Executive Summary
Pakistan stands at a critical crossroads as it faces escalating climate risks that threaten not only the environment but also the foundation of its economy. A staggering 40 billion dollars to 50 billion dollars annually is required over the next 25 years to meet climate adaptation, mitigation, and resilience needs. Yet, current climate finance flows fall drastically short of these requirements, posing severe risks for economic stability and sustainable development. To secure Pakistan’s economic survival and safeguard its population, climate finance must be prioritized as a central pillar of national economic strategy. This policy brief outlines the climate finance gap, its economic implications, and strategic recommendations to mobilize and effectively utilize climate finance.
Climate Finance Needs and Gap
Pakistan is among the countries most vulnerable to climate change effects, despite contributing less than 1% to global greenhouse gas emissions. The country experiences frequent and severe climate disasters, such as devastating floods, droughts, and extreme heatwaves that impose direct economic losses estimated at over 30 billion dollars in 2022 alone, with recovery needs exceeding $16 billion annually.
The World Bank estimates Pakistan’s total climate investment requirement at approximately 348 billion dollars between 2023 and 2030. This substantial figure includes $152 billion for adaptation and resilience and $196 billion for decarbonization initiatives. Current annual climate finance inflows average between $1.4 billion and $4 billion, highlighting a considerable shortfall relative to needs.
Pakistan’s public climate finance is largely dependent on international commitments, with domestic private sector contributions remaining below global averages. International climate finance accounts for around 84% of Pakistan’s climate funding, underscoring critical dependencies and vulnerabilities in climate budgeting. Domestic resource mobilization and private sector engagement require urgent scaling.
Economic Risks of Climate Inaction
Unchecked climate impacts threaten Pakistan’s economic growth trajectory by disrupting key sectors especially agriculture, which contributes about 20% to GDP, as well as urban centers accounting for 55% of GDP. Climate-related productivity losses, such as a 10-20% decline in agricultural output due to variability, amplify poverty, food insecurity, and inflationary pressures nationally.
The spiraling costs of climate disasters exacerbate fiscal deficits and heighten sovereign risk, limiting fiscal space for essential development programs. Without adequate climate finance, Pakistan risks falling into a cycle of chronic recovery and reconstruction costs that erode investor confidence and stymie diversification efforts vital for broader economic resilience.
Strategic Priorities for Pakistan
1. Mobilize Climate Finance at Scale: Pakistan must aggressively pursue international climate finance partnerships to close the funding gap. This includes leveraging multilateral development banks, Green Climate Fund allocations, and bilateral support. Innovative instruments such as green bonds, climate risk insurance, and blended finance mechanisms should be prioritized.
2. Strengthen Domestic Resource Mobilization: Enhancing incentives for private sector investments in clean energy, climate-resilient agriculture, and sustainable urban infrastructure is crucial. The State Bank of Pakistan’s green banking initiatives offer a starting platform but require expansion and deeper integration across the financial sector.
3. Institutional Capacity and Governance: Effective climate finance governance frameworks, including climate and gender budget tagging, are essential for transparency, accountability, and efficient use of funds. Strengthening coordination between federal, provincial, and local governments will optimize project implementation and financing delivery.
4. Integrate Climate Finance with Economic Policy: Pakistan’s broader economic strategies, from fiscal planning to industrial policy must embed climate considerations to ensure alignment and synergistic benefits. This integration will enhance economic resilience, reduce carbon dependency, and facilitate compliance with emerging global trade standards related to sustainability.
5. Focus on Adaptation and Inclusivity: Given Pakistan’s vulnerability, adaptation financing, especially for agriculture, water resources, and disaster risk management must be scaled up immediately alongside mitigation efforts. Ensuring gender-sensitive and socially inclusive access to climate finance will maximize the impact on vulnerable communities.
The Bottom Line is
The scale and immediacy of Pakistan’s climate finance needs underscore that climate action is not optional but foundational to economic survival. Prioritizing climate finance within Pakistan’s economic strategy will enable resilience-building, foster sustainable growth, and safeguard livelihoods against a worsening climate crisis. Mobilizing and deploying climate finance effectively is integral to transforming risks into opportunities, securing Pakistan’s development future amid global environmental uncertainty.
Policymakers, financial institutions, private sector, and development partners must act with urgency and coordination to place climate finance at the heart of Pakistan’s economic agenda.
Sources of Information: This brief draws on recent research from international financial institutions, government sources, and independent analysis on Pakistan’s climate finance and economic outlook. |
Hamid Ahmad
A very fundamental axion of economics which holds everywhere, and for every situation is that resources are scarce, it is a defining feature of economics and any economic system. Having this fundamental and unescapable constraint, trade-off of any economic or even social transactions, are to be tackled meticulously. This dichotomy becomes more intimidating when are to handle environment and climate change as one side of the coin the constraint is in the forefront and on the flipside the entire planet is tumbling and survival of human and biodiversity is at stake.
Over the past decades, the world has seen huge social improvements and technological progress. We have experienced unprecedented economic growth and lifted hundreds of millions of people out of poverty. We’re benefiting from a life-changing digital revolution that could help solve our most pressing social and environmental challenges. Yet despite these successes, our current model of development is not yielding the desired level of sustainable development. Among others, one of the hindrances in the journey of sustainable development is lack of intersectoral understanding of businesses as going for economic growth may exacerbate the environmental issues. Thus, growth at the cost of environment is not growth in real terms. Interestingly, most of the interventions initiated to respond to climate change are unidimensional either in the form of mass forestation or other micro financing tools but never looked holistically. The targets and policy being set for economic growth and development are not being looked from perspective of environment and climate change coupled with its dearth on interlinkages with the private sector and vice versa, whereas the sectors (Public and Private) carry a potential role for each other. Resultantly, the interventions designed and implemented do not yield the desired result.
In today’s modern economic system, two major sector work, public and private sector and both the sectors drive the economy with different layers and patterns of permutations and combinations, moreover, no sector can work or drive the economy single handedly. The public sector provides the paradigm and conducive platform, whereas the private sector drives the engine and accelerates or decelerates the speed as per need.
The private sector contributes the major share of any country’s GDP. It creates employment opportunities and provides goods and services primarily through market-led processes. The private sector can rightly be credited for the achievement of poverty reduction. On the flip side, private sector activities are also responsible for increased carbon emissions and environmental degradation. Thus, there are two alternatives. They can do more of the same, so today’s slow shuffle towards sustainability continues, two steps forward, one or more steps back. Or they can delay the shift because of apparent advantages to them in the status quo. But neither option has a long-term future. If social and environmental indicators don’t improve in the next 5-15 years what’s most likely is a strengthening popular backlash against business and increasingly drastic regulatory responses from governments.
Tackling climate change, which includes both mitigation and adaptation efforts, demands substantial investment, often referred to as climate finance. Developing nations like Pakistan and keeping face significant challenges in this area due to limited resources. The public sector has constrained fiscal capacity, and the private sector lacks sufficient investment incentives. Therefore, a robust, evidence-based strategy is essential to meet the growing need for climate finance, underpinned by a deep understanding of the challenges and opportunities available.
Climate change represents one of the most pressing challenges of our time. Poor countries are particularly vulnerable, as they rely heavily on climate-sensitive economic sectors like agriculture for livelihoods and employment while possessing a limited capacity to adapt to environmental changes and climate change-induced disasters. These nations must also contend with competing priorities and scarce resources.
In response, the global community has initiated various efforts, such as the Global Climate Fund (GFC), to assist developing countries in securing the necessary finance. These initiatives aim to provide funds for both mitigating and adapting to the harsh impacts of climate change. Under the Paris Agreement, developed countries committed to contributing $100 billion annually from 2020, with plans to increase this amount after 2025. The Copenhagen Accord and Green Climate Fund are key components of this initiative, providing over $100 billion for climate change mitigation and adaptation.
In 2018, the world’s largest multilateral development banks (MDBs) increased their climate financing to developing countries by 22%, reaching $43 billion. However, despite being seventh on the list of the most vulnerable countries in the Climate Risk Index, Pakistan has received minimal climate finance. The country’s urgent needs, such as poverty eradication, often overshadow long-term investments in climate change. With limited domestic capacity to fund climate-related projects, Pakistan depends on international financial support to address these challenges. According to a 2017 report by the Asian Development Bank (ADB), Pakistan’s annual climate adaptation needs range between $7 billion and $14 billion. In its Nationally Determined Contributions (NDCs) 2021 to the 2015 Paris Agreement, Pakistan aims to reduce up to 50% of its projected greenhouse gas (GHG) emissions by 2030, primarily through international grants totaling approximately $40 billion. However, this target appears unachievable as the actual flow of climate finance to Pakistan has fallen far short of expectations.
As per the Pakistan Economic Survey (2020), the country received a grant of $3.8 million since 2015 for reducing emissions from deforestation and forest degradation (REDD+) through the World Bank’s Forest Carbon Partnership Facility (FCPF). Additionally, in 2018, the FCPF provided a further $4.01 million to support Pakistan’s preparedness activities until June 2020. By June 2019, the Global Environment Facility had provided $234.42 million in total financing and $626.68 million in co-financing to Pakistan, supporting projects at both national and regional levels. As of August 2020, the Green Climate Fund’s total funding to Pakistan stood at $121 million, up from $89 million in April 2019. These amounts, however, are far from meeting the country’s financial needs for climate action.
To bridge this gap, Pakistan must develop a comprehensive plan to raise climate finance. Traditional methods include climate fees, loans, and taxes. However, revenues from climate fees are insufficient to cover the costs of climate programs, and a carbon tax may be less effective in a developing country like Pakistan, where industries are already weak and production costs are high. This leaves Pakistan reliant on loans, but these are becoming harder to secure, while public debt continues to rise. With limited fiscal space further strained by economic difficulties, Pakistan’s public sector cannot finance climate action, and the private sector’s contributions are limited by poor incentives and trust deficits. Moreover, Pakistan’s capital market is only moderately efficient at introducing innovative climate financing tools like issuing green bonds to attract domestic and international investment.
In the present scenario, incentivizing commercial banks is the most practical way to mobilize domestic climate finance in short term. Green banking, which is still in its nascent stages in Pakistan, offers significant potential for growth. The State Bank of Pakistan (SBP) should encourage the commercial banking sector to prioritize green finance, gradually restricting financing to environmentally harmful projects, even if they promise higher returns. The global green bond market has grown rapidly, reaching approximately $200 billion in 2019. The SBP should focus on developing both local and international markets for green bonds, which are innovative financial instruments that link bond proceeds to climate-friendly investments. Pakistan should also pursue policies that tap into local and international green finance for energy efficiency, climate adaptation, waste management, and sustainable energy projects. Bond issuance, whether by private companies or public entities, is crucial, and the private sector should be actively involved in promoting green bonds.
It is important to note that a carbon tax might be the least efficient means of raising domestic resources for climate finance. Finally, Pakistan must design strategies to attract bilateral climate finance, such as by issuing green bonds, a method already adopted by various countries like the UAE. For instance, Pakistan’s Water and Power Development Authority (WAPDA) has proposed issuing long-term, dollar-denominated green bonds of up to $500 million. Achieving this requires public policy to prioritize climate change, integrating climate adaptation and mitigation into macro-fiscal policies, including planning, development budgeting, and public investment strategies. Countries need to pay for climate action by rapidly scaling finances to achieve national commitments agreed upon and reflected in their respective NDCs to limit global warming under 1.5 Celsius. No doubt existing financing tools and policies can help to increase both public and private finance for climate action, however, identifying and leveraging the right tools remains a big challenge for developing countries. Raising awareness and building capacities of the public and policymakers is essential to improve climate-informed fiscal planning.
The first step in climate-informed fiscal planning is to know exactly or precisely how much will it cost. Knowing how much it will cost to implement an NDC is the first step to making strategic decisions about which financial instruments and policies are needed. Bringing numbers to the table helps different stakeholders understand what implementation may entail in practice and weigh the costs and benefits of potential climate actions. For developing countries, it may help them understand how much funding will be needed from external sources.
In the next step make sure that public finances are well-aligned with climate actions identified under the country’s NDC. This alignment is key to successfully funding the country’s NDC as for most countries, domestic financial flows are the largest source of finance for achieving climate goals. This ensures that public expenditures align with the climate solutions and that NDCs are not undermined in other parts of the budget at all levels of the government. The aligning process includes mainstreaming climate action in direct public investments, making public procurement standards sustainable, and reforming or removing fossil fuel subsides.
In addition to aligning public investments, the country should also take steps to raise more finances specifically for climate spending. Instruments like International Public Finance, Climate Bonds, Debt for Climate Swaps etc. could be used to raise more finances for climate solutions.
To meet the climate goals, mobilizing private finance will play a key role in financing the climate actions. The government needs to institute various economic and financial instruments and policies to shift private sector activities from business-as-usual practice towards a path more in line with national and global commitments. For this, the government can introduce policies for risk-sharing mechanisms, fiscal policy tools, and regulatory measures to increase transparency or shift behavior from unsustainable activities. The government can identify and introduce instruments like Carbon Pricing, Blended Finance and Catalytic Capital, Tax Credits for Green Investments, Public-Private Partnerships, Climate Efficiency Standards, Loan Guarantees, etc. to mobilize and shift private finance for climate actions.
In the end, we must know how much being is spent on climate action. The monitoring will enable us to better understand how public, private, and international funding has been allocated and spent for mitigation, adaptation, and other climate-related initiatives. Monitoring financial flows and expenditures for climate actions at the activity level, as well as activities that go against climate goals, will help to identify sectors or activities in need of further investments. This could be ensured by adopting the Climate Budget Tagging system.