1

Classification: Internal
 6 Climate Change and its Impact on
Pakistan’s Economy
6.1 Introduction
Moreover, signs of continued climate stress
Climate change is no longer a distant risk.1 in Pakistan are increasingly being
It is a real, systemic global risk with manifested through higher temperatures,
profound impact on lives and livelihoods, erratic rainfall, rising sea levels, and rapid
reshaping economic structure, GDP glacial retreat (Figure 6.2a-d). Damages
growth, productivity, and financing from climatic events can escalate non-
decisions across the globe. Moreover, linearly as climate issues reinforce each
scientific evidence is clear that climate other, such as intense rains after a
change is also contributing to the breach of heatwave coinciding with glacial melt
other planetary boundaries, triggering (IMF, 2025a).
tangible risks of irreversible and abrupt
environmental damages (Appendix 6A).2 The biggest underlying driver of global
There is also strong evidence that unless climate change is the emission of
necessary and timely action is taken by the greenhouse gases (GHG), chief among
global community, the intensity of climate which are carbon dioxide (CO2) and
change will inevitably increase, leading to methane (CH4) emissions. In absolute
further economic damages and social terms, global GHG emissions are driven by
disparities amid growing ecological advanced economies (AEs), leading
imbalances. emerging markets and developing
economies (EMDEs) along with some
Evidence of the impact of climate change major producers of global fossil fuels
around the world continues to accumulate. (Figure 6.3).
Between 1995 and 2024, more than 9,700
global climatic events have led to direct
economic losses of around US$ 4.5 trillion
(in real terms), affecting 5.7 billion people,
and causing more than 832 thousand
fatalities worldwide (Germanwatch, 2025).
The impact of global climate change is
pronounced in Pakistan, which is the 15th
most affected country from climatic events
between 1995-2024 (Germanwatch, 2025).
Climatic disasters in Pakistan have been
higher than both global and regional
averages in 2000-24 as well as in the
preceding two decades (Figure 6.1).

1 Climate change refers to long-term shifts in temperature (i.e. global warming) and weather patterns that can occur
naturally but is now primarily driven by human activities. Source: UN (n.d.a)
2 Planetary boundaries refer to the limits to nine environmental, biophysical dimensions of earth within which it must

remain for humanity to survive and thrive. This chapter mainly focuses on climate change, which is only one of the 7
(out of 9) planetary boundaries crossed. The breaching of planetary boundaries; how it impacts Pakistan, and how
Pakistan contributes to their breach is discussed briefly in Appendix 6A.
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The State of Pakistan’s Economy, Half Year Report 2025-26

The top ten GHG emitting economies However, Pakistan’s emission intensity –
together contribute about 70 percent of measured as GHG emission per unit of
total global GHG emissions.3 In contrast, GDP – is relatively high, despite modest
Pakistan contributes only 1 percent to total improvement over time (Figure 6.3 & 6.4).
global GHG emissions.4 Similarly, Pakistan ranks 20th in global GHG emission
Pakistan’s per-capita emissions remain as against 45th rank in terms of nominal
notably low, ranking 147th in the world.

3 Nearly 54 percent of total global GHG are contributed by the top 4 emitting economies in 2024. Source: EDGAR (n.d.)
4 EDGAR (n.d.).

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pathways.

Historically, growth in per capita income

and human development in countries
around the world has been achieved on the
back of high energy consumption and high
GHG emissions.6 However, rising income
levels along with population growth
continue to be the biggest drivers of global
CO2 emissions in energy sector,7 despite
improvements in the energy intensity of
GDP and carbon intensity of energy
(Figure 6.6a). The same is true for Pakistan,
where growth in population and income,
alongside relatively high carbon intensity
GDP.5 Since the 1960s, total emissions have of energy, are driving the growth in CO2
increased significantly, with the energy emissions of energy sector (Figure 6.6b).8
and agriculture sectors as the major
contributors (Figure 6.5a & b). Pakistan’s As things stand presently, global climate
high emission intensity puts the country at action remains inadequate across all
the risk of materially increasing its indicators required to achieve the 2030
emissions, if its economy continues to target to contain global warming to 1.5 °C
follow the traditional development

5 Both numbers are for 2023. Source: EDGAR (n.d.); WB (n.d.)

6 Guliyev, H., & Seyfullayev, I. (2025); Li et al. (2022)
7 Energy sector contributes about two-third of global CO2 emissions.
8 Pakistan’s carbon intensity of industrial energy consumption is nearly 38 percent greater than that of North America,

and 50 percent more than the European Union (EU). Source: WB (2023a)

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(Schumer et al., 2025).9 The last ten years GDP growth — from CO2 emission and
were the warmest on record; in fact, in 2024 resource depletion— is a transition that
temperatures reached 1.55 °C above the even AEs with all their financial resources,
pre-industrial level (1850-1900 AD).10,11 The strong institutions and technological
situation is grave for Pakistan as it faces progress have only begun recently.12
warming at a considerably higher rate than
world average (GoP, 2025a). Notwithstanding these challenges, Pakistan
has shown strong commitment to climate
In light of the foregoing discussion, action through the formulation and
Pakistan faces a particularly challenging progressive enhancement of Nationally
position. On the one hand, it is one of the Determined Contributions (NDCs). Under
most climate-vulnerable countries despite the Paris Agreement, Pakistan has pledged
contributing very little to global GHG to cut 50 percent of GHG emissions by 2035
emissions. On the other hand, it needs to compared to Business as Usual (BAU)
develop its economy and increase GDP scenario.13 To this end, the country has
growth, while decreasing emission taken several initiatives, such as ten billion
intensity. This is indeed a daunting tree tsunami, mangrove conservation and
challenge, considering that decoupling of restoration drives (GoP, 2025b). Pakistan

9 Climate action includes mitigation (practices to reduce GHG emissions or enhance carbon sinks to absorb GHG
emissions) and adaptation (adjustment of existing system to reduce vulnerability to the current and future impacts of
climate change). Source: IPCC (2022); EU (n.d.)
10 UN (n.d.b)
11 Under the Paris Agreement, countries committed to reduce GHG emissions to keep long-term global warming well

below 2 °C while pursuing efforts to limit it to 1.5 °C, as the impact is much lower at 1.5 °C. Source: UNFCCC (2015)
12 Berahab, R. (2017)
13 Under BAU, emissions are projected to rise from 405 MtCO₂e in 2015 to 2,559 MtCO₂e by 2035. Of the pledged fifty

percent reduction, seventeen percent will be achieved unconditionally through domestic resources, whereas the
remaining thirty-three percent is subject to provision of grant based or concessional international finance, technology
transfer, and capacity building. Source: GoP (2024a).

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has also emerged as a global leader in the country but also for maintaining
rooftop solar, expanding its capacity by economic competitiveness.14 The latter is
nearly twenty times between 2022 and 2024 particularly true in light of rising global
(Schumer et al., 2025). At the same time, the investors’ interest in environmental, social
country has rolled out an electric vehicle and governance (ESG) assets amid
policy alongside energy efficiency increasing concern for environment,15 and
measures across various sectors, such as shifting trade and investment
building infrastructure and consumer preferences.16 In addition, the upward
appliances. Moreover, to support the trend in green patents globally presents an
efforts towards building resilience to opportunity for Pakistan to leapfrog carbon
climate vulnerabilities and natural intensive pathways and instead directly
disasters, Pakistan has also secured adopt green technologies (Figure 6.7).17
financing under the IMF’s resilience and
sustainability facility (RSF). Against this backdrop, the rest of this
chapter is organised as follows. Section 6.2
Undertaking actions like these for climate sheds light on the already realised and
mitigation and adaptation is not only expected impact of climate change on
crucial for combating climate risks faced by Pakistan’s economy as well as economic
policymaking, where the key finding is that
climate change has evolved from long-term
concern to pressing macroeconomic risk.
This is followed by Section 6.3 that
discusses the challenges related to climate
action, including limited institutional and
technical capacities, which reflect
Pakistan’s low level of preparedness to face
climate shocks. Section 6.4 highlights the
need to mobilise domestic resources for
climate finance considering consistently
low international inflows. Section 6.5 offers
concluding remarks with broad
recommendations.

14 Climate mitigation and adaptation enhance competitiveness by reducing climate-related losses, supporting green
innovation, and leveraging policies like carbon border adjustment mechanism (CBAM) and emission trading.
15 ESG assets are on its way to become 25 percent of global assets under management by 2030 (Bloomberg, 2024). This is

amid growing commitment by corporate shareholders towards profits, people and planet as against yesteryears’ sole
focus on shareholder value maximisation. For instance, in 2019 Business Roundtable (BRT), a 50-year-old association of
American CEOs, shocked corporate governance theorists with a commitment to deliver value to all corporate
stakeholders, including communities, instead of only serving shareholders. BRT also support reduction in GHG
emission (BRT, n.d.).
16 For details, see Section 6.2 and Box 6.2
17 The share of SDGs related patents increased from about 25 percent in 2015 to 31.4 percent in 2023. Within this,

patents specifically linked to climate action (SDG 13) and affordable and clean energy (SDG 7) grew faster than most
other SDGs between 2000 and 2023, highlighting accelerated innovation in green technologies. (WIPO, 2024)

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6.2 Impact of Climate Change on In the long term, World Bank (2022)
Pakistan’s Economy18 estimates show Pakistan’s GDP is projected
to fall by 4.5–6.5 percent by 2050 due to
Climate change poses multi-sectoral and climate change in the optimistic scenario,
multifaceted threats to Pakistan’s economy. and by as much as 7–9 percent in the
The directly exposed sectors, most notably pessimistic scenario, where agriculture and
agriculture, energy, infrastructure, and industry are the most exposed sectors.22
tourism, experience the most immediate Without timely climate action, the output
and visible impacts,19 with their of both these sectors is estimated to drop
repercussions extending into industry and by up to 17 percent, by 2050.
services sectors. They also have negative
socio-economic consequences that Moreover, in addition to physical and
undermine the progress towards operational level impacts, there are
sustainable development goals (SDGs).20 significant transitional risks that impact
various sectors of the economy.23 In view of
Climate disasters have already inflicted these risks, this section maps out broad
economic losses amounting to US$ 29.3 contours of climate change impacts and its
billion on Pakistan’s economy during 1992- risks across agriculture and industrial
2021 (IMF, 2025), whereas the 2022 floods sectors, along with risks to inflation,
alone caused damages of around US$ 28 external account, and fiscal position.
billion (MoPD&SI, 2022).21 SBP staff
estimates also show that in terms of direct Impact on Agriculture
impact, floods had significant and negative Pakistan’s agriculture sector is among the
effect on GDP, albeit it was partially country’s most climate vulnerable and
compensated owing to post-diluvial hardest-hit sectors, being highly sensitive
improvements in agricultural output and to climate variability and extreme weather
post-disaster rehabilitation and recovery. events. Given the sector’s importance, even
Nevertheless, the floods also had an modest climate shocks translate into huge
indirect (negative) impact on GDP through economic losses and threaten food
increases in input prices (Box 6.1).

18 In consideration of limited empirical estimates of future climate-related losses in Pakistan, some sub-sections of
Section 6.2 are based on global literature review in the context of Pakistan’s economy. Forecasting of its economic
impacts is challenging since frequency and magnitude of climatic events are uncertain (Batten, 2018).
19 IPCC (2023)
20 IMF (2025a); UN-Habitat (2023).
21 Both numbers are adjusted for 2021 inflation.
22 The risks of these declines are compared to BAU without further climate impacts and a counterfactual steady GDP

growth of 4 percent by 2050. Pessimistic scenario assumes the likelihood of simultaneous and multiple climate events,
which may compound the direct and indirect risks.
23 Examples of physical impact include flood related damage to crop and industrial facilities, whereas examples of

operational impact, includes heatwaves affecting agricultural and labour productivity. Transitional impacts stem from
policy pressure, carbon pricing, shifting consumer demand requiring decarbonisation via new materials/processes.
Source: BoE (2018)

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security.24 In fact, agriculture sector was Change in Yield* Table 6.1

percent
the hardest hit in the 2010, 2022, and 2025
Next Mid- End of
floods with damages estimated at US$ 5.0, Major Pakistan
Decades Century Century
Crops vs World
13.0, and 1.5 billion, respectively (NDMA, (2020-39) (2040-2059) (2080-2099)
Pakistan -6.2 -10.2 -10.4
2025; MoPD&SI, 2025). Maize
World -3.6 -7.3 -11.2
Pakistan -13 -22.5 -29.7
Rice
Crop production: Crop production is World -1 -1.1 -2.2
highly sensitive to fluctuations in Pakistan -0.6 -2.1 -6.2
Wheat
World -3.5 -7.5 -12.9
temperature, rainfall patterns, water
*Projected annual change due to climate change
availability, and extreme events – such as (moderate emission scenario) compared to a scenario
floods, droughts, and heatwaves (ADB, without climate change
2017). For example, in 2010, floods Source: UNDP (n.d.)

submerged 2.3 million hectares of Kharif Water stress: Agriculture output losses are
crops, destroyed around 2 million bales of compounded by growing water stress,25 as
cotton (ADB & WB, 2010). In 2022 floods, the sector is the largest consumer of water,
crops accounted for around eighty percent using about 96 percent of freshwater
of total agriculture damage, with livestock withdrawals (WB, n.d.). With more than 82
contributing 17 percent. Around 1.8 million percent of arable land depending on river-
hectares of agricultural land was damaged fed irrigation,26 rising temperature and
(MoPD&SI, 2022). Similarly, during 2025 increasing weather variability exacerbate
floods, agriculture sector was the most these issues. This adds to growing demand
affected, with 2.2 million acres of crop land for scarcer water resources and puts the
inundated. food system at further risk (ADB, 2012).

Furthermore, estimates suggest that a 0.5 – Moreover, accelerated glacier melting has
2.0 °C rise in temperature will reduce not only caused floods, damaging the crops
overall agricultural productivity by around directly but also depleted water resources.
8 – 10 percent by 2040 (Dehlavi et al., 2015), As these glaciers deplete, flows may
while overall crop yields may decline by 47 decrease by around 30-40 percent in the
percent by 2050 (UNDP, 2024). Yield next 50 years (ADB, 2017). At the same
reductions due to climate change are time, rainfall patterns have become erratic;
estimated to be widespread across all major prolonged dry spells during the winter
crops (Table 6.1). Similarly, a 3–5 °C rise season and above normal monsoon rains,
can reduce cotton and sugarcane yields by often resulting in floods, have hampered
up to 6 and 16 percent per year, crop productivity and caused substantial
respectively (Akbar & Gheewala, 2020). losses to agriculture sector (SBP, 2025; SBP,

24 The sector contributes 23.3 percent to Pakistan’s GDP, sustains over one-third of the labour force with majority being
women, and directly and indirectly contributes around 70 percent of the country’s exports. Source: PBS (2025a); PBS
(2025b); FAO (n.d.a)
25 Total renewable water resources per capita have fallen from 4,858.3 m3/inhab/year in 1964 to 1,012.72,

m3/inhab/year in 2022, well below the water stress threshold of 1,700 cubic meter. Source: FAO (n.d.b)
26 Source: FAO (n.d.a)

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2023a). These climatic pressures on water and higher mortality during prolonged dry
resources are compounding the challenges periods (Chandio et al., 2023).27 In the
posed by inefficient water management absence of climate action, livestock losses
that has led to greater water scarcity, and in Pakistan are estimated to be 18 percent
low use efficiency (Figure 6.8) amid of GDP by 2030 (UNDP, 2024). In addition
depletion of ground water at an alarming to these physical impacts, the livestock
rate (PIDE, 2022). sector also faces a major transitional impact
considering that it is characterised by
Livestock: Climate change directly affects relatively high methane intensity of
livestock sector in terms of loss of livestock, livestock products (Figure 6.9).
its reproduction and health. For instance,
the 2010 and 2022 floods in Pakistan caused Impact on Industry
about 1.5 million and 0.8 million livestock While the impact of climate change on
fatalities, respectively (MoPD&SI, 2022; agriculture remains central, it has
ADB & WB, 2010). In addition, climate cascading impacts across industrial sectors,
change can affect livestock indirectly via including manufacturing, energy and
feed and fodder (Gauly et al., 2013). others. These impacts range from physical
Excessive heat stress not only harms the damage to supply chain breakdowns and
health, fertility, and productivity of farm reduced productivity. For example, the
animals but also causes an immediate recent floods in Pakistan affected industrial
reduction in milk yield of dairy animals activities both due to reduced raw
(Rahman et al., 2019). materials availability and supply chain
disruptions, with estimated industrial
Moreover, water scarcity impacts feed losses at US$ 0.3 billion in 2010 and US$ 3.8
production, leading to livestock weight loss

27For instance, droughts during 1999-2002 in Sindh and Balochistan killed two million livestock (WB & ADB, 2021),
whereas livestock output declined by 48 percent in the worst affected districts by droughts during 2015-2017 (WB,
2022).

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billion in 2022 (SBP, 2023a; MoPD&SI, 2022; Climate Impacts on Textile Table 6.2
Sector
ADB & WB, 2010).
Impact
Climatic event Impact
channel
Manufacturing: In terms of physical Temperature, Yield reduction,
Raw material
damage, the impact of climate change precipitation,
supply
quality decline, price
extreme weather volatility
events on crops and livestock have
Water
spillover effects on wheat and rice milling, availability, Production
Operational
disruptions, increased
food processing, textile and other agro- energy supply, operations
costs, resource scarcity
based manufacturing industries. These extreme weather
Infrastructure damage,
industries face shortage of inputs and raw Extreme weather, Supply chain
transport delays,
materials due to loss of agriculture output. sea level rise logistics
higher shipping costs
Workforce
Climate
Similarly, within manufacturing, textile Labour Disruptions, Social
migration, job
stability Challenges in
and clothing sub-sectors are at risk from displacement
Production Hubs
climate change across their production Source: Sustainability directory
cycle (Table 6.2). Textile industry also faces
a major transitional impact, considering vulnerable to climatic conditions due to
that it is one of the largest contributors to increased variability of rain, glacial
global GHG emissions, higher than melting, and drought amid rising
aviation and shipping sectors (UNCTAD, temperatures. At the same time, with
2025; Filho et al., 2022). As a result, there is thermal power grid capacity at 56.3
a demand for sustainable and green percent, energy sector also faces a
production cycle to reduce the impact on transitional risk, becoming more evident as
climate change through different the country adds decentralised solar to the
regulations. Adapting these measures overall energy mix. Moreover, extreme
imposes an additional cost on the industry. temperature results in tripping of T&D
lines, while high power demand in extreme
Energy: As one of the most climate heat also results in power-breakdown
exposed sectors and one of the main (IGC, 2025a; Mahmood et al., 2013; Mohsin
drivers of climate change, energy sector et al., 2024).
faces a variety of climate risks. Energy
Impact on Labour Productivity
infrastructures —generation and
Labour productivity in Pakistan across all
distribution systems —are vulnerable to
sectors, including agriculture and
extreme weather conditions and natural
manufacturing, is estimated to decline by 7
disasters (Mikellidou et al., 2018; Goncalves
percent and 10 percent due to climate
et al., 2024).
change under moderate and high emission
scenarios, respectively.29 UNDP’s Human
In Pakistan, the country’s 11,500 MW of
Climate Horizon (HCH) estimates show
hydel power capacity,28 which was 28.0
that Pakistan is at risk of losing
percent of total grid as of FY25, is

28 NEPRA (2025).
29 MoF (2024).

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significantly higher number of labour

hours per worker in a year compared to
global average in both low-risk sectors and
high-risk sectors over the next three
decades.30 These losses are projected to
increase further, if the necessary climate
action is not undertaken (Figure 6.10).

This is because high temperature and heat

stress affect labour productivity across the
globe due to occupational safety and health
hazard (ILO, 2020). Such is the case in
Pakistan as well. A recent survey of textile
workers in Karachi showed that extreme
heat stress at working places is resulting in
health issues and reducing labour
productivity (Germanwatch, 2025).

Impact on External Account

Climate change impacts the external
account through various channels (IMF,
2025b). The negative impact of climate
change on Pakistan’s industry and balance due to both direct and indirect
agriculture spillover onto exports through effects of climate change. The former
reduced output and labour productivity. impacts production, infrastructure and
For instance, in FY25, damages to domestic transport routes. The latter results from
cotton crop due to heatwaves and erratic changes in resource endowments, such as
rainfall necessitated higher cotton imports land and water availability, and efficiency
(SBP, 2025). Earlier in FY23, food and of factors of production (Dellink et al.
textile exports were affected by the floods, (2017).
while damage to food crops resulted in
higher import of pulses, sugar and cotton. In addition to these physical and
These episodes exemplify the empirical operational risks, trade balance may also be
findings of Khan et al. (2019) who found a affected by transitional risks (IMF, 2021).
negative relationship between climate For instance, EU’s climate neutral
change and Pakistan’s agriculture exports regulations and European Green Deal may
over the period 1975–2017. put Pakistan’s textile exports at a risk going
forward, if the necessary actions are not
On the whole, developing countries like taken (Box 6.2). Addressing such risks will
Pakistan are at the risk of worsening trade not only require compliance with the

30High-risk sectors are agriculture, mining, construction and manufacturing, while all others are classified as low-risk
sectors for the labour hours estimation. Source: UNDP (n.d.)

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evolving environmental standards but also (Kotz et al., 2023). Within the components
necessitates changes to Pakistan’s own of inflation, food inflation is impacted the
import policy to reduce imported most in both advanced and emerging
emissions that feed into exports (CDPR, economies. This is due to climatic
2024). variations in short-term, particularly due to
rising temperatures (Faccia et al., 2021).
Similar to exports, foreign direct Food inflation is also impacted by negative
investment (FDI) is negatively affected in effects of temperature on crop yield; Abbas
economies and industries that are more et al. (2022) found a negative relationship
vulnerable to climate risks.31 The risks and of temperature and rainfall with wheat
uncertainty associated with climatic events production in Pakistan during the period
can worsen foreign investors’ confidence 1979–2020 leading to increase in food
leading to likely reduction in FDI and inflation.
portfolio investment (IMF, 2025b).
Similarly, floods also increase inflationary
Impact on Price Stability and Monetary pressures in the short-term (Parker, 2018).
Policy For instance, in the 2010 floods, food
Climate shocks impact price stability inflation rose due to supply-chain
through different channels. The impacts are disruptions, which along with higher
expected to be visible both in the short and government borrowing for post-flood
medium term, whereas weak mitigation expenditures reduced monetary policy
actions also increase the risk of inflationary effectiveness to contain monetary
pressures. For instance, supply side shocks expansion and inflation (SBP, 2010).
arising from floods, extreme temperatures Though short-lived, the impact of the 2022
or drought can affect crop production flood was devastating for inflation in the
leading to volatility in food prices (IMF, first few months (Hussain et al., 2025). SBP
2025b). Similarly, damage to transport staff estimates also show that floods have
infrastructure, trade disruptions and policy had a positive and immediate contribution
spillovers may also have differential to the NCPI inflation, whereas temperature
impacts on prices (UNDP, 2024). Moreover, shocks are likely to increase inflation in the
inflation can also be affected by climate long run (Box 6.1).
policies, such as carbon pricing, that can
cause structural shifts to price patterns The climate shocks also pose challenges for
across the economy (Debelle, 2019; central banks in achieving monetary policy
McKibbin et al., 2020). mandate (NGFS, 2023). For example,
volatility in food prices drives inflation
Literature suggests that rising temperature expectation (Abbas et al., 2015) and risks
has an adverse effect on headline inflation central bank’s inflation projections. This
in both low- and high-income countries was the case in FY23 when the then

31In EMDEs and other countries, there is a strong negative association between climate vulnerability and FDI inflows.
However, the climate preparedness level moderates the negative impact on FDI (An et al., 2022; Gopalan et al., 2023;
Shear, 2023)

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unfolding impact of the 2022 floods in Climate change has a significant effect on
Pakistan alongside exchange rate and other public finance with non-discretionary
supply shocks resulted in increased measures driven by direct and indirect
inflation volatility and contributed to impacts (IMF, 2025b). These include
revisions in SBP’s inflation projection (SBP, various types of public spending including
2023b). rebuilding damaged infrastructure, and
increased spending on healthcare and
Moreover, higher climate risks and loss of social safety. At the same time, GDP losses
assets can weaken businesses’ repayment lead to reduced revenues, and
capacity and banks’ balance sheets, and materialisation of government guarantees
limit lending, reducing the effectiveness of that squeezes fiscal space further. These
monetary policy.32 These risks require have repercussions for future debt
central banks to be vigilant. However, obligations and sovereign risk (Figure
constraints to data availability, required 6.11).
expertise to forecast climatic events, and
identification and quantification of the In Pakistan, the fiscal cost of recent floods
transmission of physical impacts are major in Pakistan is a case in point. Pressure on
challenges to calibrating appropriate fiscal accounts increased due to
monetary policy response; hence affecting expenditures for rescue, relief and
price stability (IMF, 2021; NGFS, 2023). rehabilitation needs. Due to limited fiscal
Fiscal Impact space and external financing, a substantial
part of budgeted development spending
Impact of Climate Change on Public Finances Figure 6.11

Climate Change Impacts

ri en by climate change ri en by climate policies

irect Indirect • Mitigation related public

investments and subsidies.
• Public spending for • Reduction in tax revenue
• Carbon taxation and reduction
damaged infrastructure. driven by GDP losses.
of energy subsidies.
• Post-disaster social • Higher health care spending.
• Adaptation
transfers. • Materialisation of implicit
investment subsidies.
• Materialisation of explicit contingent liabilities.
• Emergency spending related to
contingent liabilities. • Impact on sovereign capacity
natural disasters.
due to future debt obligations.
• Contingency funds and buffers.

Source: IMF (2025b)

32 Boneva et al (2022); Oguntuase (2020).

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was reallocated for flood-related activities Impact on Urban Economy

in FY11 (MoF, 2011; SBP, 2011). For the Climate change and urban economies have
2022 floods, recovery and reconstruction a mutually reinforcing relationship. At the
needs were projected to be 1.6 times the one end, rapid urbanisation is one of the
budgeted developmental expenditure for leading causes of climate change with
FY23, adding to fiscal pressures about 70 percent of global GHG emissions
(MoPD&SI, 2022). The government also principally driven by energy demand,
had to provide subsidies of Rs 44 billion to industrial processes, and extensive
flood-affected areas and emergency cash transport systems that are mainly
assistance of Rs 70 billion, which was concentrated in urban centres (Sharma,
disbursed to flood-affected families 2025). At the other end, climate-related
through BISP (SBP, 2023a). Subsequently, hazards put urban economies at the risk of
the federal government also allocated Rs a variety of macroeconomic and socio-
164 billion in FY24 budget for flood related economic risks, such as damage to public
expenditures,33 which added a fiscal and industrial infrastructure, productivity
burden of 0.2 percent of the then budgeted losses, increased mortality, illnesses, and
FY24 GDP. scarcity of food and water (IIED, 2009).35

In addition, there are transitional impacts In terms of impact on climate change,

of climate change on the fiscal position to Pakistan’s major cities are also major
meet the needs of climate mitigation and emitters amid rapid urbanisation and
adaptation. For example, the recent risk increasing population density in urban
assessments by the MoF highlight two areas. For instance, Karachi alone is
alternative scenarios for Pakistan’s climate estimated to produce around 9 percent of
outlook (MoF, 2025).34 Under the optimistic the country’s total GHG emissions,36 with
climate action scenario, the government nearly 38 percent stemming from
needs to invest 20 percent of US$ 58.8 manufacturing industries, followed by
billion, required to mitigate GHG waste disposal/wastewater (18.3 percent),
emissions by 2030, which will have residential (18 percent), and transport (13.8
additional fiscal burden. These additional percent) segments. GHG inventories of all
costs will need to be met through the major cities of the country are not publicly
imposition of carbon taxes and reduction in available but anecdotal evidence suggests
fossil fuel subsidies (IMF, 2025b; Bachner et that the combined contribution of major
al., 2019). cities is significant. This, coupled with the

33 Out of the total, Rs 18 billion were allocated for disaster response costs, Rs 96 billion for subsidies related to
disrupted economic activity, and Rs 50 billion for social protection. Source: MoF (2025).
34 The first scenario is optimistic, which assumes that international support to meet conditional mitigation pledges is

received and the world is able to achieve RCP 2.6 target; the second one assumes that governments do not invest in
climate change, leading to RCP 8.5 scenario.
35 Fifty-eight percent of cities report urban flooding, 54 percent cite extreme heat as climate related urban hazards,

while around two-third of cities expect hazards to become more intense and frequent. Source: CDP, 2024
36 Pakistan’s GHG emission inventory is estimated to be around 489.87 mmt-CO2e (GoP, 2024), whereas Karachi’s is

estimated to be 43.5 mmt-CO2e. Source: UNDP, 2025

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fact that a one percent increase in This worsens the impact of heatwaves,
urbanisation increases carbon emission by which is one of leading causes of climate
0.84 percent in long run in Pakistan (Ali et related mortality globally (Countdown,
al., 2019), suggests that the transitional 2023). In Karachi, for example, the severe
impact of climate change on urban 2015 heatwave caused more than 1,200
economies will be significant. deaths (MoCC, 2015). This underscores
how climatic events, infrastructural design
At the same time, however, climate change and social vulnerabilities combine to
is also reshaping the country’s major cities produce fatal outcomes, where vulnerable
in at least four major ways. First, urban air groups, such as outdoor workers, the
quality in Pakistan’s major cities has been elderly and the urban poor, bear the
consistently poor and, in many cases heaviest impacts. As a result, heatwaves
among the worst globally, making Pakistan reduce overall economic productivity
the most polluted country in 2025.37 This is (Anwar et al., 2022), which is also affected
driven largely by rapid urbanisation, by higher costs of cooling.
motorisation and seasonal burning of
agricultural residues. High concentrations Third, extreme heat also alters atmospheric
of particulate matter and other pollutants moisture content that triggers short but
in cities like Lahore, Karachi, Islamabad intense cloudbursts and flash flooding. In
and Peshawar regularly exceed acceptable Pakistan, the largest sprawling megacities
standards, posing serious risks to human —Karachi and Lahore —have seen more
health and increasing health expenditure frequent and severe floods. This, together
(Figure 6.12). with weak urban planning and insufficient
drainage infrastructure, overburdened
Second, Pakistan’s urban population is
growing at approximately 2.4 percent per
year compared to global average of 1.4
percent. Owing to ill-planned urban
infrastructure amid growing population
pressure, concrete and asphalt are
replacing vegetation in urban areas. This is
leading to faster warming than
surrounding rural areas and exacerbating
urban flooding amid erratic rainfall
patterns (Jabeen et al., 2010). These trends
reflect the urban heat island effect where
dense construction and reduced green
cover trap heat in cities and impacting lives
and livelihood (IGC, 2025b).

Pakistan was ranked as the most polluted country in 2025 with PM2.5 concentration of 67.3 μg m³, where Faisalabad,
37

Rahim Yar Khan, Lahore, and Sukkur were among the top 10 most polluted cities in the world. Source: IQAir (2025)

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sewage systems, especially in low-lying 2018).

neighbourhoods, leading to widespread
flooding in residential and commercial 6.3 Challenges to Pakistan’s Climate
zones. These recurring floods cause Action
significant damage to infrastructure,
impact commerce, disrupt daily life and The foregoing discussion shows that it is
livelihood and strain essential amenities critical for Pakistan to undertake climate
(Ejaz et al., 2024). action. This is a formidable task
considering Pakistan’s low level of climate
Fourth, climate variability and urbanisation readiness despite high climate
are also placing additional stress on urban vulnerability (Figure 6.13).
water resources. Extreme droughts and
increasingly erratic rainfall patterns In addition, the localised nature of the
combined with inefficient water impact of climate events and climate
management have intensified Pakistan’s adaptation complicates the design and
looming water crisis. Additionally, runoff implementation of climate policy. This is
from heavy rain washes pollutants from because the current state of local
commercial and industrial sites into government and local participation in
reservoirs and rivers, degrading water Pakistan is not commensurate with the
quality, which has serious consequences importance of climate action. Both local
for agriculture. Meanwhile, excessive government, and local participation in
groundwater pumping is lowering water Pakistan are weak (Warraich, 2025). In
tables and drawing down aquifers, making contrast, whilst mitigation may be pursued
Pakistan a water scarce country according through some large public sector projects
to all water scarcity indicators (Ashraf, and initiatives,38 most of adaptation and

38Mitigation projects are typically amenable to centralised and capital-intensive intervention such as utility-scale
renewable projects, large-scale afforestation & carbon sequestration, and urban mass transit etc.

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disaster management are inherently local resource availability (discussed in Section

in nature, tailored to diverse geographies, 6.4), enhance readiness towards climate
climate zones and community-level action (Figure 6.14). Strengthening these
vulnerabilities.39 facets are both necessary and urgent to
prepare Pakistan for the impact of climate
Moreover, both mitigation and adaptation change and reduce vulnerabilities.
eventually impact individuals and
businesses through physical disruptions, Policy and Institutional Environment
operational adjustments, and financial Pakistan’s climate policy and institutional
costs. While public policy and institutions framework has expanded rapidly over the
enable and support private climate actions last decade, producing comprehensive
through information systems, regulation, policies and creating dedicated institutions
coordination, and financing, the economic for climate action. However, its effective
burden of climate action ultimately rests on implementation is constrained by
citizens—either in the form of taxes or out- persistent gaps in mandate alignment,
of-pocket expenditures.40 coordination, and execution capacity
(Appendix 6B).
In this context, three overarching
challenges to effective climate action relate Policy implementation: In terms of policy
to policy and institutional capacity; implementation, there are four major gaps
technical capacity and human capital; and that need to be addressed (Umar et al.,
social readiness. Cross-country comparison 2023). First, there is inconsistent
suggests that these factors, together with recognition of climate challenges and
uneven prioritisation of actions across
provinces. This is evidenced by delayed
formulation and ineffective
implementation of climate policies.
Moreover, national frameworks, such as
the National Adaptation Plan (NAP), offer
broad priorities without regional specificity
(UN, 2025).

Second, both the National Climate Change

Policy (NCCP) 2021, and most provincial
climate policy documents do not explicitly
mention timelines for actions. Some policy
measures allude to short- and medium-

39 Adaptation solution varies by region—for example, drought management is needed in Balochistan, while
groundwater recharge or rainwater harvesting to counter sea intrusion is the needed adaptation in Lower Indus Delta.
40 Much adaptation is undertaken by private actors: families elevating homes, farmers changing crops, and businesses

investing in low-carbon technologies. Likewise, the private sector bears most transition costs through green
investments and carbon taxes.

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term measures, albeit without clear Climate Change Act (CCA) was passed,
execution timelines. For instance, the creating a legislative backing for climate
mitigation targets included in the NDCs governance framework. Under the CCA
are neither time-bound, nor supported by two main bodies were to be created: the
detailed activity roadmaps, weakening Pakistan Climate Change Council (PCCC)
prospects of successful implementation. and Pakistan Climate Change Authority
This lack of well-defined milestones, along (PCCA). Envisioned as a whole-of-
with inadequate sectoral prioritisation, is government coordination and oversight
not commensurate with Pakistan’s climate forum, the PCCC is the apex body on
vulnerabilities and commitments (Masud & climate action chaired by the Prime
Khan, 2023).41 Minister and brings together key federal
and provincial ministers and bodies. The
Third, there is limited scientific grounding PCCA was envisioned as a dedicated
and risk-based assessments. For instance, technical platform to formulate and execute
adaptation and mitigation measures are programmes and coordinate
not guided by robust risk modelling or implementation mechanisms.
sector-specific climate impact analysis (UN,
2025). Lastly, climate policy and climate Overall, the setting up of this structure was
action have not been effectively integrated an important step. This is because climate
with other macroeconomic and sectoral action requires apex-level political
policies, including alignment with the fiscal leadership,42 complemented by an
framework (Box 6.3) (Masud and Khan, independent expert climate body for
2023). For instance, whilst climate policy technical oversight and professional
has prioritised renewable energy (RE) bureaucracy for effective implementation
expansion through decentralised solar (Elliott et al., 2021).
power, several regulatory, governance, and
financing challenges create investment and However, there are three major
operational barriers towards further RE institutional challenges that have and
adoption amidst a lack of grid and continue to weigh on climate policy
transmission readiness (Box 6.4). implementation in Pakistan (IMF, 2025a).
First, the actual setting up of the PCCC and
Institutional framework: In terms of PCCA were delayed. The PCCC was
overall design Pakistan’s climate established in 2022—i.e. five years after the
institutional architecture is in line with CCA was passed. Similarly, the setting up
global best practices. In 2017, the Pakistan of the PCCA was notified in May 2024,

41 NCCP 2021 is the revised version of the earlier NCCP-2012. NCCP 2012 was formulated with a major focus on
climate resilient development and adaptation in view of Pakistan’s high vulnerability to adverse climatic events. The
2021 revision came after the Paris Agreement 2015, when Pakistan accepted a voluntary reduction in emissions. Hence
the updated NCCP 2021 focused equally on mitigation, adaptation and identification of sectoral policy measures.
Source: MoCC, 2021
42 Other countries are also addressing this question. China’s National Energy Commission, with “super ministry”

status, can influence other ministries and reports directly to state council; Zambia’s climate change technical committee
is placed under their MoF; while Ethiopia’s EPA comes directly under the PM office, etc. Source: GSDRC, 2017

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following an order from the Supreme constitutional devolution and centralised

Court of Pakistan to the Federal policy ambition creates an implementation
Government (IMF, 2025a). vacuum.

Second, both the PCCC and PCCA face the Moreover, provinces that are responsible
challenge of irregular meetings and for nearly 90 percent of required climate-
operational delays. The meetings of the related functions, lack formally mandated
PCCC, for instance, have been few and provincial NDCs or structured mechanisms
irregular (Umar et al., 2023).43 Similarly, to impact national climate goals (Naeem
despite its establishment, the PCCA and Aslam, 2023). This institutional
remains largely non-functional due to disconnect reflects not only the lack of
operational delays, hurdles, and a lack of centralised direction and action, but also
clarity on how both the Ministry of Climate the absence of a coordinated, whole-of-
Change and Environmental Coordination government response. As a result,
(MoCC&EC) and the PCCA will operate regulatory oversight in climate sensitive
given their similar mandates (IMF, 2025a). areas remains weak (Sheikh, 2025).45
The delay in the formation of the
authority’s rules poses a risk of duplication In the same vein, local governments—
of technical functions, staffing, and critical for ground-level adaptation,
workflow (MOCC&EC, 2025a; MOCC&EC, municipal services, and localised disaster
2024a). Moreover, the MoCC&EC has response—remain under-empowered due
inadequate resources, which constrain its to incomplete devolution (Warraich, 2025).
programme execution capabilities (Umar et Without fiscal authority and administrative
al., 2023). autonomy, local bodies cannot initiate or
sustain investments in climate-resilient
Third, the unfinished devolution agenda is infrastructure, nor can they ensure
also contributing to institutional meaningful community participation
challenges.44 For instance, although (Umar et al., 2023).
climate-sensitive —agriculture, water,
environment, etc.—are largely devolved to Technical Capacity and Human Capital
provinces, until the NDC 3.0 in 2025, the Limited technical capacity and human
federal entities continued to make capital are among major cross-cutting
international climate commitments, constraints to Pakistan’s climate action.
particularly through the NDCs, without This impacts the public and private sectors
systematic provincial ownership (Sheikh, alike across diverse sectors of the economy.
2025). This mismatch between These constraints manifest in a variety of

43As per CCA 2017, the climate change council is required to meet at least twice annually. However, council convened
its first meeting only in 2022 (PID, 2022) with subsequent meetings remaining infrequent, indicating delayed
operationalisation and irregular functioning.
44 Decentralisation is crucial for sub-national buy-in for climate action (Khan & Hussain, 2025).
45 The inadequate enforcement of land-use and floodplain zoning regulations in Swat exemplifies governance gap. As a

result, hotel construction and human settlements arose in high-risk riverine areas, exacerbating human and economic
losses during recent floods. Source: Habib et al., 2022; Samad et al., 2024.

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ways, most important of which are an integrated approach to capacity

discussed below. building that spans technical, institutional,
and knowledge systems in both public and
Risk assessment: Timely risk assessment in private sectors. For example, agriculture
Pakistan is constrained by technical extension departments often lack training
limitations in climate observation and in climate resilient farming.47 Similarly,
forecasting systems, including meteorology there is a limited pool of professionals in
and hydrology (MoCC&EC, 2025a). For GHG inventory management in both
instance, insufficient supercomputing public and private sectors, whereas there is
capacity affects the accuracy of climate a shortage of skills in climate sensitive
forecast. In addition, there is also a need for areas, such as hydrology and meteorology,
significant improvement in local data input affecting the accuracy of weather forecast
for global forecast systems, in the absence (MoCC&EC, 2025a).
of which forecasts are coarse, restraining
the usefulness of the system (Rehman, Underlying these challenges is a broader
2024). In addition to weak early warning deficit in climate education, research
systems, technical limitations also affect capacity, and human capital development.
timely risk communication, reducing their Climate change education, which is the
effectiveness in disaster preparedness and cornerstone of long-term capacity building,
response. is perceived as insufficient for a wide array
of reasons, including insufficient funding
GHG inventories: Gaps in GHG and limited resources (Figure 6.15). The
measurement undermine the credibility majority of firms report capacity-building
and effectiveness of Pakistan’s mitigation activities as inadequate, citing insufficient
planning. Although Pakistan has compiled funding, lack of skilled staff and limited
GHG inventories since 1994, there is a lack technology and access to resources
of an institutionalised and regularly (MoCC&EC, 2025a). Human capital
updated system for GHG inventory development also remains nascent as
preparation mechanism. Moreover, a weak universities in Pakistan have a limited role
data collection framework and limited in climate related R&D and technology
GHG emission modelling capacity is one of advancements (Jaffery, 2025).
major limitations to effective mitigation. In
particular, the absence of district-level and Social Readiness
sectoral emission-factors does not just Research on social aspects of climate action
affect the precision of Pakistan's GHG is clear in the view that purely technical
inventory, but also the regional and solutions will fall short if key social
sectoral mitigation plan and financing of challenges are left unaddressed (Shaikh,
projects thereof.46 2024). This is because climate action causes
substantial changes to how individuals and
Knowledge and training: There is a lack of businesses operate. Indeed, the success of

46 MoCC&EC (2025); Khan, & Hussain (2025); UN (2015)

47 WB (2017); MoCC&EC (2025); UN (2015)

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climate action depends much on how well respondents attributed climate change to
the public demands or accepts the required natural cycles or factors beyond human
change. Public disregard of climate change control (GP, 2025). Such views can foster a
as a national agenda and weak public trust sense of helplessness, reducing support for
amid challenges to political consensus are climate action. Li et al. (2023a) also find
key social constraints in Pakistan. The that households’ and businesses’
country’s already low educational willingness to pay for climate action in
attainment also undermines effective Pakistan is limited due to low level of
implementation of climate policy. education.

Climate change awareness: Basic climate Public trust: Climate actions, whether
change awareness seems to be high in taken by the public sector or private sector,
Pakistan. A 2023 survey suggests that require households and businesses to
around 80 percent of Pakistanis are believe that sacrifices today will pay off in
concerned with climate impacts. However, the future and that authorities will manage
when asked to rank climate change as a resources fairly. This rests on public
national priority, only 25 percent placed it awareness, education, and the level of trust
among the top three issues (Figure 6.16). in climate information (Li et al., 2023b).
This suggests that Pakistanis do not
consider climate change as a pressing Research suggests that public trust in
challenge that requires urgent action. climate action in Pakistan is low, which is
prevalent across different sections of
Other surveys and studies also point in the society (Figure 6.16). Moreover, there is a
same direction. For instance, the general lack of trust in green products and
understanding that climate change is their benefits, discouraging business entry
caused by humans is not widely pervasive in this segment (Jianguo & Solangi, 2023;
in society. A 2025 nationally representative Baron et al., 2023). Weak public trust in
survey shows that 70 percent of climate governance, emanating from

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infrequent reporting on current climate due to limited resources and political

projects and financial opacity, impairs the influence (Shaikh, 2024).
government’s capacity to take climate
action, such as raising new green taxes or 6.4 Challenges to Climate Financing48
enforcing emission control (CFP, n.d.;
Sherani, n.d.) Finance is critical to the success of climate
action given its vast and diverse scale. In
Public trust is also affected by low terms of mitigation, global climate finance,
community engagement. Research suggests mainly sponsored by developed
that public sector’s climate action in economies, is important to meet the
Pakistan has often been top-down, with targeted reduction in global GHG
insufficient input from the affected emissions. This is because the bulk of
communities in the design and pledged emission reductions by most
implementation of adaptation measures developing countries, including Pakistan,
(MoCC&EC, 2024a). Moreover, climate are conditional to the provision of
journalism is limited to event-driven international grants, stemming from the
coverage, amid a lack of prioritisation and ‘principle of common but differentiated
training that hinders community responsibilities’ (UNFCCC, 2015).
engagement on climate change (Ahmed,
2024). Lack of media focus leads to low In terms of adaptation, countries must
public scrutiny of climate projects, essentially finance domestic adaptation
engendering mistrust. needs on their own since adaptation is
inherently local. There have been some
Political consensus: Building societal recent demands by countries and
consensus for climate action in Pakistan is multilateral development banks (MDBs)
constrained by the country’s political for increasing global financing to meet
economy. Elite capture in Pakistan has adaptation needs, especially of developing
contributed to restricting systemic changes economies (UNDP, 2024). However, unlike
in environmental institutions and reducing mitigation, adaptation efforts cannot be
compliance with the regulations and conditional to global financial flows, since
behavioural changes by polluters (WB, when it comes to adaptation and disaster
2019). Moreover, an abrupt shift towards risk management each country is
greener policies could face pushbacks, if essentially on its own. Against this
they are not managed in an inclusive way. backdrop, the state of global and domestic
Against this backdrop, environmental and climate financing landscape is a major
climate advocacy groups in Pakistan, challenge to Pakistan’s climate action.
though growing, struggle to counter the
influence of powerful industrial lobbies

48 Data related to climate finance —financial needs and flows by type, objectives, sectors and countries —is
discontinuous. Data reported by different institutions also often do not match. Notwithstanding these limitations, there
is sufficient evidence to believe that the key insights discussed accurately reflect the current state of climate finance in
Pakistan and around the world.

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Global Climate Finance Landscape because withdrawal by any major country

The fundamental issue in global climate risks setting a damaging precedent for
finance is the persistent gap between global withdrawals of pledges by other countries.
financing needs and current global It also raises sovereign risk perception for
priorities—a challenge that Pakistan and private investors in EMDEs. Institutional
several other EMDEs have in common. analyses show that predictable
Global climate financing needs to limit concessional global finance is important for
global warming to 1.5 °C are estimated to mobilising large scale domestic and
be US$ 8.6 trillion per year until 2030.49 international private finance (OECD, 2023).
However, global climate financial flows
remain substantially lower than both The large global financial gap presents a
financing needs and global spending on challenge to global agenda of climate
other priorities, including the Covid-19 change and enhances climate risks. The
(Figure 6.17). This reflects low economic cost of climate inaction could
prioritisation of climate change as a major amount to US$ 266 billion by 2050 from
crisis, and insufficient political will. 1.5°C of warming and it is estimated to
reach US$ 1,062 billion by 2100 (Climate
Moreover, the recent withdrawal of the US policy initiative (CPI), 2025). For countries
from the Paris Agreement risks increasing like Pakistan, this has two major
the gap between global financing needs implications. First, like other developing
and actual flows (Salik, 2025).50 This is economies, Pakistan may not be able to
achieve its conditional GHG emission
reduction commitments, which are nearly
two-thirds of its total commitments.
Second, if global warming breaches the 1.5
°C mark, Pakistan’s financing needs for
adaptation and disaster risk management
may be much higher than what’s currently
projected.

Global Climate Finance Flows to Pakistan

Pakistan’s climate financing needs are
estimated to be US$ 331 billion between
2024 and 2030, equivalent to around 10
percent of cumulative GDP for these years

49 CPI (2025) reports global climate finance needs (required to limit global warming to 1.5 °C) at US$ 8.6 trillion per
annum; others such as OECD, IEA and ISO estimate that number to be US$ 5.4 trillion to US$ 11.7 trillion per annum.
Average estimates are around US$ 8-9 trillion (OECD, n.d; IEA, 2023; ISO n.d).
50 As of January 2026, the United States has officially withdrawn from the Paris Agreement for the second time.

Previously, the USA withdrew in 2020 but rejoined in 2021. The US withdrawal may hamper global climate aid as the
US contributed around 8 percent of total global climate finance in 2024 alone. (Gabbatiss, 2025)

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or US$ 47 billion per year (CPI, 2024).51 The NDC commitments. Moreover, global
financing needs reflect the country’s high climate finance flows to Pakistan also
climate vulnerability and very little remain significantly lower in per-capita
contribution to global GHG emissions. The terms, compared to that received by peer
country’s financing need for adaptation is economies, including Bangladesh, the
42 percent of total financing needs, Philippines, Kenya and India (Akhtar &
compared to 21 percent globally (Figure Khawaja, 2025). There are three main and
6.18a), whereas financing needs for water somewhat interrelated reasons behind
and disaster risk management (DRM) are these financing gaps, which are briefly
also higher than global average (Figure discussed below.
6.18b).
Bankability: Most non-grant international
However, global climate finance flows to climate financing as well as domestic
Pakistan are far below the country's private sector financing are typically
financing needs. In absolute terms, average channelled to bankable projects (UKID,
annual climate finance inflows have been 2023). 52 For climate projects, bankability is
estimated at US$ 1.4 – 2 billion over the somewhat more challenging given the
past decade, peaking at approximately US$ long-gestation and complex nature of
4 billion in 2021. These inflows remain
insufficient to fund Pakistan’s conditional

51 GoP’s estimates of needed climate finance range from US$ 200-348 billion for climate resilient development by 2030
and NDC implementation. Moreover, the GoP’s latest Pakistan Climate Prosperity Plan for multi-phased investment
and technology access, focusing on the convergence of development, climate and nature, has identified an investment
need of US$ 1.6 trillion by 2050. Source: GoP, 2024; MOCC&EC, 2024b; MoF, 2026.
52 Climate financing opportunities that are bankable refers to the use of debts or equity in projects that offer a minimum

market-based financial returns, if not above-market; where risks are mitigated while revenue streams and cash flows
are predictable. Bankability hinges on a variety of factors including sovereign risk; credit risk; exchange rate risk; and
political risk, and macroeconomic stability. Moreover, countries with mature financial markets, and stronger
institutions, fiduciary standards and regulatory frameworks are better placed to prepare bankable projects.

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Multilateral Climate Finance by Objectives and Financing Type (till 2024) Table 6.3
million US$
Adaptation
Concessional Disbursement
Grant Guarantee Equity Approved Disbursed Vulnerability*
loan percentage
China 0 7 0 0 7 5 75 0.38
Malaysia 0 10 0 0 10 3 30 0.37
India 0 58 0 0 58 31 52 0.49
Pakistan 0 163 0 25 188 57 30 0.52
Bangladesh 58 260 0 0 318 172 54 0.57
Total Global 825 7,622 40 543 9,030 4472 50 -
Mitigation
Concessional Disbursement
Grant Guarantee Equity Approved Disbursed Vulnerability*
loan percentage
Malaysia 0 22 0 0 22 21 92 0.38
Pakistan 37 42 9 0 88 27 31 0.37
Bangladesh 291 63 0 0 355 25 7 0.49
China 0 395 0 0 395 261 66 0.52
India 805 310 0 333 1,447 823 57 0.57
Total Global 8,585 8,732 318 621 18,256 8,781 48 -
Multiple Focus
Concessional Disbursement
Grant Guarantee Equity Approved Disbursed Vulnerability*
loan percentage
Malaysia 0 14 0 0 14 2 13 0.38
Pakistan 0 15 0 15 30 2 8 0.37
Bangladesh 0 47 0 0 47 35 75 0.49
China 100 79 0 0 179 104 58 0.52
India 200 91 0 25 315 28 9 0.57
Total Global 3,283 5,859 40 570 9,752 2,564 26 -
*Higher vulnerability score indicates higher climate exposure and vice versa
Source: SBP Staff calculations based on CFU data and ND-GAIN

climate projects.53 The emphasis on country is affected by recurring episodes of

bankability has had a two-pronged impact macroeconomic instability, exchange rate
on global climate finance flows to Pakistan. volatility, elevated sovereign risks and
political uncertainty, amid underdeveloped
First, when it comes to global climate financial markets and weak institutional
finance mitigation projects are considered and regulatory environment (Pereira,
more bankable than adaptation projects 2025).54,55
(IMF, 2025c), whereas Pakistan’s financing
needs for mitigation are lower than global These factors reflect in global climate
average (Figure 6.18a). Second, the finance flows to Pakistan. Whilst globally,
bankability of climate projects in the mitigation has seen more approvals and

53 Climate projects require relatively long and cumbersome preparatory and logistical work to start and take longer to
yield returns compared to traditional projects.
54 This is mainly because of the public good nature of adaptation projects, such as storm-resilient roads, a flood

embankment or a weather station does not generate direct cash flow. Consequently, most of adaptation finance
remains dependent on strained domestic public budgets. Source: IMF, 2025c; OECD, 2025.
55 In fact, under the Paris Agreement, adaptation is recognised as a development and equity issue seen from the

perspective of humanitarian crisis prevention rather than climate policy Source: UN Paris Agreement 2015 Article 7.2.

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disbursements, mostly through loans and

equity (CPI, 2024),56 Pakistan received
more inflows for adaptation, which is
mainly financed through grants (Table
6.3).

The bias for bankability in global climate

finance and Pakistan’s low bankability is
also reflected in geographical allocation of
global climate finance. With debt being the
dominant instrument (Figure 6.19), global
climate finance is lopsided towards AEs,
and those EMDEs that have developed
financial markets and bankable project
pipelines (Kerr & Hu, 2025). For instance, commitments (Fraz, 2025; UKID, 2023; IMF,
North America, Western Europe, and East 2025c).
Asia attracted nearly 82 percent of total
global finance flows in 2022. In contrast, The country’s weak project pipelines are
flows to highly vulnerable regions, such as due to a variety of factors. At the one end,
Sub-Saharan Africa and South Asia, were as discussed in Section 6.3, integrated
significantly lower, as most EMDEs face a sectoral or provincial action plans do not
cost of capital penalty that risks making exist, whereas the National Adaptation
climate projects unfeasible (Figure 6.20a & Plan also does not have detailed project
6.20b) (CPI, 2024; IEA 2024).57 prioritisation. At the other end, there is a
need for evidence-based quantification of
Project Pipeline: Pakistan’s climate finance the cost of climate inaction to create buy-in
gap also stems from a limited capacity to for global grants and concessional
develop project pipeline. Developing financing (UKID, 2023).
project pipelines is important to attract
international public and private sector Lastly, MDBs also report that Pakistan’s
inflows since it gives a sense of direction disbursement rates for climate finance are
and confidence to MDBs and market hindered by bureaucratic bottlenecks and
participants, and increases their shifting political priorities (Fraz, 2025). For
example, World Bank’s Pakistan Hydromet

56 Climate finance data shows that debt overwhelmingly dominates sectors with mature markets and strong private
participation, especially the main mitigation sectors. Energy sector projects were financed with the share of (market-
rate) debt and equity at 53 percent and 46 percent respectively, reflecting their commercial viability and ability to
mobilise private capital on a scale. Transport projects were financed with an almost equal share of (market-rate) debt
(47 percent) and equity (46 percent), while only a small share (around 7 percent) came from concessional finance.
Source: CPI, 2025.
57 Cost of capital penalty (or capital risk premium) refers to the significantly higher financing costs for clean energy

projects in EMDEs compared to advanced economies. For example, the cost of capital for a utility-scale solar PV plant
in 2021 was between two to three times higher in key emerging economies than in AEs and China. Source: IEA, n.d.

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and Climate Services Project concluded in First, limited pool of skilled climate finance
mid-2025 with critical components professionals58 affects the ability of
scrapped. According to the World Bank’s provincial and local governments to
completion report, weather radars, develop competitive climate finance
automatic weather stations and proposals (Fraz, 2025; MoCC&EC,2025b).
observatories were dropped due to Sub-national governments also struggle
procurement delays and institutional with setting up monitoring and evaluation
frictions (WB, 2025a). In addition, lack of (M&E) systems for climate projects
technical data anchors, such as integrated (MoCC&EC, 2025b). Project proposals are
MRV (Monitoring, Reporting, and rejected if financiers are not satisfied with
Verification) system, makes it difficult for the M&E plan,59 or if projects do not meet
donors to track outcomes, leading to risk the typical international development
aversion among international lenders (GoP, assistance assessment criteria standards.60
2024).
Second, there is a need to fast-track the
Supporting Domestic Environment: A mainstreaming of corporate sector
supporting domestic environment is compliance with Environment, Social and
necessary to attract and absorb global Governance (ESG) framework, CBAM, and
climate finance, especially those from the other related certifications. In this context,
private sector. In this context, three gaps the SECP’s notification for listed companies
particularly stand out. for phased adoption of sustainability-
related (IFRS-S1) and climate-related (IFRS-

58 This includes areas of blended-finance, fiscal guarantees or partial guarantees, and disclosure requirements.
59 Green Climate Fund, 2018; Global Environment Facility Evaluation, 2006
60 For example, OECD’s Development Assistance Committee criteria use six core standards for evaluating international

development and humanitarian aid: (a) Effectiveness; (b) Impact, (c) Efficiency, (d) Relevance, (e) Coherence, and (f)
Sustainability. Source: OECD, 2019

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S2) disclosure standards is a step in the

right direction and are directly aligned
with Pakistan Green Taxonomy, facilitating
compliance for exports facing carbon-
related regulations like the EU's CBAM
(SECP, 2025). The IFRS-S2 is particularly
important since it requires companies to
disclose all their GHG emissions (ACCA,
n.d.).

Globally, ESG is rapidly moving from

niche to mainstream. ESG assets are
expected to reach US$ 40 trillion by 2030, or
about 25 percent of total global assets
under management (Bloomberg, 2024). In sectors (Figure 6.21). Domestic public
this context, it is important to support and climate finance in Pakistan remains limited
incentivise corporate compliance with the and contributed only 11 percent of total
ESG framework beyond listed companies climate finance in the country between
and link all such companies to global 2018-2021 (Akhtar & Khawaja, 2025). This
investors to attract a growing pool of reflects structural weaknesses in revenue
international ESG capital and green generation and limited financing ability.
financing.
Moreover, unlike many advanced and
Third, there is a need to develop the several emerging economies where private
currently nascent and underdeveloped capital is increasingly central to climate
carbon market in Pakistan, considering its finance, Pakistan’s private sector
potential to finance public and private participation remains marginal with a 5
sector investments in mitigation projects. percent contribution in overall climate
To this end, the policy framework for finance between 2018-21. Most domestic
carbon markets needs to be improved, private finance is highly concentrated in a
alongside the creation of public platforms few large renewable energy projects
or a registry that provides visibility into supported by public guarantees.61
carbon market transactions and other
related information (TIP, 2025) (Box 6.5). Domestic public financing: Pakistan’s
high fiscal constraint is a major challenge to
Domestic Financing Landscape its ability to address climate vulnerabilities.
Despite relatively lower global climate Pakistan is among the countries that have
finance flows, Pakistan relies more on relatively high fiscal constraints and high
external financing due to limited domestic climate vulnerability (Figure 6.22). As a
participation from both public and private result of insufficient fiscal space, spending

61 UNFCCC, 2021; CPI, 2023; OECD, 2023

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on climate adaptation and building low. This is not in line with the fact that,
resilience against climate-related disasters unlike mitigation spending, which to some
is crowded out (IMF, 2023). degree is conditional on international
support, the responsibility of adaptation
Although, as discussed in Section 6.3 & primarily rests with the government.
Box 6.3, climate budget tagging has begun Lastly, there are different climate finance
recently,62 domestic public finances are units in different ministries with
constrained by the fact that climate risks overlapping responsibilities at the federal
have not been systematically integrated level, where provinces are operating in
into macroeconomic models, fiscal silos amid a lack of effective systematic
frameworks, and public investment
planning in Pakistan. This is important
because economic models need to be
extended to include a wider range of social
and economic impacts to incorporate
climate vulnerability and allocate funds
beforehand.63 Furthermore, due to weak
integration, post-disaster rehabilitation
spending is reactive and financed through
budget reallocations rather than prior
provisions (UNDRR, 2022).

Moreover, as Figure 6.23 shows, public

spending on adaptation is significantly

62 Climate Budget Tagging (CBT) is a systematic process that identifies, classifies, weights and marks budget lines to
facilitate the estimation of public spending on climate change mitigation and adaptation.
63 IMF, 2022; Ghafoor et al., 2016

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coordination among relevant ministries

(UKID, 2023).

Domestic private financing: Domestic

private climate finance in Pakistan remains
low due to a combination of financial
sector constraints, policy uncertainty and
weak market infrastructure. This includes
underdeveloped capital markets, carbon
market, and green bond market. The
country issued its first sovereign green
Eurobond in 2021, marking an important
step toward diversifying climate finance
beyond concessional loans and grants. encouraging banks and DFIs to integrate
Whilst the issuance helped establish environmental risk management, facilitate
market precedent and signal policy intent, green financing and reduce their
subsequent activity has been limited.64 environmental footprint. In 2022, SBP also
issued Environmental and Social Risk
Moreover, the banking sector, which Management manual as a supporting tool
dominates the country’s financial (SBP, 2022a). Building on this foundation,
landscape with nearly 77 percent of total the government in collaboration with
financial assets (SBP, 2024), mainly lends to Ministry of Climate Change and SBP has
the government, whereas bank lending to recently released the Pakistan Green
private sector is mostly concentrated in Taxonomy to define green economic
short-term loans. These characteristics activities and guide financial flows toward
exhibit high risk aversion, making the climate mitigation and adaptation
sector unsuitable to finance long-term (MoCC&EC, 2025b).
climate mitigation and adaptation projects
with uncertain cash flows and illiquid Notwithstanding these positive
collaterals (IMF, 2022). Moreover, the fixed developments, several challenges persist.
investment loans extended to energy sector For instance, there are capacity gaps within
are primarily concentrated in thermal financial institutions in climate risk
generation as opposed to renewable energy assessment and reporting, while robust
(Figure 6.24). monitoring, verification and disclosure
frameworks are still under development.
In recognition of these challenges, a These issues constrain the effective
number of policy initiatives have been operationalisation of the taxonomy and
taken. For instance, SBP’s Green Banking reduce incentives to mainstream
Guidelines in October 2017 (SBP, 2017), investment in sustainable activities (OECD,

64In May 2021, WAPDA launched its first green Eurobond (Indus Bond) for 10 years to raise US$ 500 million at a
competitive price. Since then, only two green bonds have been launched: Parwaz Green Action bond and Sovereign
Green Sukuk in March 2025 and May 2025, respectively.

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2026). Moreover, Pakistan’s Green Banking development also demands large

Guidelines are voluntary, whereas several investments in mitigation to avoid carbon-
emerging market regulators including intensive lock-in and simultaneously
China, Bangladesh, Nepal and others have reducing climate vulnerability.
issued mandatory green credit or
sustainability requirements for banks (Park The growing global capital flows in ESG
and Kim, 2020). investments and the increasing global
trend in green technologies present an
6.5 Final Remarks opportunity for Pakistan to directly
leapfrog onto climate friendly
Several sobering realities emerge from the modernisation and development.
above analyses and discussions that However, green growth and low emission
warrant urgent and consistent action by development remain a daunting challenge,
individuals, businesses, and public sector because even some of the world’s
officials. First, climate change is advanced and resource rich economies
irreversible, and its impact on global and have not been able to successfully achieve
Pakistan’s economy is real. In some ways, it. Recent evidence shows that global
such as the recent floods, the impact has climate action remains insufficient as both
already made its presence felt. And if developed and developing economies are
appropriate climate action is not taken, on course to miss their emission reduction
then climate change is estimated to have targets for 2030 to contain global warming
even more serious impact on lives and to 1.5 °C.
livelihoods, with negative macroeconomic
and socioeconomic consequences. These Third, although Pakistan has shown a
risks that can escalate non-linearly— strong commitment to global climate action
affecting both rural and urban areas— and has made notable progress in
include damage to agricultural and formulating a climate change policy
industrial output with cascading effects on framework, the country’s climate
the services sector, price stability, external preparedness is affected by a variety of
and fiscal accounts. unaddressed challenges. The
implementation of climate policy is not
Second, although Pakistan contributes little effective due to several reasons including
to global GHG emissions, it is highly weak integration of climate change policy
vulnerable to climate change. Despite that, with other macroeconomic and sectoral
Pakistan has low level of climate readiness. policies; overlapping mandates and
This means that Pakistan needs to invest coordination across and between different
substantially in adaptation to be able to tiers of government; weak local
deal with the expected impact of climate governments; and a lack of clear timelines
change. However, the country’s relatively for action.
high emission intensity, its large and
steadily growing population, and Weak technical capacity and human capital
aspirations for GDP growth and constraints — such as a limited GHG

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emissions database, shortage of skilled This is due to persistent fiscal constraints, a

personnel for climate risk assessment and lack of systematic integration of climate
climate policy implementation, and deficit risks into macroeconomic models and
in climate education and research capacity overlapping responsibilities. In addition,
—augment these challenges. In addition, private financing is also low, constrained
there are social constraints at play. These by the fact that majority of bank lending
include a public disregard for climate goes to the government, whereas private
change as a national agenda and weak sector lending is in relatively short-term
public trust in government policies and projects amid policy uncertainty and weak
action, amid low political support for market infrastructure.
climate action. Addressing these social
constraints are critical since climate actions Fourth, climate action eventually burdens
require households and businesses to everyone: individuals, businesses, and the
believe that sacrifices today will pay off in public sector. This is because climate action
the future and that authorities will manage necessitates a change in ways and means of
resources fairly. production, consumption pattern, and also
how perhaps the society is organised. The
Underlying these challenges is limited latter is an important consideration,
climate finance. Although Pakistan mainly especially in the context that while
relies on global climate inflows, the global mitigation may still be somewhat achieved
climate finance flows to Pakistan are not through large public sector projects and
commensurate with the country's financing initiatives, most of adaptation and disaster
needs for climate action. This is mainly management are inherently local in nature.
owing to low bankability of projects, Integrated economy-wide planning is,
undeveloped project pipelines, and lack of therefore, urgently needed for a balanced
a domestic supporting environment. climate action and for catering Pakistan’s
diverse geographies, climate zones, and
Domestic climate finance flows, which are communities.
especially critical for adaptation finance,
are affected by limited public financing.

Box 6.1: Estimating the Impact of Climatic Shocks on Economic Growth and Inflation in Pakistan

Introduction: Most studies use temperature to estimate the impact of climate change on economic
growth, while others use rainfall or precipitation as other climate proxies. Bilal & Kanzig, 2026; Kahn et
al., 2021; Dell, 2012 studied the impact of temperature on a panel of countries.

Their findings suggest that higher temperature variations compared to historical averages result in a
reduction in economic growth. The impact may vary depending upon the magnitude of temperature
variations. In the case of Pakistan, studies established a negative relationship between temperature and
GDP growth and productivity in agriculture, manufacturing and services sectors (Akram & Hamid, 2015;
Akram & Gulzar, 2013; Akram, 2015). The impact of precipitation on aggregate growth is mostly seen in
developing countries (Damania et al., 2020), with the rise in rainy days and extreme rainfall reducing
economic growth (Kotz et al., 2022).

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Similarly, studies find impact of temperature on

inflation mostly through food inflation (Hagos, 2018;
Faccia et al., 2021; Li et al., 2023; Kotz et al., 2023).
Moreover, rains resulting in floods impact inflation
through reduced output, particularly of agriculture,
supply disruptions due to infrastructural damage,
and labour productivity. Rojasavachai et al., 2025;
Kunawotor et al., 2021; Baten et al., 2020; Mitra et al.,
2017 find that rainfall and floods have negative
impact on food and headline inflation through
various channels.

Methodology: To investigate the dynamic response

of growth (RGDP) and inflation to climatic shocks,
this Box estimates Impulse Responses (IRs) using
Local Projections (LP) on quarterly data spanning
from Q1-2016 to Q4-2025,65 whereas, an extended
sample size from Q1-2003 to Q4-2025 is used for inflation model.66 Moreover, Historical Decomposition
(HD) approach is also employed to estimate the period-wise contribution of climatic shocks.67 National
average rain and temperature data is used to capture the impact of climatic shocks on economic growth.
In addition, real effective exchange rate (REER), policy rate (PR), fiscal balance to GDP ratio (FB_Y) and
wholesale price index (WPI) are incorporated in the model to control for the effects of external, monetary
policy, fiscal policy and input prices.

Impact on economic growth: Figure 6.1.1 shows that one standard deviation (SD) shock to rain (flood)
has a negative and immediate effect on RGDP in the first quarter, which is partially compensated by some
improvement in second quarter. Moreover, fluctuations in temperature are also used to capture the
impact of climatic shocks. The findings suggest that the likely response of RGDP to 1 SD-shock to

65 The sample period used for estimation is restricted due to non-availability of quarterly data of real GDP.
66 LP is useful for its flexibility. LP estimations are based on separate equations; hence they more robust; flexible to non-
linearity; and tackle model misspecification.
67 It may be noted that HD results are based on SVAR estimations.

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temperature is negative but statistically insignificant in the short-run. This contrasts with earlier studies
for Pakistan, which estimated the impact of temperature on GDP separately from rainfall.

The HD-based period-wise contributions of climatic shocks to RGDP are shown in Figure 6.1.2. The
results suggest that RGDP responds negatively to flood shocks. As far as the impact of temperature is
concerned, the period-wise results suggest no significant impact on economic growth. In addition, the
findings suggest that monetary policy, fiscal position, input prices (proxied by WPI), and exchange rate
movements play pivotal role in the determination of economic growth during 2017 to 2025. The
counterfactual analysis confirms the robustness of these results. The findings show that economic growth
would have been higher in the absence of climatic shocks (Figure 6.1.3).

Impact on inflation: As expected, inflation has positive response to climatic shocks in terms of heavy rain
or floods in the country. The results exhibit that one standard deviation (SD) shock to rain (flood) has a
positive and immediate effect on inflation which,
unlike the case of RGDP, decreases but remains
positive up to fourth quarter (Figure 6.1.4). This is also
consistent with (Hussain et al., 2025) who used
rainfall as a proxy for floods and found that the
impact of floods is inflationary but for short-term. A
positive shock to temperature is likely to increase
inflation in the long-run with no immediate or short-
run effect.

The HD of inflation is reported in Figure 6.1.5. The

findings suggest that climatic shocks both in terms of
floods and higher temperature have positive and
statistically significant impact on inflation.
Compared to temperature, floods have a higher
impact on inflation throughout the estimation
period. Counterfactual analysis also shows lower
inflation without climatic shocks (Figure 6.1.6).

*The contribution of Shah Hussain and Syed Qamar Hussain is acknowledged in writing this box.

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Box 6.2: EU’s Carbon-related Trade Regulations and Potential Implications for Pakistan’s Exports

Adapting to climate change related regulations is becoming instrumental for staying in business and
remaining competitive in global markets. This is particularly true in the case of the EU, which is placing
carbon-related conditions on its imports, non-compliance of which threatens Pakistan’s market access and
export competitiveness (Senate of Pakistan, 2025). This Box discusses major climate-related regulations
introduced by the EU, and its implications for Pakistan’s textile exports.

Background:68 In 2005, the EU implemented a domestic carbon pricing mechanism called the Emissions
Trading System (ETS), which was the world’s first carbon market. This cap-and-trade mechanism set a
limit on the amount of GHG emissions allowed to energy-intensive industries and power generation.69 In
2019, in response to growing public pressure for stronger climate action and environmental protection,
the European Green Deal (EGD) was introduced, which was the EU’s overarching strategy to transform
the economy towards a climate-neutral future. The EGD announced legally binding targets to cut
emissions by at least 50–55 percent by 2030 and become carbon neutral by 2050. It drives change across
energy, transport, and industrial sectors. Under the EGD, carbon pricing and industrial reforms were also
introduced that have implications for EU’s industrial sector as well as for global exporters. One of these
reforms was the introduction of Carbon Border Adjustment Mechanism (CBAM) aimed at providing a
framework for reaching the EU's climate objectives.

CBAM: Implemented in October 2023 with its initial transition lasting until 2025, the CBAM will
eventually help the EU in phasing-out earlier allocation of free emission permits under ETS. Under the
initial phase, EU importers were required to report data on embedded emissions during the production
cycle of goods entering the EU borders. This data allowed the European Commission to prepare a
mechanism for entry of goods before the start of definitive phase beginning January 2026.

The CBAM is currently applied to imports of goods

related to six sectors (Figure 6.2.1) and a limited Sectors co ered under C A Figure 6.2.1
number of downstream products, such as screws
and bolts. Under this phase importers of CBAM- Iron &
related products sectors need to apply for CBAM Steel
certification before the import of goods. The cost of
this certification will reflect the auction price of EU Electricity Cement
ETS allowances, expressed in euros per tonne of CO₂
emitted. CBAM
Implications for Pakistan: The CBAM does not
Hydrogen Aluminum
currently have any major impact on Pakistan’s
exports. This is because with the exception of cement
Pakistan exports a negligible quantity of the goods Fertilizer
currently under CBAM to the EU or anywhere else
in the world.70 However, after 2030 other ETS
sectors, as well as textile—being one of the major Source: European Commission

68 European Commission (n.d.a).

69 Electricity and heat generation, energy-intensive industry sectors, including oil refineries, steel works, and
production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic
chemicals, aviation and maritime. Source: (European Commission, n.d.b).
70 Based on SBP data, exports of products currently under CBAM accounted for a meagre 0.2 percent of total exports to

EU in FY25. This accounted for 0.05 percent of total exports in FY25, based on the SBP data.

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contributors to global GHG emissions71—may also be a part of CBAM as under the EGD, the EU has
committed to become climate neutral by 2050 (CDPR, 2025; APTMA, 2023; APTMA 2025). In addition,
there is another major development in the EU related to textile sector, i.e. the EU’s Sustainable and
Circular Textiles Strategy (SCTS), which focuses on how textiles are made and used, while recognising the
sector’s economic and social importance.72 The SCTS incorporates EGD’s goals, the EU’s Circular
Economy Action Plan, and the European Industrial Strategy. This along with the expected expansion of
CBAM’s scope to textile and other sectors may have significant implications for Pakistan.

The EU is the largest destination of Pakistan’s textile exports (Figure 6.2.2). To maintain competitiveness
in the EU region, Pakistan’s textile sector must reduce its carbon footprints given SCTS’s focus on the
entire lifecycle of textile products — from design and production to use and disposal. The SCTS outlines a
range of actions, which include the need to make durable, repairable, and recyclable textile, and removal
of microplastic pollution from synthetic textiles.73

In this context, Pakistan is at risk of losing industrial competitiveness due to three interlinked challenges
(APTMA, 2025). These are (a) higher industrial emissions due to increasing reliance on coal between
FY15-FY25; (b) carbon embedded in imported inputs which adds to the footprint of export value chains;
and (c) a potential implication of taxes on gas for captive power plants that may further push industries
towards a more carbon-intensive grid. These trends not only increase Pakistan’s exposure to higher cost
associated with CBAM but may also complicate the compliance with international climate commitments,
such as under the UNFCCC, the Paris Agreement, and SDGs (APTMA, 2025).

The EU actions in the past illustrate that trade preferences can be withdrawn or market access curtailed
when compliance gaps persist. Pakistan has
previously faced an EU ban on seafood exports on
sanitary and phyto-sanitary grounds (MOFA, 2013),
and its football industry came under severe
commercial pressure over documented child-labour
concerns (HRBDF, n.d.). More recently, repeated EU
quality and pesticide-residue alerts for Pakistani rice
consignments have led to heightened scrutiny and
shipment rejections (European Commission, n.d.d).74
These actions suggest that even though textiles are
not yet covered by CBAM, their expected inclusion
by 2030 implies that similar compliance-based risks
for Pakistan’s textile exports are material rather than
hypothetical.

Way Forward: Against this backdrop, preparedness

appears to be weak, as evident from the fact that less
than 40 percent of the country’s textile firms hold

71 Textile consumption in the EU is one of the biggest environmental concerns as textile ranks fifth in overall GHG
emissions, and third for water and land use in the EU (European Commission, n.d.c). In Pakistan, the textile sector is
responsible for nearly 5 percent of the country’s overall industrial emissions (WB, 2025).
72 European Commission (n.d.c).
73 The Eco-design for Sustainable Products Regulation passed in June 2024, included textiles in the list of products for

EU market that needs to be designed to improve their circularity, energy performance, recyclability, and durability.
74 European Commission (n.d.d).

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eco-label certification.75 Most of these firms are large export-oriented firms (SBP, 2025), which indicates
that carbon neutrality is not pursued across the industry nor across the value chain. This requires urgent
attention given the lead time for retrofitting industrial process for carbon neutrality. To this end, several
actions need to be taken. Fiscal and financial incentives need to be linked to energy efficiency and
emission reduction targets alongside access to financing for climate neutral technologies; central
mechanism for monitoring and benchmarking energy efficiency needs to be put in place; knowledge of
climate neutral technologies needs to be made available; and awareness needs to be increased that textile
firms certified under voluntary environmental standards demonstrate higher profitability, stronger stock
performance and better sustainability outcomes (WB, 2025; SBP, 2025).

*The contribution of Syed Qamar Hussain and Ravi Kumar is acknowledged in writing this box.

Box 6.3: The Challenge of Climate Mainstreaming in Pakistan

The large-scale and broad-based nature of climate action requires it to be integrated with economic
policies. Global best practices, such as the EU Green Deal, suggest that this integration requires a
comprehensive review of existing policies and laws across all federating units. Such an exercise has not
been initiated in Pakistan yet. There have been some efforts to incorporate climate considerations in
policies as envisaged in the Framework for Implementation of Climate Change Policy (FICCP) 2014-2030.
Similarly, the recently launched Pakistan Climate Prosperity Plan is also a step in the right direction given
its aim to embed climate resilience at the core of economic planning through a dynamic modelling
system; and its vision to adopt whole-of-society and whole-of-government approach to address the
challenges of climate change (MoF, 2026). However, successful execution of this plan would depend on
the addressing of institutional challenges discussed in Section 6.3, and comprehensive review and
revision of federal, provincial and sectoral policies and laws that have not yet been undertaken. In this
context, the significant gaps highlighted in the discussion below, demonstrate limited climate
mainstreaming in Pakistan.

Fiscal policy: Fiscal policy seems to be sending mixed signals vis-à-vis climate action. On the one hand,
carbon levy has been introduced as part of reforms under IMF’s RSF to mobilise revenue for clean
development. On the other hand, sales tax
exemption on import or supply of solar panels has
been withdrawn, which undermines transition
towards clean energy (PwC, 2025). Moreover, while
the share of explicit fuel subsidies is declining, the
implicit subsidies, in the form of undercharging
environmental costs and foregone consumption tax
on fuel prices, is projected to increase (Figure 6.3.1)
(IMF, n.d).

Pakistan’s fiscal architecture remains structurally

less aligned with its climate policy objectives.
Although Climate Budget Tagging (CBT) has been
recently introduced at federal level, it is yet to be
introduced in provincial budgets, which significantly
limits effectiveness within Pakistan’s decentralised

Around 100 out of the 456 ecolabels tracked worldwide, apply to the textile sector with the major focus on energy,
75

water, and chemical efficiency.

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fiscal system (IMF, 2025c). At intergovernmental level, the NFC award allocates resources without
recognizing, incentivising, or conditioning transfers on climate action, leaving provincial development
budgets under no obligation to prioritise NDC commitments or climate resilience. This weak incentive
structure contributes to tangible delays in necessary investments, such as, in flood resilience
infrastructure) (Sheikh, 2025). Similarly, climate change is also not adequately embedded in public
investment management. For instance, although the Planning Commission has revised project proposal
guidelines (PC-1) to require integration of climate action in projects, most development projects continue
to be approved using outdated formats that ignore climate risks (Krogstrup & Oman, 2019; IMF, 2025c;
Sheikh, 2025).

Monetary policy and financial stability: SBP recognises climate change as major financial stability risk
and includes it as a major theme in its Strategic Vision 2023-28. The measures regarding climate
mainstreaming for the financial sector include, but are not limited to Green Banking Guidelines, quarterly
bank reporting on Environmental & Social Risk Management (ESRM) Manual, Green Taxonomy as part of
reforms committed under IMF’s RSF, and Draft Guidelines on Climate Stress Testing for Banks, and
others.76

However, there is a need to further strengthen climate integration by improving analytical capability in
macroeconomic modelling and forecasting for monetary policy (IMF, 2021) and accustoming economic
actors to the risk of climate change and transition policies through central bank’s communication (NGFS,
2020). Moreover, improvements in the quality of data that feeds climate analysis is important to advance
the precision of the policy decision. Furthermore, tracking new climate-related risk indicators, such as
carbon footprint of financial institutions’ portfolios (and collaterals) and exposure to climate-related
physical risk etc. can improve supervisory framework (IMF, 2021).

Trade policy: Despite having a comprehensive climate change policy in place, the Strategic Trade Policy
Framework (STPF) 2020-25 did not explicitly prioritise climate concerns in trade. As a result, the average
tariff on imports of environmental goods (EG) remains elevated compared to that on non-environmental
goods. Import tariffs on EGs are also higher compared to Bangladesh, China, India and Vietnam, and thus
discouraging adoption of green supply chain. Moreover, Pakistan applies non-tariff measures to very few
categories of EGs, due to which EG import quality assurance remains challenging. (Iqbal et al., 2024). The
STPF have also not conceptualised exports of green manufacturing as potential opportunities (Sohail,
2025a), nor the need to adequately facilitate trade through digitisation of trade documents and reduction
of trucks’ waiting time, which can significantly reduce GHG emissions (Iqbal et al., 2024).

Industry: Mitigation policies are weakly integrated at the sectoral level in manufacturing. The absence of
mandatory reporting by industrial units on emissions makes it difficult to regulate emissions. In the
absence of strong regulatory framework, the impetus for green innovation; disclosure of climate related
risk; and ESG compliance remain either low, slow, or voluntary (Sohail, 2025b; Bashir, 2025). While green
industrialisation, which refers to a set of processes aiming to decouple economic growth from GHG
emissions, is building momentum, reliable data to evaluate progress is rather scant.
Under the FICCP, industry is not listed among the sectors in need of climate adaptation but only of
mitigation, signalling a narrow conceptualisation of climate strategy. Even the most recent NAP 2023 does
not assign green manufacturing as a priority in terms of adaptation, when in fact industrial adaptive
measures, such as supply chain resilience, heat-resilient factor design and cooling systems, are common
practices in other countries (MoCC&EC, 2023).

76 SBP (2022); SBFN & IFC (2025)

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Transport: The bulk of passenger and goods cargo in Pakistan uses road transport rather than public or
rail transport as mass transport can help mitigate some emissions. Both the trucking fleet as well as buses
and other passenger transport mainly rely on outdated technologies (Hasan, 2025). There is also a lack of
harmony between different transport modes; assigning agency-specific tasks to reduce emissions; and the
absence of National Transport Masterplan, as envisioned in National Transport Policy 2018, which further
slows the greening of transport sector.

Similarly, instead of creating incentives for the use of public transport, the country’s auto policies, such as
2021-26, incentivise manufacturing and import of fossil fuel light vehicles through reduction in duties and
taxes. Such incentives were not only environmentally unfriendly but altered land use through urban
sprawl and increased emission through road congestion (Hasan, 2025). Moreover, whilst New Energy
Vehicle (NEV) policy, and the reforms under IMF’s RSF—including introduction of EV subsidy and
internal combustion engine vehicle tax —are catalysing the transition to clean passenger cars, the
incentive for electrifying commercial fleets, which have no emission standards, is minimal in the NEV
Policy.

* The contribution of Abdul Jabbar is acknowledged in writing this box.

Box 6.4: Renewable Energy (RE) Transition in Pakistan: Phenomenal Growth Facing Headwinds
The phenomenal transition to RE in Pakistan during the last four years is good for climate change
mitigation and for the economy. Like recent global trends, Pakistan’s RE transition is mainly led by solar
energy, amid expectations that solar power will continue to drive the global RE transition in the
foreseeable future. This Box sheds light on recent growth in solar power, its main drivers, as well as the
key challenges to its continued growth in Pakistan.

Rapid adoption of solar power in Pakistan: RE has a sizable share in grid capacity in Pakistan. In FY25,
35 percent of installed capacity was from on-grid renewable energy, up from 30.3 percent in FY10.77
Official numbers show that a major source of RE in Pakistan has been hydel, with a 28 percent share
equalling 11.5 GW in FY25. However, in terms of the
total power mix (in terms of capacity), decentralised
solar capacity—including off-grid and behind-the-
meter (BTM) installations—has the largest share.

The measurement of decentralised solar energy is a

challenge in Pakistan. Except for net-metered
systems, no official measures exist for decentralised
solar energy. This lack of data is due to the bottom-
up nature of these installations, with no exact figures
available for BTM and off-grid installations.
However, estimates based on China’s solar panel
exports to Pakistan (which constitutes around 99
percent of Pakistan’s total solar panel imports)
suggest that the quantum of decentralised solar
power capacity in FY25 was around 40.8 GW.78,79As
a result, total RE (including estimated decentralised

77 Includes Hydel, Wind, Solar, Bagasse energy as a percent of total grid capacity as of June 2025. Source: NEPRA (2025)
78 SBP Staff calculations based on import data from Ember, NEPRA, and stakeholder consultations.
79 This 40.8 GW is around 99 percent of total grid capacity. Even conservative estimate of decentralised power puts the

number at around 27.5 GW or 67 percent of grid capacity. Source: TZ (2025) based on satellite imagery.

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capacity) was around 67 percent of total power mix (in terms of capacity) (Figure 6.4.1). Moreover, with
an estimated installation of 9.2 GW of decentralised solar capacity during H1-FY26, total decentralised
solar capacity could be around 50 GW. This is expected to further improve Pakistan’s already leading
position among countries with high share of solar in total power generation mix (Figure 6.4.2).

This transition to solar power has led to a gradual but consistent increase in gross foreign exchange
savings on account of lower energy imports, cumulatively estimated to be around US$ 7.1 billion in last
six years.80 SBP staff estimates suggest that the estimated installed solar capacity as of December 2025 will
reduce annual energy import bill by around US$ 5.2 – 7.8 billion in 2026. Overall, SBP staff calculations
suggest that the cumulative solar panel import in dollar terms is now broadly offset by the resulting
foreign exchange savings in fuel imports from solar-based electricity generation in recent years and is
likely to generate net FX savings going forward.

Drivers of solar power boom: According to a survey, the residential sector leads Pakistan’s decentralised
solar adoption, accounting almost for 50 percent of total installed capacity. This is followed by the
industrial, agriculture and commercial sectors, reflecting a broad-based adoption and a move towards
self-generation.81 A combination of four key factors are behind Pakistan’s solar growth. First, Pakistan has
a natural endowment for solar energy because of high solar irradiance along with low seasonality. Some
estimates hold that the country can generate more than 100,000 MW of electricity,82 which positions
Pakistan among the top countries with RE potential.

Second, to capitalise on this potential, Pakistan

introduced the Policy for Development of Renewable
Energy (DRE) in 2006 to create an initial policy
framework for wind and solar energy, followed by
the Distributed Generation and Net Metering
Regulations (DGNMR 2015). DGNMR allowed
households and businesses to monetise surplus solar
generation. The Alternative and Renewable Energy
(ARE) Policy 2019 further mainstreamed renewables
by shifting policy from fixed tariffs to competitive
auctions and least-cost procurement, embedding RE
within national planning targets. Till June 2025, total
net metered capacity was 6.5 GW, equalling 16
percent of total decentralised solar power.

Third, a lack of access to grid and weaknesses in

Pakistan’s grid infrastructure accelerated
decentralised solar adoption, as an underfunded and
outdated transmission and distribution system faces
high losses, congestion, and creates unreliability of
grid energy. Fourth, and the single biggest reason of
decentralised solar power growth is the declining

80 SBP Staff estimates based on estimates of annual increases in installed solar capacity.
81 Sectoral adoption studies categorise sectors based on scale which follows a pattern with solar adoption. For instance,
the solar adoption in Pakistan is strongest amongst high-income households, medium scale business, large scale
industries, particularly textile, and medium farm, driven by affordability, grid unreliability and greater capital. Source:
PRIED, 2025; Shah, 2025.
82 Mirza et al. (2011); Muhammadi et al. (2024)

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costs of solar infrastructure, which has fallen sharply

worldwide. Moreover, global prices for battery and
storage technology have also been declining (Figure
6.4.3), making solar energy cheaper and more
reliable than before.

Challenges to RE transition in Pakistan: The

continued growth in distributed and utility-scale
solar power faces a range of structural and policy
challenges.

Capacity purchase price (CPP): The growth in the

adoption of solar power has created the conditions of
a utility death spiral (UDS), reducing grid
consumption and further increasing idle capacity
(Shah, 2025). This translates into higher electricity
cost for grid-reliant consumers. The policies to
mitigate the challenge of UDS, such as net billing,
and removal of GST exemption on import and sales, etc., are expected to discourage decentralised solar
adoption, as already evident by a 40 percent reduction in solar capacity imports from China in 8M-FY26.
However, rising fuel prices due to the war in the Middle East, declining battery costs and gradual
behavioural change are expected to continue decentralised solar uptake, leading to continued UDS and
further increase in CPP. Consequently, the government may be forced to frequently revise decentralised
solar regulations to address UDS, translating into policy confusion, and deterring smooth growth in
decentralised solar.

Grid and transmission readiness: The existing infrastructure was not planned for a massive
decentralised RE network. Grid stability issues and technical constraints lead to reverse power flows and
transformer overloading, thus limiting the growth of solar in absence of advanced technologies, such as
smart transformers, automated control centres and real-time monitoring systems (SDPI, 2024).

Moreover, transmission bottlenecks and insufficient evacuation capacity limit integration of utility scale
RE generation (RF, 2024). Pakistan’s utility-scale renewable energy potential is geographically
concentrated in the southern region, whereas demand hubs are concentrated in the central region. In
addition, poor grid connectivity and inadequate transmission infrastructure has left substantive electricity
potentially unutilised (NEPRA, 2026).

The grid is also insufficiently equipped to manage the variability of solar and wind energy, due to
inflexible grid infrastructure; lack of utility scale storage to save excess energy; absence of advanced
technologies, such as smart transformers, automated control centres and real-time monitoring systems;
and demand-side tools to shift consumption (SDPI, 2024). In contrast, higher reliance on thermal plant,
outdated dispatch protocols and baseload centric planning has limited operational flexibility. 83

Institutional factors: From the perspective of utility-scale RE projects, overlapping mandates, delayed
tariff approvals, and weak inter-agency accountability are considered primary barriers to scaling

83Baseload power refers to the minimum level of electricity demand that must be met consistently to ensure the
reliability and stability of the grid. Traditional baseload demand is met by plants that can operate continuously, such as
coal, oil, or nuclear plants.

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renewable deployment (Elahi et al, 2024). The bidding process for utility-scale RE faces poorly defined
criteria, lack of standardisation, and opaque evaluation mechanisms, creating inefficiencies and deterring
investment (SDPI, 2024).

From the perspective of decentralised solar, official planning frameworks have chronically understated
actual market activity, particularly the surge in distributed and off-grid solar installations. With the surge
in solar decentralisation, power sector planning needs to evolve from old era of power shortages to new
era of surplus capacity, which requires change in tariff design; demand volatility management; and
adoption of large-scale Battery Energy Storage system (BESS). Another challenge remains unnecessary
delays in the approval of net metering applications by DISCOs, even when applications have met all
requirements.

Financing constraints: Utility scale RE projects are inherently capital-intensive, with majority expenditure
incurred upfront and recovered over time. However, these projects face acute financing challenges as the
cost of capital in EMDEs has doubled compared to that in AEs (RF, 2024). In addition, limited technical
expertise and dealing with disruptions often leads to cost and schedule overrun, leading to significant
delays in utility scale solar and wind project (IEEFA, 2022). Financing of decentralised solar power is also
limited due to low bank credit, amid concerns of collateral and recoverability (RF, 2025). The recently
proposed transition to net-billing can affect bank financing because lower export rate lengthens the
payback period, raising loan premium. Moreover, continued fossil fuel subsidies distort pricing signals by
reducing the relative cost of thermal generation, weakening RE competitiveness and transition (Black et
al., 2025). Instead of subsidizing fossil fuel consumption, such fiscal allocations can be used for the
development of a cleaner energy mix.

*The contribution of Ali Ahsan, Ali Ahmed Shah, Abdul Jabbar and Umar Mashood is acknowledged in writing this
box.

Box 6.5: Developing Carbon Markets (CM) in Pakistan

Amid the growing importance of carbon markets for climate action, Pakistan issued the ‘Policy
Guidelines on Trading in Carbon Markets’ in 2024. However, a variety of policy, institutional and
capacity challenges must be addressed to develop the market. This Box outlines how carbon markets
enable climate action, the challenges in developing one in Pakistan and its broad solutions.
Background: Originating in 1997, CM emerged as a market-based mechanism for issuing tradable carbon
credits against GHG emission reductions. Carbon credits— are independently verified, aligned with
recognised standards (either international, national or independent) and then retired to meet voluntary or
mandatory climate obligations.84 Typically, one carbon credit represents one tonne of CO2 equivalent
emission reduced (offset),85 or permitted (allowance) in some systems.

How CMs function: CM are regulatory or voluntary. Regulatory markets impose binding emission limits
through carbon pricing instruments, such as emissions trading systems (ETS), output-based benchmarks,
or carbon taxes (Table 6.5.1). These markets generate fiscal revenues, transmit carbon pricing signals and
create binding incentives for firm-level decarbonisation. Globally, the value of traded credits in
compliance markets was US$ 947 billion in 2024 – with the EU ETS representing 84 percent of this value
(ICMA, 2025). While the EU remains the largest CM by transacted value, China operates the largest ETS

84 Carbon credit retirement is the permanent removal of a carbon credit from circulation, ensuring that it cannot be
reused or resold after it has already been used to offset emissions.
85 For e.g. through emissions reduction activities, such as transitioning to green energy, or destroying methane

generated at landfills.

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Instruments of Carbon Markets Table 6.5.1
Instrument Mechanism Market type
Cap-and-trade Sets an emissions cap and then tradable allowances are sold by
Emissions Trading a public authority. Allowances represent an emissions quota. Regulatory
System (ETS) Emission caps are gradually reduced every year.
Rate-based/ Output- Regulate emissions per unit of output rather than setting an
Regulatory
based absolute cap, incentivises production efficiency
Carbon Tax Government levy per tonne CO2e emitted Regulatory
Credits from GHG reduction projects, representing carbon Regulatory
Carbon Credits offsets. Credits can be verified by either international, and/or
independent or domestic crediting bodies. voluntary
Source: World Bank (2025)

by coverage, while several EMDEs such as Indonesia, Türkiye and are accelerating the development of
national regulatory markets (LRI, 2025).

In contrast, voluntary markets enable firms and governments to finance mitigation projects - generating
carbon credits that can be sold for revenue or utilised to meet climate commitments. For firms, voluntary
markets monetise emission reductions and attract private climate finance. Internationally, voluntary
credits may be authorised for country-to-country transfers under the Paris Agreement (OIES, 2022).

In practice, voluntary and regulatory markets increasingly overlap, as some regulatory systems allow the
use of credits for meeting compliance obligations and crediting mechanisms are often used to build MRV
capacity ahead of market deployment. Regulatory markets establish explicit carbon pricing signals that
drive demand for carbon credits both globally and domestically. Formal pricing instruments also help
firms internalise the carbon cost which can support future decarbonisation decisions. Global carbon prices
have been steadily rising since 2020 and are expected to continue rising as more national regulatory
markets are established (Investcorp, 2024) (Figure 6.5.1).

Challenges & way forward for Pakistan: Pakistan’s 2024 Policy Guidelines on Trading in CM
demonstrate intent to deepen participation in voluntary markets while laying the foundation for a future
regulatory market, supported by the establishment of a Carbon Market Working Group and plans for a
national carbon registry (MOCC&EC, 2024c). Pakistan’s has previously participated in international CM;
notably through the Sindh Delta Blue Carbon Project from which Pakistan has earned approximately US$
40 million from selling carbon credits and is
expected to earn US$ 50 million annually (MoIB,
2025). The KP Billion Tree Tsunami Project is also
designed to generate carbon credits for revenue
purposes. Some assessments place Pakistan’s carbon
market earning potential at US$ 400 million to US$
2.25 billion (TIP, 2025).

However, several constraints remain regarding

Pakistan’s CM readiness. These include the absence
of a national emissions baseline; lack of formal MRV
guidelines for carbon market participation; limited
carbon accounting capacity; low private sector
awareness; lack of domestic pricing signals and
trading infrastructure. In the absence of binding
carbon costs and emission caps, private firms face
limited incentives to participate (TIP, 2025).

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While it is important to urgently address these issues, the transition to CM needs to be phased out
through sectoral pilots on emission-intensive industries to ease the transition to nation-wide deployment
through a regulatory CM. Sudden introduction of emission targets or pricing instruments can lead to
market distortions and price volatility, and undermine business confidence especially in a weak
institutional setting like in Pakistan. International experiences offer some lessons in terms of building
market readiness, institutional capacity and price discovery mechanisms to pave the way for an active
CM in the future. China first piloted its ETS on the power sector, distributing emission allowances with
output-based benchmarks adjusted to different types of power plants (CFAI, 2024). The pilot has since
been expanded to include other sectors, such as cement, transport, and waste management. Similarly,
South Korea is also implementing its national ETS in gradual phases, expanding sectoral coverage with
each phase.

In parallel to this, transparent price discovery mechanisms should be developed to ensure market stability
and maturity. For example, shadow carbon prices (reference prices published by a regulator) can help
firms to factor in the carbon cost. This can serve as a price signalling tool without imposing compliance
obligations and prepare markets in advance before formal pricing instruments are imposed (WB,2025). As
markets mature, auction-based allocation of carbon credits, such as those used in the EU, can allow
competitive price setting. Additionally, the establishment of a centralised carbon registry or trading
platform can help in tracking the issuance and retirement of credits and support secondary market
trading. To this end, the carbon trading market may be set up at a national stock exchange, as done by
Egypt since August 2024 (FRA, 2024).

Pakistan has made meaningful strides towards carbon market development; however, broadening private
sector participation, designing price discovery mechanisms and building readiness for a CM through
phased pilots will be essential to ensure a smooth transition. A sequenced approach along with clearer
policy signals, and gradual introduction of sectoral benchmarks can minimise market distortions while
positioning carbon markets as a credible tool for mobilizing climate finance. This needs to be anchored in
the development of national MRV guidelines and reporting standards, similar to those introduced in
other regulatory markets.

*The contribution of Mehreen Tariq Ghani is acknowledged in writing this box.

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Appendix 6A: Planetary Boundaries (PB) and Risks to Global and Domestic Economy

The PBs refer to the environmental limits within which humanity can safely operate while maintaining
the balance of earth’s ecosystem (Rockström et al., 2009). The PBs are interlinked and driven by local
stressors, such as burning fossil fuel; untreated waste; and pollution. Transgression of one PB can worsen
the impact on other PBs (Gerten et al., 2025). For instance, climate change accelerates biodiversity loss,
while land degradation can trigger droughts and heatwaves. As of 2025, human activities have pushed
seven out of nine boundaries (including climate change) beyond safe limits (Figure 6.A.1). Although the
transgression of these seven PBs does not imply immediate system collapse, it materially increases
systemic risk with non-linear and cascading impacts. Continued pressure on the PBs increases the risk for
the earth to cross the tipping points, causing irreversible damage to earth’s ecosystem.86 The monitoring
of PB markers remains sparse in Pakistan (Ali, 2020), leading to material knowledge gaps about the pace
of change, and its exact economic impact. This Appendix serves as a primer on the PBs that have been
breached,87 and its consequent risks to global and Pakistan’s economy.

Freshwater Change: The increase in global GHG emissions, excessive water withdrawals, and expansion
of agricultural land, have altered freshwater flows and stocks across land and atmosphere (PHC, n.d.a).
As of 2025, more than one-fifth of global land area experienced significant dry and wet deviations in both
blue and green water,88 breaching the safe limits of freshwater change by 9.7 and 9.6 percentage points,
respectively. This has led to increased frequency of droughts and disruption of river flows to oceans (PB
Science, 2025). These deviations are far more pronounced in major river basins, such as the Indo-Gangetic
Plain,89 particularly in Pakistan where overextraction of ground water is depleting water resource at an
alarming rate (Mohan et al., 2022). Since 1970, the world has lost around one-third of its wetlands,
contributing to increase in water shortages and food insecurities; decline in freshwater biodiversity; and
aggravating economic pressures (WWF,2023). Similarly, changes in water flows have impacted
agricultural productivity in Pakistan (Naeem and Sulehri, 2019).

86 Tipping points are the threshold beyond which the earth system changes irreversibly. For example, if Amazon
rainforest crosses the threshold, it would lead to extreme weather patterns (IPCC, 2022; Germanwatch, n.d)
87 This excludes climate change, which is already covered in detail in this chapter.
88 Blue water refers to river, lakes, and underground aquifers; green water refers to soil moisture.
89 Includes regions of Pakistan, India, Nepal, and Bangladesh

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Land System Change (LSC): Driven primarily by expansion of agriculture land and urbanisation,
alteration in LSC increases the risk of irrevocable environmental shifts and triggers adverse impacts
across multiple PBs, such as climate change and freshwater change. The transgression of these PBs in turn
impact LSC as increasing warming and alteration in rainfall patterns strain forest ecosystems and reduce
their resilience. LSC is mainly measured through forest cover,90 which is approximately 59 percent at
global level, well below the safe threshold of 75 percent (Figure 6.A.2). In absolute terms, global forest
cover has declined by approximately 4.2 percent in 2023 compared to 1992, whereas Pakistan experienced
a far more severe loss of 26.4 percent. Deforestation has intensified Pakistan’s environmental degradation
(Hashmi and Asif, 2025), reducing land’s capacity to absorb and regulate water runoff. The impact of the
three recent floods in Pakistan—in 2010, 2022, and 2025 —was intensified due to changes in Pakistan’s
LSC (Khan, 2025).

Biogeochemical Flows (BF): Modification of BF refers to the alteration of natural nutrient cycles mainly
due to application of mined phosphorus and industrially fixed nitrogen as fertilizers. Since only a fraction
of these nutrients are absorbed by crops, a large amount accumulates in soil, discharges in surface water,
and remains in the atmosphere. Therefore, breaching of this PB has extensive impact on marine life,
terrestrial ecosystem, human health, alongside impact on agriculture and tourism. As of 2025, the total
amount of anthropogenic nitrogen has exceeded that from all its natural sources, whereas growing
demand for food has accelerated the phosphorus cycle two to three times beyond natural rates
(PBScience, 2025). Cropland nitrogen and phosphorus use is rising globally, with Pakistan exhibiting a
notably steeper rise (Figure 6.A.3). Low fertilizer-use efficiency in Pakistan, particularly nitrogen, directly
impacts the water and air quality (Raza et al., 2018), whereas phosphorus fertilizer has led to nutrient
overload in aquatic systems harming marine biodiversity (Ogwu et al., 2025).

Ocean Acidification (OA): OA is the increase in acidity of seawater due to absorption of anthropogenic
CO₂ from the atmosphere. Acidic seawater reduces the amount of carbonate in seawater, which is
measured by aragonite saturation level (Figure 6.A.4).91 This affects calcifiers and coral reefs, that are
integral to the sustainability of marine ecosystem (IPCC, 2021). Global assessments conclude that OA is

90Existing forest area as a ratio of original forest cover, which would exist in the absence of anthropogenic LSC.
91Aragonite saturation state is a measure of the availability of carbonate ions in seawater for calcifying marine
organisms (called Calcifiers) to build their shells and skeletons. It is a geochemical index of whether aragonite will
precipitate or dissolve in seawater.

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still ongoing, pushing ocean chemistry beyond safe levels (Findlay et al., 2025). Pakistan’s coastal waters
are exposed to global OA trend as well as local stressors, such as nutrient loading, turbidity and thermal
stress that together exacerbate reef vulnerability (Ali, 2020; Sreeush et al., 2019). This puts the country’s
seafood export potential at risk and exposes the country’s mainly artisanal92 fisheries sector to income and
poverty shocks. Reduced catch also risks further reducing seafood consumption, which is already
significantly lower in Pakistan than global average, affecting public health and nutrition outcomes (HL,
n.d; Andreoli et al., 2025).

Biosphere Integrity (BI): BI depends on health, diversity, and interactions of the organisms that make up
Earth’s ecosystems. Globally, human activities are putting increasing pressure on BI through land use
changes, such as deforestation for urban expansion and agriculture amid population growth, and
industry’s overexploitation of natural resources, leading to habitat loss for species. The last century has
seen a significant increase in the extinction rate of species across the animal kingdom (Figure 6.A.5).93
Pakistan’s land-use change, irrigation expansion and unsustainable extraction contribute to local BI
erosion. For example, freshwater systems in Pakistan, Indus Basin in particular, have experienced species
decline and altered flow because of water abstraction, dams, pollution and habitat conversion (Zahra et
al., 2023). Biodiversity loss undermines the natural capital that supports agriculture, forestry and
fisheries, leading to a variety of macroeconomic impacts, such as declining crop yields, food price
volatility, and export losses to fisheries sector.94

Novel Entities (NE): NE boundary covers a wide class of substances and materials including human-
made materials, synthetic chemicals, heavy metals, plastics, radioactive materials and genetically
modified organisms. Scientists measure NE boundaries through various proxies, such as plastics, whose
increasing production (Figure 6.A.6) has had a ubiquitous impact on global environment (Persson et al.,
2022). Pakistan is a significant generator of plastic waste and faces high rates of mismanaged plastics with
an estimate of around 2 million tons of annual plastic waste, 86 percent of which is not managed properly.
This mismanagement harms human health and marine species, with over 1.7 million tons ending up in
landfills, open dumping sites, waterways and food systems, placing Pakistan among the top 10 plastic-

92 Artisanal fishing refers to small scale, traditional fishing practices carried out by households or local communities
rather than large commercial companies. Pakistan’s fisheries continue to be predominantly artisanal (FAO, 2009).
93 PHC, n.d.b
94 IPBES, 2019; Brander et al., 2014

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polluting countries globally (WWFP, 2025). Pakistan also faces the challenge of pesticide and industrial
chemical released into rivers and soils, impacting riverine ecology and soil degradation (Abbas et al.,
2024). The economic risk from NE transgression is two-fold; direct costs from health impacts and indirect
longer run costs from altered ecosystem function such as soil contamination impacting agriculture and
bioaccumulation harming fishing industry.

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Appendix 6B: Policy Framework and Institutionalisation of Climate Action in Pakistan

The institutionalisation of climate change in Pakistan reflects a gradual but uneven progress. It is
characterised by the chronological expansion of institutions, policy layering, and periods of institutional
restructuring. Early efforts were targeted towards environment protection in general, following
international commitments, such as the Stockholm Declaration. This policy framework was followed by
dedicated climate governance structure. However, as the table below suggests, the timeline exhibits
implementation lag as indicated by delayed emergence of operational frameworks and enforcement
mechanism of policies. The intensification of climate-related disasters, along with the Paris Agreement,
has since accelerated transition from policy formulation toward implementation, giving renewed
attention to climate action even as it remains inadequate.
History of Policy Framework and Institutionalisation of Climate Action in Pakistan Table 6.B.1
Year Accomplishment Year Accomplishment
Environmental and Urban Affairs Division
1974 established at the Federal Level following 2012 National Disaster Management Plan approved
Stockholm Declaration
Pakistan Environmental Protection Ordinance
1983 enacted, first comprehensive environment 2012 National Sustainable Development Strategy
specific legislation
Environmental and Urban Affairs Division
Ministry of Climate Change downgraded to
1989 upgraded to the Federal Ministry of
Division of Climate Change
Environment, Forestry and Wildlife
2013
National Conservation Strategy prepared;
Global Change Impact Studies Centre granted
1991–93 National Environmental Quality Standards
autonomous status
adopted in 1993
Cabinet Committee on Climate Change Framework for Implementation of Climate
1995 2014
established, as policy coordination forum Change Policy adopted
Division of Climate Change upgraded to
1997 Pakistan Environmental Protection Act enacted 2015
Ministry of Climate Change
2002 GCISCC, first research centre on CC, established 2016 NDC 1.0 in line with Paris Agreement
PMM Committee on CC convenes National National Forest Policy; National Water Policy of
2004–05 2016-18
Environmental Policy Pakistan
National Energy Conservation Policy, National
2006 renewable Energy Policy, CDM implementation 2017-18 Climate Change Act was passed
framework
18th Amendment to the 1973 Constitution led to
Clean Green Pakistan Movement (CGPM)
2010 devolution of climate change policy 2019
launched
implementation and related sectoral policies
Revised National Climate Change Policy of
2011 Ministry of Environment ceases to exist 2021
Pakistan
The New Ministry of Disaster Management
2012 established; Ministry of Disaster Management 2022 National Hazardous Waste Management Policy
renamed to the Ministry of Climate Change
National Climate Change Policy approved by
2012 2022 Implementation Framework reporting for NCCP
Federal Cabinet
Punjab and Balochistan Environmental
2012 2023 Progress on National Adaptation Plan (NAP)
Protection Acts prepared and enacted
Pakistan Third National Communication; Third
Green Benches established in all High Courts and
2012 2025 NDC Submission (NDC 3.0); Draft Pakistan
the Supreme Court of Pakistan
Green Taxonomy; First Climate Budget
Institutional Development Legal Development
Policy Formulation Policy Implementation
Sources: MoCC&EC (2025a); Mumtaz (2023)

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