Carbon levy, water pricing & the green tax puzzle

Business Recorder

01-05-2025

It began with a bang—quite literally. On April 16, Islamabad was hammered by a freak hailstorm that turned the capital into a scene from a disaster flick. Hailstones the size of golf balls smashed car windscreens, tore through trees, and wreaked havoc on rooftop solar panels across the city.
The very icons of our green aspirations — solar carports, residential panels — were left in ruins, with estimates suggesting damage worth tens of millions of rupees. Climate change had arrived. Not through a long, boring UN report, but via a dented Honda Civic and a broken inverter.
Events like this are no longer flukes. From unprecedented monsoon floods to suffocating heatwaves, from melting glaciers to disappearing groundwater tables, Pakistan's weather patterns are becoming more erratic — and more expensive. In this climate reality, the conversation has finally shifted from 'if' to 'how much longer can we afford to ignore it?'
Enter the IMF — and with it, a set of fiscal policies that attempt to put a price on pollution and depletion. The upcoming carbon levy, expected to be imposed at Rs 3-5 per litre on petroleum products and coal starting July 2025, is part of Pakistan's commitment under the Resilience and Sustainability Facility. The stated aim: raise revenue to fund climate adaptation. But more than that, it's a wake-up call — a signal that business-as-usual now carries a cost.
That cost, however, is not just carbon. If there's one crisis that looms even larger, it's water.
Let's call it what it is: Pakistan is on the brink of a water collapse. According to the IMF and the PCRWR (Pakistan Council of Research in Water Resources), we may become a water-scarce country as early as this year — 2025. Per capita availability has dropped below 1,000 cubic meters, the international threshold for scarcity. By comparison, India hovers around 1,500. We're not just inching toward the cliff. We're over the edge and falling.
And yet, what do we do with the little water we have?
We pump it. Relentlessly. Without meters. Without permits. Without the faintest idea of how fast the aquifers are declining. In Lahore, the water table has dropped over 50 feet (15.24 m) in just the last 15 years. In parts of Karachi and Hyderabad, underground water has turned saline. And still, housing societies, beverage plants, and textile mills continue to extract it like it's a divine inheritance.
We waste it. Our urban water infrastructure leaks over 40 percent of supplied water before it even reaches the tap. Agriculture—our largest consumer of water—continues to flood-irrigate fields as if it were 1890. Sugarcane and rice dominate crop cycles in arid zones. In cities, car washes, fountains, and lawns thrive, while groundwater shrinks and rivers run dry.
We ignore it. Pakistan gets about 145 million acre-feet (MAF) of water annually. Of this, we manage to store just 13 percent — mostly in a few large dams built decades ago. The rest? It flows straight into the Arabian Sea. If ever there was a definition of short-sightedness, it's this: a water-insecure country letting most of its rainwater drain away.
This is the context in which water pricing is being discussed—not as a revenue tactic, but as a matter of survival. We must begin drafting legislation to regulate and price groundwater extraction, starting with industrial and commercial users. Without commenting on what is in the works with the provincial governments the intention must be clear: stop treating water as a free resource and start managing it as a strategic asset.
Naturally, many in the business community are bracing for impact. Energy prices are already high. Inflation is running wild. Tax compliance is patchy. And now, new levies?
But let's take a step back.
First, it's important to separate pain from panic. The proposed carbon levy is modest by global standards. Even at Rs5 per litre, it remains lower than many environmental taxes in developing economies. And it doesn't apply to small producers or agriculture — at least not yet.
Second, water pricing, in its initial phase, targets the largest extractors — industries pumping tens of thousands of gallons daily. These aren't small businesses, rather they are large-scale operations that can afford a few paisas per litre to secure their future access.
And third—and this is crucial—pricing isn't punishment. It's a pathway to reform.
By making overconsumption expensive, you incentivize efficiency. You nudge businesses to recycle wastewater, invest in closed-loop systems, adopt water-saving tech, and even change sourcing strategies. And yes, examples of this already exist in Pakistan. A major Lahore-based textile exporter recently installed a zero-liquid-discharge system, reducing its water consumption by over 70% and earning 'preferred supplier' status from European buyers. Did it cost them upfront? Sure. Did it pay off? Absolutely.
Globally, this shift is already happening. Green taxation is being paired with green finance. Carbon pricing mechanisms, ESG reporting requirements, and climate-related disclosures are becoming standard in boardrooms, not just think tanks. And the businesses that lead—not lag—are the ones getting the contracts, the capital, and the credibility.
Pakistan, for all its flaws, has a chance to leapfrog. With a young workforce, a growing green energy sector, and a private sector that's more agile than it gets credit for, we can build a low-carbon, water-secure economic model. But that requires courage—from policymakers and from the business class.
The government, for its part, must do three things to avoid turning good policy into bad politics.
One, ringfence the revenue. Use funds from the carbon levy and water pricing to actually build resilience—solar parks, urban water tanks, canal lining, and rainwater harvesting. If businesses know where their money is going, they're more likely to pay without protest.
Two, communicate predictability. No more surprise SROs or last-minute reversals. Create a 5-year roadmap with clear escalation paths and sunset clauses. Let industries plan, budget, and adapt.
Three, reward the early movers. Offer tax credits, soft loans, and fast-tracked permits for companies that invest in clean energy, green tech, or water conservation. Show that responsibility isn't just a burden—it's a competitive edge.
As for the private sector: adapt or perish. We can't keep importing used Japanese cars, exporting low-value yarn, running on diesel, and pumping free groundwater forever. The world is changing—and fast. Europe's CBAM will tax the carbon in our exports. Customers care about water footprints. Investors track ESG scores. Whether we like it or not, sustainability has become bankable.
The carbon levy and water pricing are not perfect tools. But they are necessary signals. And if we implement them with fairness and foresight, they can help shift us from short-term survival to long-term strategy.
In the words of Benjamin Franklin, 'When the well is dry, we know the worth of water.' In Pakistan, the well isn't just drying—it's screaming. And ignoring that scream could cost us more than any tax ever will.
Copyright Business Recorder, 2025