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  • Is Pakistan Ready to Go Green with Its New Taxonomy?

     Introduction to Pakistan’s Green Taxonomy:

    Green taxonomies are classification systems that define environmentally sustainable economic activities. They provide clear guidelines to financial institutions, investors, and policymakers on how to identify and support projects that contribute to climate action and sustainable development. These taxonomies play a critical role in steering capital towards green projects, preventing greenwashing, and enhancing financial sector resilience against climate-related risks.

    Pakistan’s Green Taxonomy 2025 (Draft), developed with assistance from the World Bank, aims to direct investments into key economic sectors aligned with climate mitigation, adaptation, and broader environmental goals. This taxonomy is structured around major economic sectors contributing to Pakistan’s sustainability efforts.

    Sectoral Focus in the Pakistan Green Taxonomy:

    The Pakistan Green Taxonomy identifies several sectors that play a crucial role in sustainability. Manufacturing is one of them, focusing on reducing emissions in industrial processes such as cement, steel, and chemical production. It encourages the use of renewable energy in manufacturing and adoption of circular economy principles. Transportation is another key sector, emphasizing the transition to electric vehicles, low-carbon public transport, and efficient logistics. The taxonomy also promotes urban and intercity rail projects to reduce emissions from road transport.

    The energy sector is an important part of the taxonomy, prioritizing renewable energy sources like solar, wind, and hydro, while encouraging energy efficiency. It calls for a gradual phasing out of fossil fuels but allows some transitional measures such as carbon capture and storage. Similarly, the construction sector is addressed with a focus on green building materials, energy-efficient designs, and low-carbon construction technologies, in line with policies such as the Energy Conservation Building Code (ECBC).

    Water and waste management is also a priority, promoting wastewater treatment, recycling, and circular economy approaches. The taxonomy encourages resource-efficient waste disposal and improved solid waste management practices. In the Information and Communication Technology (ICT) sector, the focus is on smart grids, energy-efficient data centers, and sustainable e-waste management. It supports digital solutions for environmental monitoring and efficiency improvements. Tourism, too, is included, with emphasis on ecotourism investments and sustainable infrastructure development. It encourages the preservation of natural landscapes and low-impact tourism models. Agriculture, forestry, and fishing are also covered, promoting climate-smart agriculture, sustainable forestry, and responsible aquaculture. There is an emphasis on water-efficient irrigation systems and organic farming.

    Gaps and Inadequacies in the Draft Document:

    While Pakistan’s Green Taxonomy 2025 is an important step towards sustainability, there are several limitations and challenges. One major issue is the lack of strict implementation mechanisms. The taxonomy provides sectoral guidelines but does not specify binding regulations or penalties for non-compliance. This could limit its effectiveness in pushing industries toward greener practices. Another concern is the inclusion of transitional (amber) activities. Some high-emission activities, like cement production and fossil-fuel-based energy generation with carbon capture, are still categorized under transition rather than being phased out entirely. This will slow down the shift to zero-carbon alternatives.

    There is also an absence of clear incentives for green investments. The taxonomy does not provide concrete financial incentives such as tax breaks or subsidies, which are essential for encouraging businesses to align with its guidelines. Additionally, there is a lack of a robust monitoring system to track real-time progress in green investments and environmental benefits. 

    Without proper oversight, it will be difficult to measure whether the taxonomy is achieving its intended impact. Sector-specific challenges also remain. Manufacturing industries struggle with the high costs of transitioning to green technologies, while the energy sector faces grid limitations that make large-scale renewable integration difficult. In transportation, a lack of infrastructure for EV adoption remains a barrier, and in agriculture, stronger policies are needed to promote regenerative farming.

    Recommendations:

    To improve the effectiveness of the Green Taxonomy, several measures should be considered. There needs to be a stronger regulatory framework with mandatory compliance mechanisms and penalties for industries that fail to meet green standards. An independent oversight body should be established to track implementation. Financial incentives such as tax benefits, low-interest green loans, and investment guarantees should be introduced to encourage businesses to adopt sustainable practices. Public-private partnerships can also play a key role in financing green projects. The timeline for phasing out transitional (amber) activities should be clearer, with defined exit strategies for industries reliant on fossil fuels. A structured roadmap for emissions reduction should be enforced to ensure steady progress. Additionally, the monitoring and reporting framework must be improved by implementing real-time tracking tools for emissions reductions and green investments. Blockchain and AI-driven analytics can help ensure transparency and accountability.

    Each sector also requires tailored improvements. In manufacturing, incentives should be provided to support the adoption of low-carbon materials and circular production models. The energy sector must upgrade the national grid to better integrate renewable energy. The transportation sector should focus on expanding EV charging networks and developing sustainable mass transit options. In agriculture, a carbon credit market should be introduced to reward sustainable farming practices.

    Conclusion: 

    The Pakistan Green Taxonomy is a promising step towards aligning economic activities with climate goals, but stronger enforcement, clearer incentives, and better monitoring are needed to ensure long-term success. By refining sectoral strategies and ensuring accountability, Pakistan can attract green investments, mitigate environmental risks, and build a resilient, sustainable economy. Additionally, by enhancing clarity on transition pathways, financing mechanisms, and decentralized renewable energy adoption, Pakistan can strengthen its green economic framework and accelerate its low-carbon future. 

  • Understanding Pakistan’s Energy Crisis: The Roles of Central Power Purchasing Agency (CPPA) and Independent Power Producers (IPPs)

    Pakistan’s energy crisis has been a persistent issue, with deep-rooted inefficiencies, financial burdens, and regulatory challenges. At the heart of this crisis lie two key players: the Central Power Purchasing Agency (CPPA) and Independent Power Producers (IPPs). While IPPs are often blamed for the high electricity costs and the ever-increasing circular debt, a closer look at the operations and responsibilities of CPPA reveals a more complex interplay that exacerbates the situation.

    Central Power Purchasing Agency (CPPA): The Key Facilitator

    The CPPA, established as a single buyer and market operator, plays a crucial role in the energy sector. It is responsible for purchasing electricity from generation companies, including IPPs, and selling it to distribution companies (Discos). CPPA’s operations are central to the financial flows in the power sector, and its inefficiencies have significantly contributed to the circular debt problem.

    Circular debt has ballooned to over Rs 3 trillion, a figure that represents the difference between the cost of electricity and the revenue recovered from consumers. A substantial part of this debt is attributable to the CPPA’s failure to make timely payments to IPPs. In 2023 alone, the CPPA owed IPPs over Rs 1 trillion, leading to disputes and operational inefficiencies. The delay in payments forces IPPs to borrow at high-interest rates to cover their operational costs, which are then passed on to consumers through increased tariffs.

    CPPA’s role in tariff setting, in conjunction with NEPRA, has also been problematic. Tariffs are often set below cost-recovery levels, necessitating government subsidies. According to a 2023 report by the Ministry of Energy, the government provided over Rs 1.5 trillion in subsidies to cover the shortfall. However, these subsidies are unevenly distributed, with many benefiting industrial consumers more than residential ones, leading to social inequities.

    CPPA’s inefficiency is also evident in the high transmission and distribution (T&D) losses, which stood at 17% in 2023, far above the global average of 8-10%. These losses represent a significant cost, estimated at Rs 350 billion annually, that ultimately falls on the consumer. The CPPA’s inability to reduce these losses reflects broader governance and operational challenges that exacerbate the energy crisis.

    The Role of Independent Power Producers (IPPs)

    The introduction of IPPs in Pakistan’s energy sector was a response to the country’s inability to meet its growing electricity demand. The Power Policy of 1994 opened the doors for private sector involvement, leading to the establishment of several IPPs. These companies operate under Power Purchase Agreements (PPAs) with the government, which guarantee payments for electricity generated, including capacity payments for maintaining available generation capacity.

    From 2013 to 2019, Pakistan saw significant growth in its generation capacity, with IPPs playing a pivotal role. New projects, primarily based on imported fuels like LNG and coal, added approximately 9,000 MW to the grid. This expansion helped reduce the severe load-shedding that plagued the country in the early 2010s. However, reliance on imported fuels introduced new vulnerabilities. According to the National Electric Power Regulatory Authority (NEPRA), around 50% of Pakistan’s electricity is now generated from imported fuels, making the country susceptible to global price fluctuations and foreign exchange variations.

    A major point of contention is the system of capacity payments, which, according to recent figures, contribute significantly to the rising cost of electricity. Capacity payments are made to IPPs even when they do not generate electricity, leading to public outcry. The 2023 data shows that capacity payments reached Rs 1,300 billion, up from Rs 600 billion in 2018. These payments are indexed to the US dollar, which further burdens the economy, especially with the Pakistani rupee’s depreciation.

    Critics argue that IPPs have secured exorbitant profit margins, sometimes up to 15-18% Return on Equity (RoE), as per NEPRA’s reports. While these agreements were made to attract foreign investment, they have been criticized for being overly generous, especially in the context of Pakistan’s economic constraints. The 2020 report by the Committee for Power Sector Reforms highlighted that IPPs earned a cumulative profit of Rs 450 billion from 2008 to 2019, which some view as excessive given the economic situation.

    Comparing Responsibilities: CPPA vs. IPPs

    While IPPs are often criticized for their profit margins and the burden of capacity payments, it is crucial to recognize that these issues are symptoms of deeper systemic problems, for which CPPA bears significant responsibility.

    IPPs operate under the terms of contracts that were designed to attract investment at a time when Pakistan desperately needed new generation capacity. These contracts, while perhaps overly favorable to IPPs, are legally binding and reflect the conditions of the time. CPPA, on the other hand, is responsible for managing the day-to-day operations of the power sector, including payment flows, tariff setting, and ensuring efficiency. The chronic delays in payments, mismanagement of subsidies, and high T&D losses point to systemic inefficiencies that fall squarely under CPPA’s purview.

    The direct impact on consumers comes from high electricity tariffs, which are a result of both the profit margins secured by IPPs and the inefficiencies within CPPA. However, it is CPPA’s failure to reform and manage the power sector effectively that has allowed these issues to persist and worsen. The 2023 NEPRA report indicates that the average tariff increased by 35% in the last five years, with much of this increase attributed to the costs passed down from inefficiencies within CPPA and the broader energy sector governance.

    Conclusions and Recommendations

    Pakistan’s energy crisis is a multifaceted issue, deeply rooted in the contractual arrangements with Independent Power Producers (IPPs) and the inefficiencies of the Central Power Purchasing Agency (CPPA). While IPPs have contributed to the high cost of electricity through capacity payments and favorable profit margins, these issues stem from the regulatory frameworks and agreements established by the government. On the other hand, CPPA’s inefficiencies, particularly in managing payments, tariff setting, and reducing transmission and distribution (T&D) losses, have significantly exacerbated the crisis. To address these challenges effectively, the following recommendations are proposed:

    1. Renegotiation of Power Purchase Agreements (PPAs) with IPPs

    Rationale: The current PPAs with IPPs, particularly the capacity payments and dollar indexation clauses, are heavily skewed in favor of the power producers. While these agreements were initially designed to attract foreign investment, they have now become a significant burden on the economy.

    Recommendation:

    • The government should initiate a renegotiation process with IPPs to revise these contracts. The goal should be to reduce capacity payments and minimize dollar indexation where feasible. Some recent agreements, particularly with newer IPPs, have shown a willingness to revise terms, and this should be extended to all contracts.
    • Establish a task force comprising representatives from the government, NEPRA, and independent financial experts to oversee the renegotiation process, ensuring transparency and fairness.

    2. Improving CPPA’s Operational Efficiency

    Rationale: CPPA’s inefficiencies, particularly in managing timely payments to IPPs and reducing T&D losses, have significantly contributed to the circular debt and the financial instability of the power sector.

    Recommendation:

    • Implement an automated payment system that ensures timely disbursement of funds to IPPs, reducing the need for IPPs to borrow at high-interest rates and pass these costs to consumers.
    • Invest in advanced grid management technologies to monitor and reduce T&D losses. CPPA should collaborate with distribution companies (Discos) to implement smart grid technologies that provide real-time data on electricity flows, enabling more effective loss prevention.
    • Enhance the capacity of CPPA staff through training programs focused on financial management, contract negotiations, and advanced grid management techniques.

    3. Encouraging Renewable Energy Integration

    Rationale: Pakistan’s heavy reliance on imported fuels for electricity generation makes the country vulnerable to global price fluctuations and foreign exchange variations. Increasing the share of renewable energy in the energy mix can reduce these vulnerabilities.

    Recommendation:

    • Set ambitious targets for renewable energy generation, aiming to increase its share to 30-35% by 2030. This will require a mix of solar, wind, and hydropower projects.
    • Provide incentives for private sector investment in renewable energy, such as tax breaks, guaranteed purchase agreements, and fast-track project approvals.
    • Invest in grid modernization to handle the intermittency of renewable energy sources effectively. This includes energy storage solutions and enhanced grid connectivity to ensure a stable supply of electricity from renewable sources.

    4. Developing a Competitive Energy Market

    Rationale: The monopolistic structure of Pakistan’s energy market limits competition and innovation, contributing to inefficiencies and higher costs. A competitive energy market could drive down prices and improve service quality.

    Recommendation:

    • Gradually transition from the single-buyer model dominated by CPPA to a competitive market where multiple buyers and sellers can trade electricity. This requires the introduction of a Competitive Trading Bilateral Contract Market (CTBCM), where Discos can directly negotiate contracts with generation companies.
    • Start with pilot projects in select regions to test the CTBCM model, refine regulatory frameworks, and address any issues before scaling up nationwide.
    • Provide training and support to stakeholders, including Discos, generation companies, and regulators, to navigate the complexities of a competitive market effectively.

    The author is an agricultural engineer specialized in energy systems. He currently serves as a Green and Clean Energy Officer at The Alternate Development Services, Islamabad.

  • Climate Change and Decarbonization of Pakistan’s Industrial Sector

    Pakistan urgently requires a diverse portfolio of low-carbon technologies, a transition to renewable energy sources, and a viable solution for carbon capture and storage to swiftly reduce GHG emissions and mitigate the impact of climate change

    Extracting raw materials from colonised territories, Europe in general, and Britain and France in particular, embarked rather rapidly on the path to industrialisation from 1850 to 1950. Fueled by fossil fuel, they covered significant miles of industrial growth, technological, and economic development in the next semi-sesquicentennial and monopolised international trade. In other words, the Industrial Revolution marked the beginning of a rapid increase in methane, CO2, and other greenhouse gas emissions into the atmosphere, mainly due to coal burning and the deforestation of large tracts of land.

    Ignoring the initial warnings of global warming in the sixth and seventh decade of the last century, it was in the late 1990s and in the first couple of decades of the new century that the world began feeling the heat. We ended up with climate change, erratic patterns of weather, heat waves, and flooding of epic proportions, including urban flooding, glacial meltdowns, massive forest fires, cyclones, hurricanes, and typhoons. These emerging symptoms have caused havoc from the global north to the south.

    Though Africa and Asia, skipping India and China, have limited carbon footprints, they have emerged as the worst sufferers of the global climate crisis. Nevertheless, with rising temperatures and shifting weather patterns, the contours of the climate-change crisis are becoming increasingly sharp, foreshadowing far-reaching consequences transcending traditional boundaries and causing concerns for national security and geopolitical dynamics. Climate change knows no boundaries, making it a quintessential global concern.

    In recent years, Pakistan has experienced significant fluctuations in its per capita CO2 emissions, with an average annual growth rate exceeding 3.4%. The primary sources of these emissions include cement plants, transportation, agriculture, gas processing, power plants, and refineries. In terms of geographical contributions, Sindh accounts for over 22 million tons of CO2 emissions. It is followed closely by Punjab, which exceeds 20 million tons. With the use of coal, this is likely to rise sharply.

    In relative terms, while Pakistan is the least contributor to global carbon footprints (roughly around 0.7% globally), it is one of the ten most affected countries by global warming and climate crisis. But it doesn’t mean Pakistan and its industrial sector absolved of decarbonisation responsibilities. The country’s steady transition from an agriculture-led economy to an industry-led economy is increasing its energy consumption as well as carbon emissions.

    Obviously, it is a worrying sign because our industrial sector uses over 98% of the polluting energy sources. Our neighbouring country, India, the world’s third-largest CO2 emitter, also holds a significant challenge ahead as its energy-intensive industries — like chemicals, steel, and cement — need to be decarbonised. Similarly, Bangladesh, despite having a smaller size of industry, must also be mindful of adopting renewable sources of energy for being a delta and low-lying country. A slight rise in the sea level may prove catastrophic for its overpopulated tracts of dry land.

    Despite the commitment of all South Asian countries to the Paris Agreement and setting targets for minimising carbon intensity and increasing non-fossil-fuel power, the current emission ratios of these countries are likely to rise significantly by 2050. It is in this context that we turn our attention to Pakistan, a country whose complex geography and socio-economic conditions render it utterly vulnerable to the effects of global warming.

    Industries, carbon emissions and climate change

    Industries, undoubtedly, are an important basis for social and economic growth. At the same time, they are also substantial contributors to greenhouse gas (GHG) emissions. Since 2010, the net anthropogenic CO2 emissions have increased across all major sectors. In 2019, approximately 34% and 24% of the net anthropogenic GHG emissions were attributed to the energy supply sector and industry, respectively.

    Read more at: https://thefridaytimes.com/23-Feb-2024/climate-change-and-decarbonisation-of-pakistan-s-industrial-sector