What does it do?
The fossil fuel tax puts a price on the carbon emissions associated with the production and consumption of fossil fuels, such as coal, oil, and gas. The aim of this climate finance policy is to create an economic incentive for individuals and companies to shift to cleaner energy sources or reduce overall energy consumption. The revenue generated from a fossil fuel tax can be used to fund climate mitigation and adaptation measures, including disaster response and recovery.
Have other countries used it?
Many countries, even low-income and developing nations, around the world have used fossil fuel taxes with great results:
- Costa Rica introduced a carbon tax in 1997 that now covers 46% of its emissions. The results? The country’s shift to renewable energy capacity has been phenomenal. In 2020, renewable sources accounted for over 99% of the country’s electricity generation.
- Mexico introduced a carbon tax charging $3.50 per tonne of emissions, which has helped to reduce the country’s greenhouse gas emissions. Since the implementation of the tax, Mexico’s emissions from fossil fuel combustion have decreased by 5.5%.
Has Pakistan used it?
Not yet. In a country where petrol prices are the greatest trigger for public distress, Pakistan will not risk placing a blanket tax on fossil fuels. Our government’s go-to move to retain the populist vote has been to dole out fuel subsidies, seeking immediate gratification over long-run benefits.
In March 2023, the Sharif government announced the release of a joint subsidy and tax on fuel: where ‘rich’ motorists (owning cars above 800CC) will be charged PKR 50 extra per liter of fuel, and ‘poor’ motorists (with cars below 800 CC) will be subsidized PKR 50 per liter. This raises several issues, from both an economic perspective, and a climate one, which must be addressed.
Firstly, this policy does nothing for the climate: the total fuel usage stays the same, and might even rise if the quantity of motorists classified as ‘poor’ is greater than ‘rich’ motorists. Secondly, what transparency and accountability measures will be put into place to ensure there are no leaks in the rapid transfer of funds? Lastly, given rising unemployment and stagnating GDP growth, does the government plan to incentivize businesses to stay in Pakistan, given that their transport charges just rose by PKR 50 per liter?
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