Carbon Trading has evolved as a new concept in Pakistan for which no policy mechanism was available to reap its financial benefits before the formal approval of Pakistan’s debut carbon policy, termed as “Policy Guidelines for Trading in Carbon Markets 2024”. The Policy is a milestone for Pakistan, which enables it to step into the carbon market. The Policy was presented at COP-29, held at Baku, and approved by the Cabinet in December 2024. Pakistan’s Policy for Climate Change aims to address the compliance of the UN Convention on Climate Change and the subsequent Paris Agreement.
Pakistan is one of the most vulnerable countries to disasters induced by climate change. This acute vulnerability is further highlighted by the floods of 2022, which have created a national consensus advocated and voiced by civil society organisations and NGOs.
Subsequently, the political leadership, recognising the urgency and importance of climate change, coupled with Pakistan’s international commitment under the Paris agreement, carved out a domestic market for Carbon Trading, which is deeply rooted in local environmental realities. Such a policy needs to be in line with the commitments and international obligations to fulfil its Nationally Determined Contributions (NDCs) under the Paris Agreement, while, at the same time, due to the country’s financial constraints, offer financial incentives to the public and private sectors to monetise their environmentally friendly projects through Carbon Trading in the form of earning carbon credits. Hence, both normative framing and empirical urgency necessitated the political drive to formulate the Carbon Trading policy on an emergency basis.
It should be kept in mind that Pakistan is not a major contributor to the global carbon index. At the same time, it is blessed with an abundance of glaciers, backed by river water flows and an economy largely contributed by Agriculture. As a result, Pakistan’s inherent Risk assessment of carbon emissions is much below the average of high contributors in the global index. Therefore, the Policy designed by Pakistan carries more weight in exporting carbon credits to other countries after meeting the targets as NDCs. The policy devised by Pakistan suggests a coordinated action by the Federal and Provincial Governments. Therefore, an effective design to implement the decarbonization of the environment towards earning carbon credits will not only facilitate the local communities in terms of clean air but also contribute to GDP through revenue receipts from the export of carbon credits. Earlier, Pakistan had the National Climate Change Policy 2021, which, including all previous policies, was silent on carbon trading, being a new and evolving concept. This gap was filled through the current policy guidelines.
Development and registration of carbon projects involve high transaction costs in the form of registration, validation, and verification fees by the international standards, validation and verification bodies.
Government officials, political leadership, and international partners share the same vision that creating a Carbon Market is essential for the ecological financial area in Pakistan. Thus, for government officials and international technocrats, the policy is not only an instrument for fulfilling Pakistan’s international obligation under the Paris Agreement, but also to monetize on ecological projects to enhance fiscal resilience. The private sector, particularly large emitters in the cement and energy industries, interprets the policy as an opportunity for economic repositioning, transforming carbon reduction into a revenue-generating and reputationally beneficial activity.
For civil society, the policy is merely further exploitation by the global north and not shouldering responsibility for their part of environmental degradation, but also creating hurdles in the future development of the global south by selling their carbon quota, which will have implications for their future choices of industrialisation; additionally, the Policy will also take away the community rights over forest and land. The shared and common vision evolved among the government officials and international partners often interacts, overlaps, and sometimes comes into conflict with the views of civil society and the private sectors, which will shape the future success of this policy.
Moreover, policy may create confusion between the Federal government and Federating Units, over project selection, prioritising areas and sectors, and above all, over financial earnings from the carbon credits. But the real test of the robustness of this Policy will come into play when the implementation of the Policy is operationalised, the Registry is established, the Carbon Exchange Market is developed, and the Measurement, Reporting & Verification (MRV) system is put in place.
Further, this op-ed series explains its salient policy proposals, implementation challenges, inherent risks associated with it, and future recommendations.
Salient features of the Carbon Trade Policy include the establishment of a dual market structure (voluntary and compliance market), alignment with international commitments (Paris Agreement, UNFCCC, Verra and Gold standards), targeting high-impact sectors (agriculture, energy, forest, industry and transport), formation of a carbon market working group, an MRV system and a Carbon Registry.
It also aims at equitable benefit sharing and digital processing of projects, for which an authorisation framework is also proposed. Furthermore, the policy outlines how consultations with various stakeholders have been carried out, laying down a detailed process of project selection, approval, and appraisal along with an implementation mechanism. The implementation mechanisms of the Policy comprise three pillars: (i) Oversight & Governance, (ii) Obligatory Fees, and (iii) Support & Guidance.
Oversight and Governance: There are provisions in the policy related to oversight and governance that include the establishment of a Carbon Market Working Group, National Carbon Registry, and Measurement, Reporting, and Verification (MRV) System. All three of these components are essential for the implementation of the policy. However, the policy does not provide detailed guidelines or SOPs, and timelines for putting these systems in place. The policy also does not provide for sector-specific guidelines for measurement, reporting, and verification of carbon credits.
Obligatory Fee: The policy outlines a clear fee structure for national authorisation and corresponding adjustments of carbon projects, which include the following. (a). 5% of the credits generated by the project shall be deducted at source, in the form of credits, preferably to be adjusted towards Pakistan’s voluntary NDCs. (b). Corresponding Adjustment Fee (CAF) calculated at 12% of net revenues generated from the sale of carbon credits. 50% of the CAF shall be directly transferred to the province where the project is based. The remaining portion (50%) of the CAF will be credited to the Pakistan Climate Change Fund, to be used for climate change initiatives across the country, in consultation with the province where the credits are generated. (c) Administrative Costs, equating to 01% of gross revenues generated from the sale of carbon credits, will go to the Federal Government.
The above-mentioned fee structure has two aspects. From the Government’s perspective, it will help in meeting the unconditional targets of NDCs in the form of 05% credits deduction at source and providing financial resources to Federal and Provincial Governments in the form of 12% CAF, and an additional 01% revenue for administrative costs.
However, from the perspective of investors and the private sector, these costs are a significant barrier to attracting private investors into a newly established market whose financial sustainability is already uncertain. International investors will channel their investments to those regions and countries that provide incentives to investors rather than imposing 18% deductions on them. There is also an argument that the government should incentivise emissions reduction projects rather than discouraging them by imposing a high fee structure for authorising these projects.
It is also worth mentioning that development and registration of carbon projects involve high transaction costs in the form of registration, validation, and verification fees by the international standards, validation and verification bodies. Imposing an additional 18% cost on such a project by the Federal Government will make this business non-attractive and financially unviable for the private sector. Complexities of the Accounting system need to be removed and simplified.
(To Be Concluded)
The writer works at a public policy think tank. He can be reached at [email protected].