Responsible Banking & ESG

Regulatory Compass: Mapping Pakistan’s Sustainable Finance Framework

Pakistan’s Policy Guidelines for Trading in Carbon Markets (2024)

A first national framework for governing voluntary and compliance carbon trading under Article 6 of the Paris Agreement.

Ranked among the world’s most climate-vulnerable countries and facing a climate-finance requirement estimated at US$348 billion (US$152bn adaptation + ~US$196bn mitigation) for climate-resilient development by 2030 (Pakistan Green Taxonomy 2025), Pakistan has missed the regulatory architecture to monetise emissions reductions through carbon trading. To unlock this instrument, the Government of Pakistan — through the Ministry of Climate Change & Environmental Coordination (MoCC&EC) — secured Federal Cabinet approval, on 27 December 2024, of the country’s first-ever Policy Guidelines for Trading in Carbon Markets.

The Guidelines establish a roadmap for both voluntary and compliance carbon markets, anchored in Article 6 of the Paris Agreement and aligned with international integrity standards. They define the legal basis for issuing and transferring carbon credits, introduce the concept of Internationally Transferred Mitigation Outcomes (ITMOs), and institute corresponding adjustments to prevent double counting. Their core provisions:

  • Carbon market potential — commits the Government to an enabling environment for development-friendly mitigation projects across forestry and land use, wetlands, agriculture, waste management, industry, transport, and energy, with incentives for private-sector engagement.
  • Objectives — sets eight aims spanning low-emission economic development, climate resilience, private-sector engagement, alignment with international commitments, equitable benefit-sharing, green-job creation, robust monitoring and verification, and capacity building.
  • Target— to facilitate the carbon market, encourage emissions-reduction projects beyond those mandated in the NDCs, and mobilise domestic and international private finance.
  • NDC anchor and trading ceiling — against Pakistan’s 2021 NDC pledge to cut emissions 15% unconditionally and 35% conditionally, trading is capped at 50% (≈280.5 MtCO₂e) of the conditional target.

Partners in development

The Guidelines were led by the MoCC&EC’s Climate Finance Wing, established in November 2023, with technical support from the Supporting Preparedness for Article 6 Cooperation (SPAR6C) programme — funded by Germany’s International Climate Initiative, led by the Global Green Growth Institute (GGGI), and implemented in Pakistan by the UNEP Copenhagen Climate Centre. Development drew on engagement from federal ministries, provincial governments, private-sector stakeholders, and international experts.

What the framework requires of market participants and financial institutions

  • Transact carbon credits under Article 6 mechanisms, observing the cap of 50 percent (≈280.5 MtCO₂e) of the conditional NDC target.
  • Apply corresponding adjustments to traded credits to prevent double counting against Pakistan’s Nationally Determined Contributions (NDCs).
  • Remit the Corresponding Adjustment Fee of 12 percent of net revenue, shared between provinces and the Pakistan Climate Change Fund.
  • Secure approval for eligible projects and sectors through the MoCC&EC’s Carbon Market governance process.
  • Adhere to monitoring, reporting, and verification (MRV) standards and international integrity benchmarks for credit quality.
  • For banks and investors: channel private capital toward credit-generating projects, develop carbon-linked financial products, and integrate carbon-revenue streams into project finance and risk assessment.

Private capital and the role of finance

Carbon markets are, in essence, a mechanism for pricing avoided or sequestered emissions and routing private capital toward the projects that deliver them. Independent analysis suggests Pakistan could generate 40–75 million tonnes of tradable credits annually — worth an estimated US$400 million to US$2.25 billion — if markets are credibly developed. Realising this depends on the banking sector and institutional investors stepping in as financiers, intermediaries, and quality-assurance gatekeepers: pricing carbon-revenue streams into lending, underwriting project developers, and screening for credit integrity. The framework’s success therefore hinges less on classification than on whether private finance is mobilised at scale behind high-integrity supply.

A view from civil society

Civil-society observers, notably Transparency International Pakistan in its 2025 readiness study, have cautioned that the policy was finalised with limited structured onboarding of the banking sector, industry leaders, and private-sector financiers — the very actors expected to mobilise capital — and that Pakistan’s framework remains fragmented, short on technical capacity, and without a consolidated national emissions baseline. Benchmarked against the EU and emerging ASEAN carbon-market frameworks, five gaps stand out:

  • No binding MRV and registry infrastructure: unlike the EU’s centralised registry and robust monitoring, reporting and verification regime, Pakistan lacks an operational national registry and digital MRV system.
  • Absent eligibility and integrity criteria: there are no clear additionality, permanence, or quality thresholds comparable to the EU’s tightening standards or ASEAN taxonomy safeguards.
  • Weak private-sector and financial-institution integration: limited formal role for banks and investors in governance, in contrast to market-maker structures abroad.
  • Thin benefit-sharing and community safeguards: no codified framework for equitable revenue distribution or grievance redress for affected communities.
  • No primary carbon-market law: the framework rests on policy guidelines rather than statute, leaving enforceability and investor certainty weaker than in mature jurisdictions.

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