explained that this measure aims to discourage the use of fossil fuels and mobilize resources for climate adaptation, green energy programs, and climate-resilient projects.
The funds collected will be allocated towards green budgeting initiatives, reflecting Pakistan’s commitment to transitioning towards low-carbon growth and meeting international climate goals.
The levy will not apply to kerosene oil and light diesel oil (LDO). Additionally, a petroleum levy on furnace oil will be finalized and imposed at a rate to be notified by the federal government.
This policy aligns with Pakistan’s broader strategy to promote sustainable energy, including the upcoming New Energy Vehicle Policy encouraging electric vehicles over conventional fossil fuel-powered vehicles.
However, the immediate impact will be higher fuel prices for consumers and potentially increased electricity costs due to the levy on furnace oil used in power generation.
Overall, this carbon pricing mechanism marks Pakistan’s first formal step towards integrating environmental costs into fuel pricing, aiming to reduce greenhouse gas emissions and support climate change mitigation efforts while fulfilling commitments under the International Monetary Fund (IMF) Extended Fund Facility (EFF).