In a landmark move, Pakistan’s federal government unveiled its Fiscal Year (FY) 2025–26 budget on June 10, 2025, totaling PKR 17.57 trillion. This marked a 7% reduction from the previous year’s budget, amid growing fiscal constraints and an increase in defense spending.

Climate Budget Tagging has been incorporated into IFMIS and SAP software to enable real-time expenditure tracking.

For the first time in its history, the national budget integrates Climate Budget Tagging (CBT), an initiative that classifies climate-sensitive expenditures across federal ministries and departments. Over 5,000 cost centers have now been tagged under adaptation, mitigation, and supporting categories. This tagging has been incorporated into the government’s Integrated Financial Management Information System (IFMIS) and Systems Applications and Products (SAP) software to enable real-time expenditure tracking.

Moreover, all federal subsidies are now screened through Form-III C, a mechanism that ensures every subsidy aligns with national climate objectives prior to disbursement. This step is also a requirement under the International Monetary Fund (IMF)’s Extended Fund Facility program. Minimum thresholds have been introduced to guarantee that at least 8% of current expenditures and 16% of the Public Sector Development Program (PSDP) allocations are climate-tagged.

These reforms reflect a significant step toward greater financial transparency and prepare Pakistan to better engage with international climate finance mechanisms.

• 6.9% of the total current expenditure and 8.2% of PSDP allocations are earmarked specifically for climate action.
• PKR 85.43 billion has been allocated for climate adaptation, with a focus on building resilience to floods, droughts, and other climate-induced disasters.
• PKR 603 billion is designated for climate mitigation, primarily aimed at reducing greenhouse gas emissions through clean energy investments and sustainable transport systems.
• PKR 28.33 billion will go to supporting functions, including capacity building, research, institutional development, and climate governance reforms.

These allocations reveal a more structured and thematic approach to climate finance, distributing resources across the adaptation-mitigation spectrum with institutional backing.

The carbon levy is a bold step, but may be politically unpopular given rising fuel costs and inflation.

The government has revived the Green Pakistan Programme, allocating PKR 2.25 billion for afforestation, biodiversity, and conservation work. Additionally, PKR 16 billion is earmarked for flood management, urban drainage improvement, and sustainable water resource use.

A notable feature of this year’s budget is the introduction of a carbon levy of PKR 2.5 per litre on petrol, diesel, and furnace oil, with plans to double this levy in the next fiscal year. This levy is intended to raise revenue for green public spending and to gradually shift consumer behavior towards more sustainable fuel use.

A major institutional reform in the 2025–26 budget is the rollout of the Climate Public Investment Management Assessment (CPIMA) framework. Under this mechanism, 30% of all PSDP projects are evaluated for their climate relevance and long-term sustainability. This assessment ensures that climate risk management, environmental screening, and cost-benefit analyses are integrated into infrastructure development planning.

30% of all PSDP projects are evaluated for their climate relevance and long-term sustainability.

While the FY 2025–26 budget signals a major policy shift, implementation challenges persist. Key considerations include:

1. Although CBT and CPIMA offer new tools for tracking and accountability, many line ministries and provincial departments may lack the technical expertise or data infrastructure to report accurately and act on these reforms.
2. The carbon levy is a bold step, but may be politically unpopular given rising fuel costs and inflation. If fossil fuel subsidies persist in parallel, the effectiveness of the levy could be undermined.
3. While PKR 603 billion has been allocated to mitigation, ensuring actual investments in clean energy, sustainable agriculture, and emission reductions will be the real test. Similarly, adaptation funding must directly support frontline communities vulnerable to climate risks.
4. These reforms, particularly CBT and CPIMA, position Pakistan more favorably for international climate finance, including the Green Climate Fund (GCF), Adaptation Fund, and bilateral donors. However, consistency and transparency in implementation will determine the actual inflow of support.
5. The defense budget saw a sharp rise to PKR 2.55 trillion, making up a significant portion of total federal spending. Balancing climate, education, and health priorities against rising security expenditures remains a core challenge.

Pakistan’s climate finance journey is far from complete, but with this budget, the country has clearly entered a new chapter of climate accountability and ambition

Pakistan’s FY 2025–26 budget lays a promising foundation for aligning national development priorities with climate resilience and sustainability. With dedicated climate-tagged financing, improved public investment planning, and a pioneering carbon levy, the country has taken important first steps in building a climate-smart economy.

The journey ahead demands strong political will, inter-ministerial coordination, and continuous capacity building to translate budget allocations into real-world results. Pakistan’s climate finance journey is far from complete, but with this budget, the country has clearly entered a new chapter of climate accountability and ambition.

Disclaimer: The opinions expressed in this article are solely those of the author. They do not represent the views, beliefs, or policies of the Stratheia.