Pakistan's Rs5 Carbon Levy Isn't Ring-Fenced: What It Means for Corporate Fuel Costs and IFRS S2 Transition Risk

Pakistan’s Rs5 Carbon Levy Isn’t Ring-Fenced: What It Means for Corporate Fuel Costs and IFRS S2 Transition Risk

Every litre of petrol and high-speed diesel sold in Pakistan now carries a Rs5 carbon levy. On 22 October 2026, the finance ministry told the Senate Standing Committee on Climate Change that the money is not earmarked for climate spending. It flows into the Federal Consolidated Fund with every other receipt.

Source: Arab News Pakistan, 22 Oct 2026

That admission reopened a political question about what a carbon levy should fund. For companies, the more useful question is different. The levy is a real, rising cost on every litre burned, and under the Pakistan carbon levy companies face an IFRS S2 transition risk that has to be measured, priced and disclosed, wherever the revenue ends up.

Spectreco, a US-headquartered sustainability technology and advisory company with offices in Atlanta, Lahore, Lisbon, Dubai and Muscat, helps Securities and Exchange Commission of Pakistan (SECP) listed companies turn exactly this kind of policy cost into decision data. This piece sets out what the levy is, what the earmarking debate is about, and what finance teams should do with it.

On this page

• What is Pakistan’s carbon levy and who pays it?
• Is Pakistan’s carbon levy used for climate projects?
• Why the levy is still a carbon price signal for Scope 1
• Should Pakistani companies set an internal carbon price?
• How should companies disclose carbon pricing under IFRS S2?
• A five-step carbon levy response for finance teams
• Frequently asked questions

What Is Pakistan’s Carbon Levy and Who Pays It?

Direct answer: Pakistan’s carbon levy is a fixed charge of Rs5 per litre on petrol and high-speed diesel, and Rs5,330 per tonne on furnace oil. It is officially called the Climate Support Levy. Fuel buyers pay it at the pump or through direct sales, so any company burning these fuels carries the cost.

Rate and legal basis

The levy was introduced at Rs2.50 per litre from 1 July 2025 through amendments to the Petroleum Products (Petroleum Levy) Ordinance, 1961, made in the Finance Act 2025-26. The government signalled at the time that it would rise to Rs5 in fiscal year 2026-27.

Sources: Dawn, 14 Jun 2025, Profit by Pakistan Today, 20 Jun 2025

That increase arrived on 2 July 2026. The Petroleum Division notification, issued under Section 3 of the Petroleum Products (Petroleum Levy and Climate Support Levy) Ordinance, 1961, set the Climate Support Levy at Rs5 per litre on petrol, high-speed diesel and high-octane blends.

The government cut the petroleum levy by the same Rs2.50, so pump prices did not move on the day. The climate component of the tax stack still doubled.

Source: Profit by Pakistan Today, 2 Jul 2026

Why the IMF matters here

The levy is a reform commitment under the International Monetary Fund (IMF) Resilience and Sustainability Facility (RSF), the climate-focused arrangement Pakistan agreed alongside its Extended Fund Facility in March 2025. The government committed to a levy on hydrocarbons that will “gradually increase”.

Read that as a direction of travel. Rs5 is the current rate, not a ceiling.

Sources: Dawn, Mar 2025, Dawn, 14 Jun 2025

Is Pakistan’s Carbon Levy Used for Climate Projects?

Direct answer: Not directly. On 22 October 2026, the finance ministry told the Senate climate committee that levy proceeds go into the Federal Consolidated Fund and no revenue stream is ring-fenced. Pakistan spent Rs816 billion on adaptation and mitigation last fiscal year, but that spending is not tied to levy receipts.

What the finance ministry said

A ministry official told the Senate Standing Committee on Climate Change and Environmental Coordination that national accounting rules do not earmark individual revenues. “There is not a single revenue stream that is ring-fenced for a specific [purpose],” the official said. “This all goes into the FCF.”

Source: Arab News Pakistan, 22 Oct 2026

What the committee and the climate minister said

Committee chair Senator Sherry Rehman said a levy that is not ring-fenced and not spent on climate should not be called a climate or carbon levy. She asked the finance ministry to channel carbon revenue into mitigation in the next federal budget, citing Lahore’s winter smog, water scarcity in Balochistan and climate pressures in Karachi.

Federal Minister for Climate Change Musadik Malik backed the committee, saying levies are by definition meant for a specific purpose.

Source: Arab News Pakistan, 22 Oct 2026

What this debate changes for companies

The earmarking argument is about public spending. It does not change the rate, the legal basis or who pays. If the next budget does ring-fence the money, the levy becomes easier to defend politically, which makes further increases more likely, not less.

Why the Levy Is Still a Carbon Price Signal for Scope 1

Burning petrol, diesel and furnace oil in owned vehicles, generators and boilers produces Scope 1 emissions: direct greenhouse gas (GHG) emissions from sources a company owns or controls. A charge per litre is therefore a charge per tonne of CO2, whatever the treasury does with it.

Converting Rs5 per litre into a price per tonne

Using standard US Environmental Protection Agency (EPA) combustion factors of about 2.70 kg CO2 per litre of diesel and 2.32 kg per litre of petrol, Spectreco’s conversion gives the following implicit carbon prices.

Spectreco calculation. Emission factors from the EPA GHG Emission Factors Hub; US dollar values use the Rs816bn = US$2.9bn rate in the Arab News report. Combined levy from the July 2026 notification.

Sources: US EPA, Emission Factors for GHG Inventories, Profit by Pakistan Today, 2 Jul 2026

Small per litre, material at fleet scale

A logistics company burning 2 million litres of diesel a year emits roughly 5,400 tonnes of CO2. At Rs5, its carbon levy bill is Rs10 million a year, and the July 2026 step-up alone added Rs5 million.

The explicit carbon price is low by global standards. The total fuel levy stack is not. Both numbers belong in a transition-risk assessment, because a government that can shift Rs2.50 between the two levies overnight can also raise the climate component without moving pump prices.

Should Pakistani Companies Set an Internal Carbon Price?

Direct answer: Yes, for any company with material fuel use. An internal carbon price puts a cost per tonne on emissions inside investment and procurement decisions. In Pakistan, the Rs5 levy gives a defensible floor of roughly Rs1,850 to Rs2,150 per tonne, and scenario prices above it show what further IMF-linked increases would do.

Two common designs

• Shadow price: a notional price per tonne applied in capex appraisals, fleet replacement cases and supplier selection. No money moves.
• Internal fee: a real charge billed to business units for their emissions, with proceeds funding efficiency or electrification projects. This is the corporate version of the ring-fencing the Senate committee asked for.

Setting a credible price

• Start from the levy-implied floor so the price ties to a real, observable cost.
• Add scenarios that reflect plausible policy steps, such as a doubled levy or extension to coal and other hydrocarbons, which the IMF commitment already contemplates.
• Apply it where decisions are long-lived: generators versus grid or solar, diesel versus electric fleet, furnace oil boilers versus alternatives.

Source: Dawn, Mar 2025

Companies selling into the EU also face the Carbon Border Adjustment Mechanism (CBAM), so a single internal price can carry both domestic and export exposure. Our Pakistan carbon market and Article 6 guide covers how carbon credits fit alongside that price.

How Should Companies Disclose Carbon Pricing Under IFRS S2?

Direct answer: IFRS S2 requires companies to disclose climate-related transition risks, such as rising carbon costs, and their financial effects. Under paragraph 29(f), they must also state whether and how they use an internal carbon price in decisions, and the price per tonne. Pakistan’s levy belongs in both disclosures.

Transition risk in the strategy section

IFRS S2 (Climate-related Disclosures), issued by the International Sustainability Standards Board (ISSB) in June 2023, asks for risks that could affect cash flows, access to finance or cost of capital. A government levy on fuel is a textbook policy-driven transition risk. Disclose the current cost, the trend, and how the business would absorb further increases.

Source: IFRS Foundation, IFRS S2

Metrics: internal carbon prices

• Whether and how the carbon price is applied in decision-making, for example investment decisions, transfer pricing and scenario analysis.
• The price per metric tonne of GHG emissions used to assess the costs of those emissions.
• Scope 1 emissions from fuel combustion, which the levy cost is calculated against.

Sources: IFRS Foundation, IFRS S2, AASB, IFRS S2 paragraph 29(f) extract

SECP timing

SECP adopted IFRS S1 and S2 in phases: periods beginning on or after 1 July 2025 for Phase 1, July 2026 for Phase 2 and July 2027 for Phase 3, with assurance from the second reporting year. Phase 2 companies are inside their first reporting year now. Our SECP IFRS S2 compliance guide and Phase 2 readiness guide cover the full requirements.

Source: SECP press release, 1 Jan 2025

A Five-Step Carbon Levy Response for Finance Teams

1. Map fuel use. Pull litres of petrol, diesel and furnace oil by site, vehicle and generator from fuel cards, invoices and the ERP.
2. Convert to Scope 1. Apply consistent emission factors and record the source, so the figure survives assurance.
3. Price the exposure. Multiply litres by the current levy and by two higher scenarios, then show the result by business unit.
4. Set an internal carbon price. Use the levy-implied floor, approve it at board or CFO level, and apply it to capex and fleet decisions.
5. Write it into IFRS S2. Describe the levy as a transition risk, report the internal price under paragraph 29(f), and link both to your transition plan.

Spectreco’s AI cloud-native ESG platform automates steps one to three from fuel and ERP data, and our Decarbonization and Net-Zero Strategy advisory supports internal price design.

Frequently Asked Questions

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Where Spectreco Fits

Spectreco helps SECP-listed companies turn fuel data into a priced, disclosed transition risk. Our advisory team maps your Scope 1 fuel exposure, sets a defensible internal carbon price, and drafts the IFRS S2 strategy and metrics disclosures that go with it.

The Virtual Sustainability Office combines that advisory team with our ESG platform, so levy costs and emissions stay current as rates change.

Next step: book an IFRS S2 transition-risk review through Spectreco’s Compliance, Reporting and Disclosures advisory and get your carbon levy exposure priced before your next reporting cycle.

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