Shahid Sattar and Noreen Akhtar
The World Bank Group’s Country Climate and Development Report 2022 for Pakistan presents an in-depth analysis of Pakistan’s mounting vulnerability to climate change, its rising GHG emissions, the financial implications of climate risks for Pakistan and the country’s current climate change policies and regulatory frameworks to enhance its adaptation and mitigation efforts to climate change. The report also sheds light on the major sectoral transitions Pakistan requires to pivot its economy to an inclusive, resilient and green development pathway. Finally, the macro-fiscal, financial and distributional implications of climate and development policy actions are evaluated.
APTMA has thoroughly reviewed the report and believes that, the comprehensive discussion aligns with APTMA’s analysis of the climate and development scenario in Pakistan. Therefore, Pakistan must adopt the report’s policy packages and key recommendations to ensure an inclusive and resilient socio-economic and environmental progress in all the sectors including the industry.
The report argues that Pakistan continues to face considerable macro-fiscal fragility, that could significantly hinder its ability to sustain growth and enhance equity. The investment rates and the tax to GDP ratio remains low, and there are unproductive subsidy regimes in the energy, agriculture and irrigation sectors, which indicate the lingering fiscal stress faced by the country. The high inflation rate prompted the government to implement the energy price relief plan, that ballooned the already high fiscal expenditures and fiscal space has been shrinking rapidly. These plus the country’s low investment rate and low export volume have severely hindered the country’s ability to grow sustainably and reduce poverty. Moreover, the country is experiencing a youth bulge, with 2.1 million young people entering the labour pool every year, but many are poorly skilled and inexperienced. All these issues are compounded by extremely high levels of environmental pollution due to lack of waste management infrastructure and unregulated and unmonitored pollution from the industrial processes.
Regarding climate change vulnerability, the report evaluates that Pakistan’s current GHG emissions account for less than 1% of the global GHG emissions. However, the country will experience more climatic variability and extreme events in the form of severe and more frequent droughts and floods, thus causing economic losses of billions from damage to crops and property. Agriculture will be severely impacted, that will result into significant damages to crops and food insecurity. These climate threats from heat, floods and drought suggest a loss of up to 9% of GDP by 2050, relative to the Business as Usual (BAU). The scenarios of sectoral GDP decline indicate that industry and agriculture will experience much larger impacts. A GDP decline of 8% by 2030 and 17% by 2050 for these sectors is predicted.
Damage from water insecurity is likely to increase significantly, with climate change. Water demand is projected to increase by almost 60%, with the highest demand rates coming from the industrial and domestic sectors. Pakistan will experience inter-sectoral tradeoffs for water and about 10% of irrigation water will need to be repurposed to meet non-agricultural demands.
Pakistan has adopted several sectoral policies to support decarbonization. The legislative and policy reforms clearly indicate a new momentum to enhance climate resilience. However, with blurred lines of responsibility and weak accountability, the commitment to climate mitigation and adaptation has not shown significant results. Thus, Pakistan needs to tie the environment and climate actions closely into the green-growth agenda to ensure sustainable growth in all its sectors.
Pakistan’s development challenges and high exposure to climate change highlight the need of major sectoral transitions. Transformation of agri-food system is one of them, which requires major changes in the way crops are grown, harvested, stored and marketed. Transformation of irrigation and both surface and ground water management is the second, that highlights the need to overcome the current inefficient and wasteful use of water in major sectors and manage it sustainably.
The report also rightly elucidates the fact that fertilizer subsidies are a problematic practice which not only promote inefficient use of chemical fertilizers but also impose heavy fiscal burden on the government. In this regard, the report suggests that freed-up fiscal resources need to be utilized to remove barriers to climate-smart, on-farm investments and value chain improvements. Moreover, research and technological advancements are required to grow climate resilient crops.
Transitioning to sustainable energy sources is another critical enabler of sustainable economic development in Pakistan. The report states that power shortages in the country cause an economic loss of more than US$8 billion a year. Also, there is a significant use of imported coal, especially in the industry, and the country suffers relatively high energy intensity of GDP. These challenges are compounded by growing financial deficits due to energy prices and poor performance of electricity and gas distribution companies, that place heavy fiscal burden on the government and disincentivize private investment in the sector, as well as electricity and gas supply interruptions causing loss of productivity and heat stress. Additionally, poor planning and substantial subsidies have caused huge inefficiencies across energy sector that causes circular debt. The circular debt continued to accumulate and by the end of June 2022, it was estimated to be around US$11.3 billion in the electricity sector and US$7.5 billion in the gas sector, creating barriers to the future investments.
Pakistan, therefore, urgently needs to transition away from the fossil fuels and accelerate the commissioning of its renewable energy (RE) capacity, as the country has a huge RE potential. This will reduce the overall energy generation cost and improve energy security in the major sectors such as industry. Moreover, Pakistan must see through politically difficult supply-side efficiency improvements, including tariff and subsidy reforms, introduction of private sector participation in the DISCO (electricity distribution company) sector and start a competitive wholesale power market. Moreover, as the industrial sector is the largest consumer of the fossil fuels with only partial scope for electrification or fuel switching, the government needs to give specific attention to this sector and incentivize decarbonization and efficiency improvements through regulations, fiscal incentives and improved access to financing. Lastly, there is a need to adopt, widely, the programs such as Partnership for Cleaner Textiles, which is being implemented in partnership with the International Finance Corporation (IFC). Such programs can support the global brands and their local suppliers to achieve long-term competitiveness and the corporate sustainability targets by employing cleaner production technologies. This requires a close collaboration between the government and the industry. The industries and their associations need to get involved from the beginning in articulating energy efficiency plans and in investment financing negotiations and arrangements. The adoption of circular economy practices in the industry require such collaborative efforts through continuous stakeholder engagement.
One of the policy packages presented in the report is of carbon taxes, revenue recycling and feebates. It states that introduction of carbon taxes would provide a clear signal for the country to adopt energy efficiency measures and shift to renewable energy sources. It would also broaden tax base by bringing into the tax net the currently untaxed producers who operate in the informal economy (estimated to be 35 – 50%).
Finally, the report puts a major emphasis on the role of private sector engagement in addressing climate challenges and in transitioning to sustainable practices. It targets the SME sub sector and the informal sector with the undocumented economic activity, which not only need to be brought to the tax net, but also, to the network of compliance requirements imposed by the global community of buyers on Pakistan’s industrial sector. Lastly, the need to focus on green investment and access the international climate finance in all sectors of Pakistan is also highlighted in the report.
The report’s comprehensive discussion and analysis matches APTMA’s analysis of the current and future climate and development scenarios in Pakistan. Therefore, Pakistan must adopt the policy packages and key recommendations presented in the report, to ensure a resilient and sustainable socio-economic and environmental progress, the absence of which will retard the industrial development in the country.
Note: Full report can be retrieved from: