ISLAMABAD: In the latest budget announced on the floor of the National Assembly, Finance Minister Muhammad Aurangzeb has proposed an imposition of carbon levy on petrol, high-speed diesel, and furnace oil of Rs 2.5 per liter in the coming financial year, which is expected to increase to Rs 5 per liter in the next year (2026–27). The measure is expected to raise an estimated Rs 48 billion in the upcoming fiscal year.
The purpose of this levy is to discourage the use of fossil fuels in order to decrease the negative environmental impact of burning the fuel while also looking to decrease the import bill attached with the use of these fuels. The government is looking to promote green energy-related programs, and this will fund such initiatives in order to improve the use of alternative fuels and energy sources.
The Carbon Levy is an addition to the existing Petroleum Levy already imposed on petroleum products and forms a central element of the Finance Bill 2025. It is part of the government’s broader climate strategy that seeks to reduce greenhouse gas emissions and generate funding for climate adaptation and green energy projects. The levy applies across key fuel types—motor spirit, diesel, and furnace oil—and is intended to realign Pakistan’s energy consumption with international climate goals while also mobilizing domestic financial resources.
In a notable development, the Petroleum Products (Petroleum Levy) Ordinance, 1961, has been amended to reflect this change. The title of the ordinance has been officially updated to include the term “Carbon Levy” alongside “Petroleum Levy,” signaling the integration of environmental considerations into petroleum taxation. The amendments also include a new sub-section within Section 3 to define the rates and scope of the carbon tax, the omission of the Fifth Schedule, and the addition of Furnace Oil Bunker ‘C’ to the First Schedule, formally bringing furnace oil under the levy’s scope.
In addition to this, the imposition of petroleum levy will also start to apply to furnace oil, which was only applicable on petrol and high-speed diesel previously. The move is to rationalize the use of all these fuels by bringing them under a uniform tariff scheme.
The levy has been applied on furnace oil after it was already placed on the other fuels in the previous year. The additional imposition comes due to the shortfall that was seen in the petroleum development levy of Rs 215 billion being projected by the International Monetary Fund (IMF). Under the review carried out, the IMF projected that Rs 1,066 billion would be collected under PDL while the target had been set at Rs 1,281 billion in the negotiated extended arrangement.
The shortfall could be partially explained by the fact that the government had capped the PDL to Rs 60 per liter on petrol and diesel till March 15th of 2025. Only after this date was the cap removed and PDL was increased by Rs 10 on 16th March and then further increased by Rs 8.02 per liter on petrol and Rs 7.01 per liter on diesel. Currently, the PDL stands at Rs 78 on petrol and Rs 77 on diesel.
The impact of this levy will be seen as being twofold. Firstly, even though the move is a step in the right direction, it will prove to be an additional burden on the consumers who are using these fuels currently. The brunt of this measure will fall on the motorcycle and car owners who will have to pay an additional 1% being added to their fuel cost. This can lead to inflation seen in the economy as the cost of fuel will rise uniformly.
The second impact of this levy would be the cost of electricity, which will increase once the levy on furnace oil goes into effect. Until now, no PDL was being charged on furnace oil, which is used in power generation, boilers, and kilns. Once the new levy is put into place of around Rs 75 per liter, it can be expected that the cost of electricity generation will rise, which can have a secondary inflationary impact on the economy as well.
Finance Minister Aurangzeb emphasized that the new measure reflects Pakistan’s commitment to transitioning toward low-carbon growth and addressing climate vulnerabilities. He noted that revenues from the levy will support investments in renewable energy and climate resilience, aligning with both national and international climate obligations.
This marks the first time Pakistan has formally introduced a carbon pricing mechanism within its petroleum framework. By phasing in the levy and planning to double the rate in the next fiscal year, the government is signaling its intent to institutionalize carbon pricing as a permanent tool of fiscal and environmental policy. With Pakistan among the countries most vulnerable to the effects of climate change, this policy shift is seen as a crucial step in building national resilience and fulfilling global climate commitments.
