Despite contributing just 0.9 per cent to global greenhouse gas emissions, Pakistan ranks among the top five most vulnerable nations to climate change.

The country is already experiencing the devastating impacts of climate change, including erratic rainfall, glacial melt, increased frequency of vector-borne diseases, and extreme weather events. The catastrophic floods of 2022 alone resulted in an estimated GDP loss of $15.2 billion, affecting over 33 million people.

In this context, Pakistan has set an ambitious target of reducing its projected emissions by 50pc by 2030 — 15pc drop below business as usual (BAU) from domestic resources, and the remaining 35pc drop below BAU contingent upon receiving international financial support. The broader climate finance needs of the country range between $200bn for Nationally Determined Contributions (NDCs) implementation and $348bn for climate-resilient development by 2030.

Pakistan’s share in globally accredited carbon credit issuance is a mere 0.05pc, underscoring the urgent need to develop and scale its carbon market.

Recognising the need for innovative financing mechanisms, Pakistan introduced its Policy Guidelines for Trading in Carbon Markets at COP29. This regulatory framework aims to develop a domestic carbon market, facilitating the generation and trade of carbon credits. These guidelines seek to attract green investments, mobilise climate finance, and align Pakistan’s emission reduction commitments with global climate goals under the Paris Agreement.

Pakistan’s carbon markets require strong governance, technical expertise, and inclusive and defined policies if it hopes to compete with regional peers in leveraging carbon credits

A crucial aspect of the policy is its revenue allocation mechanism, implemented through a corresponding adjustment fee (CAF). Under this system, a 12pc fee applies to all internationally transferred mitigation outcomes — 50pc of the CAF will go to the province where the project is based and the remaining 50pc to the Pakistan Climate Change Fund for national climate initiatives. 5pc of the total credits generated will be deducted at source to contribute toward Pakistan’s NDCs, and an administrative fee of 1pc of gross revenues will go to the federal government.

The policy also emphasises digitalisation and introducing a decentralised and secure infrastructure for carbon trading. This ensures transparency, traceability, and an investor-friendly environment to attract both local and international participation.

While the policy sets a strong foundation, several considerations are key to successful implementation. One major issue is policy ambiguity and institutional gaps. The policy document lacks defined timelines and actionable steps, such as a clear timeline for when the Carbon Market Working Group will become operational.

Additionally, most provinces lack institutional structures to execute carbon projects and coordinate with international registries. A well-defined roadmap with clear timelines and provincial coordination mechanisms is essential.

Provinces should be encouraged to develop region-specific carbon trading strategies. For example, Sindh and Balochistan could focus on blue carbon initiatives due to their coastal ecosystems, while Punjab and Khyber Pakhtunkhwa could prioritise agriculture-based carbon sequestration.

Pakistan currently lacks the expertise needed to develop, verify, and trade carbon credits effectively. Without a robust monitoring, reporting, and verification system aligned with global best practices, the credibility of Pakistan’s carbon credits may be questioned, limiting investor confidence.

This necessitates investments in capacity-building initiatives, including knowledge-sharing programmes, technical training for emissions accounting, and the development of local verification and validation bodies to reduce the cost of certifying carbon offset projects.

The success of a carbon market relies on clear regulations, stable pricing, and policy consistency. If Pakistan’s carbon trading regulations remain ambiguous or subject to frequent revisions, potential investors may hesitate to engage.

Establishing a stable investment climate through clear legal frameworks, tax incentives, and investor protections will help attract foreign buyers. Strengthening the National Carbon Registry and enforcing measures to prevent double-counting will further enhance Pakistan’s credibility in global carbon markets. A reliable pricing mechanism and incentives for early market participants could also boost long-term investments.

Furthermore, many carbon sequestration projects, such as afforestation and land-use initiatives, require active community participation. Without structured revenue-sharing mechanisms, these projects may face resistance from local stakeholders. The government must introduce transparent policies ensuring local communities receive a fair share of revenues from carbon credit projects. This will promote grassroots engagement and make carbon trading a vehicle for sustainable development at the community level.

Regional comparison shows that peer countries have advanced considerably in the carbon markets space, and Pakistan still has a long way to go. For instance, India is a major exporter of carbon credits, with 61m credits retired abroad over the past decade, while domestic demand remains relatively low at 600,000 retired credits.

However, this is set to change with the launch of the Indian Carbon Credit Trading Scheme by 2026, which could eventually cover 55pc of India’s annual emissions. India’s carbon market ecosystem is far more developed, exemplified by EKI Energy Services Limited, a leading carbon credit developer and consultant that has supplied over 200m offsets. Pakistan, by contrast, lacks a comparable infrastructure to support large-scale carbon trading.

That said, Pakistan’s carbon market holds immense promise as a tool for climate resilience and green financing. However, realising its full potential requires strong governance, technical expertise, inclusive and defined policies.

With strategic investments, policy clarity, and community-driven initiatives, Pakistan’s carbon market can become a catalyst for both economic growth and environmental sustainability, paving the way for a greener and more resilient future.

The writer is Executive Research & Insights at Karandaaz Pakistan

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Published in Dawn, The Business and Finance Weekly, March 17th, 2025