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Business Recorder

Towards a climate-informed NFC Award

EDITORIAL: Planning Minister Ahsan Iqbal's recent announcement that the federal government is contemplating a revision to the criteria for the National Finance Commission (NFC) Award to better reflect the country's ecological and environmental realities deserves careful consideration. It signals a growing recognition of the need for climate-aware fiscal frameworks that ensure more equitable resource distribution. Terming the current population-based formula — where 82 percent weightage is given to population and the rest to factors like poverty, revenue generation and inverse population density — as 'regressive', he indicated that the government will push for including climate adaptation and other social sector indicators as key criteria when the NFC convenes for a crucial meeting in August. This marks the latest signal of the Centre's intent to reduce the dominant role population plays in shaping the inter-provincial fiscal compact. In recent months, Finance Minister Muhammad Aurangzeb has also called for a 'fundamental rethink' of the population-heavy NFC formula. And given the trajectory of the economy since the 7th NFC Award came into effect in 2009, the case for revisiting the fiscal distribution framework looks increasingly compelling. By disproportionately prioritising population, the NFC formula has long overlooked structural inequities among the provinces in terms of development indicators, infrastructure and security needs. Worse still, it has created a perverse incentive for unchecked population growth, placing unsustainable pressure on economic, environmental and social resources, while also deepening the climate crisis. A runaway annual population growth rate of 2.55 percent rapidly depleting the country's already strained resources, and a worsening climate crisis battering the economy and upending millions of lives, in fact, together form the twin existential threats confronting us. Given this, it is encouraging that the government is not just reconsidering the NFC framework, it has also directed a sizeable share of the upcoming fiscal year's budget towards climate-resilient development. However, the budget document is marred by policy contradictions and a lack of clarity on how it intends to prioritise climate-related goals. A notable feature of the budget is the rollout of the IMF-backed Climate Budget Tagging tool, aimed at identifying and categorising Public Sector Development Programme expenditures according to their relevance to climate objectives. Under this framework, projects are categorised under either adaptation, mitigation, or supporting activities. To this end, the government has allocated Rs85.43 billion for adaptation — measures aimed at preparing for climate change impacts, like floods — Rs603 billion for mitigation, which focuses on reducing emissions, and Rs28.33 billion for supporting functions, including research and institutional development. While the largest share of the funding has gone to mitigation, the finance minister has repeatedly stressed that our most pressing challenge remains adaptation – an entirely valid assertion, given that this category encompasses a wide range of critical initiatives like flood protection, water resource management and climate-resilient agriculture. Yet, the funds set aside for adaptation remain disproportionately small. There seems to be little focus on developing new drought-resistant crop varieties, retrofitting aging infrastructure to protect against extreme weather, or establishing robust early warning systems. Furthermore, contradictions within the mitigation framework are also evident: a 2.5 percent carbon levy has been imposed on the fossil fuel industry, but any benefit accrued here will just be undermined by the simultaneous duties introduced on solar imports. Crucially, funding for the climate change ministry has been slashed from Rs3.5 billion to Rs2.7 billion, hindering climate research and capacity building. Given this, policymakers must recognise that a climate-informed revision of the NFC Award, while welcome, must be matched by greater coherence in the national climate agenda. The budget reflects troubling contradictions and lack of clear direction, particularly in its neglect of urgently needed adaptation efforts. Unless these gaps are addressed, any shift in fiscal thinking will struggle to deliver meaningful results. Copyright Business Recorder, 2025