Carbon levy pops up in talks with IMF
Pakistan on Monday showed reluctance to slap a carbon levy, which the International Monetary Fund wants the government to introduce in an effort to raise funds for the promotion of new energy vehicles as part of its resilience conditions under a new $1 billion loan facility.
The brief discussions about the new carbon levy took place during the kick-off meeting to finalise the Resilience and Sustainable Facility (RSF) - an IMF loan package that is largely meant to prepare climate-vulnerable nations for disaster management.
The government officials did not support the carbon levy proposal due to its implications for the growth of companies, according to the people privy to the discussions. A detailed session on the carbon levy would take place today (Tuesday), they added.
An IMF team is in the town to finalise a new set of resilience conditions that Pakistan will adopt to qualify for and avail the estimated $1 billion climate lending. It will be Pakistan's 26th IMF programme but its purpose will be different from the traditional bailouts for the balance of payments support.
The Pakistan-IMF discussions are taking place in the light of the World Bank's Country Climate and Development report. The World Bank has already identified the policy gaps, which the IMF and Pakistan will try to bridge through adaptation of new policies.
The sources said that one of the resilience conditions might be the imposition of the carbon levy, which the lenders want Pakistan to impose on traditional fossil fuel-based cars – the internal combustion engine vehicles.
According to the government's estimates, 10% of the total carbon dioxide emissions are originating from the transport sector and a shift to cleaner sources of vehicles will require massive funding and efforts.
The Ministry of Industries is in the process of finalising a five-year New-Energy Vehicles (NEVs) policy. The ministry's initial estimates show that Pakistan needs at least Rs155 billion additional funding till 2030, if it wants to replace the combustion engine cars and motorcycles with clean-fuel based engines.
Pakistan's nearly 80% imported oil is used in the transport sector and the conversion to cleaner energy vehicles can save foreign exchange reserves.
However, this conversion is quite expensive, which will require subsidies to reduce the cost of the vehicles and promote new infrastructure, including tax waivers and concessions, said the sources.
The traditional two-wheeler motorcycles are up to 100% cheaper than the new-energy fired two-wheelers. The three-wheeler's new energy vehicle will be up to 123% expensive. The plan is that by 2030 up to 90% of new purchases of two and three wheelers should be renewable energy sources based.
The new technology-based four-wheeler cars are estimated to be expensive by 65% compared to combustion engines and the government wants that at least 30% of the new buying by 2030 should be based on new technologies, said the sources.
The Ministry of Industries is planning to propose multiple measures, which include zero federal excise duty, reduced sales tax rate and zero withholding tax rates on purchase of new-energy vehicles irrespective of the battery size.
The losses in revenues are planned to be compensated through the new carbon levy. Other measures may include allowing bank financing for NEVs having worth of up to Rs10 million- up from Rs3 million
There is also a proposal for a free registration and no tolls on highways for the new-energy cars, said the sources. The government also plans to set up about 750 new charging stations till 2030.
The global lenders are asking to impose carbon levy on fossil-fuel based cars to raise funds for funding the new infrastructure for promotion of the clean energy vehicles, said the sources.
According to the World Bank, a carbon tax could, from several perspectives, be beneficial to Pakistan's development. Pakistan imports nearly one-third of its energy in the form of oil, coal, and re-gasified liquefied natural gas (RLNG) at enormous cost, which contributes significantly to the country's chronic fiscal stress, it added.
The introduction of a carbon tax would provide a clear signal to both firms and households to start adopting efficiency measures and shift consumption and investment away from fossil fuels to renewable energy sources, it added.
A carbon tax would also broaden the tax base by bringing currently untaxed producers who operate in the informal economyestimated to be between 35 and 50%into the tax net at a low administrative cost, stated the World Bank report.
The use of traditional tax instruments is more challenging in such contexts. A broad-based carbon tax would circumvent this and could be relatively easy to implement, administratively and politically, if it is introduced gradually, with adequate revenue recycling to protect the poor and to sustain an expansion of shared prosperity.
About 51 manufacturers of various types of transport vehicles have secured licenses and the government incentives can help to establish the infrastructure. The government is also planning to introduce National Vehicle Emissions Efficiency Standards aimed at promoting newer more efficient vehicles.
The Energy Ministry briefed the IMF about the steps that it was taking to promote the new infrastructure. However, the government has not yet made its final mind on the issue of the carbon levy, said the sources.
Any commitment to the IMF about levying the new tax will be given after the consent of Prime Minister Shehbaz Sharif, said the government officials. They said that a clear picture in this regard will emerge by the end of this week.
The new IMF facility will also target gradual removal of the subsidy to electric tube-well, gradual phasing out of the natural gas subsidy for fertilizer production, implementing reforms in the sugar sector such as removing entry barriers like licensing restrictions on new sugar mills and removing import duties and export subsidies for sugar, according to the sources.
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