Emissions Trading System in Pakistan
Climate change is no longer solely an environmental concern, it has become one of the defining economic and trade challenges of the twenty-first century. Around the world, governments are increasingly using market-based mechanisms to reduce greenhouse gas (GHG) emissions while maintaining industrial competitiveness and economic growth. Among these mechanisms, the Emissions Trading System (ETS) has emerged as one of the most effective policy instruments. According to the World Bank’s State and Trends of Carbon Pricing 2026, there are now 87 carbon pricing instruments operating globally, including emissions trading systems and carbon taxes, covering nearly 30 percent of global greenhouse gas emissions. These instruments generated over US$107 billion in public revenues in 2025, demonstrating that carbon pricing has evolved from an environmental policy into an important pillar of economic and fiscal governance.
In the case of Pakistan, one that is most vulnerable to climate change, the discourse & discussion on emissions trading has become increasingly pertinent. While Pakistan contributes less than one percent of global greenhouse gas emissions, it remains among the nation’s most severely affected by climate-induced disasters. The catastrophic floods of 2022 alone caused economic losses estimated at more than US$30 billion, highlighting the enormous economic costs of climate vulnerability. As Pakistan seeks to achieve sustainable economic growth while fulfilling its commitments under the Paris Agreement, an Emissions Trading System offers an opportunity to integrate climate action with industrial competitiveness, investment promotion, and long-term economic resilience.
An Emissions Trading System, commonly referred to as a cap-and-trade mechanism, establishes a limit on the total amount of greenhouse gas emissions that regulated industries are permitted to emit. Within this overall cap, companies receive or purchase emission allowances that authorize them to emit a specified quantity of carbon dioxide or its equivalent. Firms that reduce their emissions below their allocated limits can sell their unused allowances to companies that exceed their emission caps. This market-based approach creates a financial incentive for industries to invest in cleaner technologies, improve energy efficiency, and reduce emissions while allowing businesses the flexibility to determine the most cost-effective compliance strategy.
The success of emissions trading systems across the world demonstrates the growing importance of carbon markets in modern economic management. The European Union Emissions Trading System (EU ETS), launched in 2005, remains the world’s largest multinational carbon market and has significantly reduced emissions from power generation, manufacturing, and aviation. China now operates the world’s largest ETS by emissions covered, initially focusing on the power sector and gradually expanding to additional industries. South Korea, New Zealand, Switzerland, the United Kingdom, Kazakhstan, and several states in the United States and Canada have also established operational emissions trading systems tailored to their economic structures. Collectively, jurisdictions accounting for almost two-thirds of global GDP have either implemented or are actively developing direct carbon pricing mechanisms, signalling that carbon markets are rapidly becoming mainstream economic policy rather than experimental environmental initiatives.
Across South Asia, governments are increasingly recognising carbon markets as instruments of economic competitiveness rather than solely environmental regulation. India has initiated the Carbon Credit Trading Scheme (CCTS) while expanding its long-standing Perform, Achieve and Trade (PAT) programme to improve industrial energy efficiency. Bangladesh is developing the institutional and regulatory foundations needed to participate in voluntary carbon markets and future compliance mechanisms. Together, these developments indicate a gradual regional shift towards integrating climate policy with industrial development, trade competitiveness, and sustainable economic growth.
Pakistan has also begun laying the foundations for a future carbon market, although the country remains at an early stage of development. The National Climate Change Policy, Pakistan’s updated Nationally Determined Contributions (NDCs), and the National Adaptation Plan recognise the importance of market-based mechanisms for reducing emissions. The Ministry of Climate Change and Environmental Coordination, together with development partners including the World Bank, GIZ, UNDP, and the Asian Development Bank, has initiated policy dialogue and capacity-building initiatives aimed at strengthening Pakistan’s carbon market readiness.
At the provincial level, Punjab has emerged as the frontrunner in preparing for emissions trading. With technical support from GIZ, the Environment Protection and Climate Change Department and the Planning and Development Board have initiated collaborative efforts to develop the institutional architecture necessary for an Emissions Trading System. These initiatives include the development of emissions inventories, digital Monitoring, Reporting and Verification (MRV) systems, the Green Credit Initiative, and the strengthening of Punjab’s Climate Watch platform to improve emissions monitoring and support evidence-based climate decision-making. Although these initiatives do not yet constitute a formal ETS, they represent important building blocks for a future provincial pilot that could eventually inform the development of a national emissions trading framework.
Despite these encouraging developments, Pakistan faces several institutional and technical challenges before an operational ETS can be introduced. Reliable emissions inventories remain incomplete across many industrial sectors, while comprehensive Monitoring, Reporting and Verification systems are still evolving. Institutional responsibilities for climate policy, industrial regulation, energy management, and environmental protection remain fragmented across multiple federal and provincial agencies, requiring stronger coordination. Furthermore, many industries and institutions have limited experience with greenhouse gas accounting, carbon pricing & reporting, emissions verification that highlight the need for substantial technical capacity building.
Nevertheless the opportunities created by ETS are significant, not only due to environmental benefits but formulates holistic markets that contribute to the world economy. Carbon market revenues have already crossed the threshold of almost US$30 billion in 2016 to over US$107 billion in 2025, representing the rapid and robust growth of climate finance and green investments worldwide. The European Union’s Carbon Border Adjustment Mechanism (CBAM) signals a new era where carbon compliance is becoming integral to international trade. Although Pakistan’s textile exports are not yet covered, global buyers increasingly demand transparent emissions reporting and low-carbon production. Developing an Emissions Trading System (ETS) and robust Monitoring, Reporting and Verification (MRV) systems will help Pakistani industries strengthen compliance and safeguard export competitiveness.
Pakistan stands at a crossroads in its climate and economic development. With an estimated greenhouse gas emissions of around 500 million tonnes of CO2 equivalent (MtCO2e) per year, of which nearly 50 percent are assumed to be generated by the energy sector, Pakistan has both the need and the opportunity to decarbonize its economy. As carbon pricing mechanisms around the world gain traction, with 87 carbon pricing mechanisms now in place globally and the potential to generate over US$107 billion in revenues in 2025, carbon markets are rapidly becoming integral to international trade, investment, and industrial competitiveness. At the same time, the International Finance Corporation (IFC) estimates that Pakistan could unlock over US$348 billion in climate-related investments by 2030 across renewable energy, climate-resilient infrastructure, sustainable transport, green buildings, and climate-smart agriculture, an Emissions Trading System (ETS) can play a critical role in stimulating these investments while also helping to improve energy efficiency, reduce emissions from industry, enhance export competitiveness, and meet international carbon regulations. The transition to a low-carbon economy has already begun. The key question is not whether Pakistan needs an Emissions Trading System, but rather how soon the country can build the institutional, regulatory, and market foundations to shape a new era of sustainable economic growth and competitiveness in the global green economy.