Assessing Carbon Emissions in Pakistani Households: Implications for Carbon Tax Policy - Technical Note

Overview & Synopsis

As Pakistan pursues its climate commitments, carbon pricing offers a market-based tool to align economic incentives with environmental goals. This note examines Pakistan's carbon emission profile, current emission levels, and their projected increases as the country transitions to a higher middle-income status. Using the latest household survey available, it imputes carbon content to the consumption basket of Pakistani households and discusses the direct, indirect, and behavioral channels affected by carbon taxation. The note argues that taxing carbon should be part of a comprehensive policy addressing the actual carbon price in the economy, which includes phasing out of energy subsidies that lower the cost of carbon emissions —at a high fiscal cost. Carbon pricing emerges as a policy with a potential "double dividend" that can simultaneously reduce emissions and generate substantial fiscal resources for development initiatives or tax burden reduction elsewhere in the economy. However, implementation success hinges on addressing distributional effects, as analysis shows lower-income households would primarily experience impacts through indirect price increases in essential goods rather than through direct energy costs. The note emphasizes the importance of considering these channels when designing policies to compensate vulnerable households impacted by carbon taxation.