Pakistan’s Federal Budget FY2026–27 should not be read only as an annual statement of taxes and expenditures. The budget comes at a time when fiscal space is extremely constrained. Total federal expenditure is estimated at Rs18.771 trillion, of which current expenditure alone accounts for Rs17.495 trillion. Interest payments are budgeted at Rs8.054 trillion, defence at Rs3 trillion, while the Federal Public Sector Development Programme stands at Rs1 trillion. In simple terms, the budget is dominated by debt servicing, defence, pensions, subsidies and transfers, leaving limited room for development and transformation.
This fiscal constraint is real. However, constraint should not become an excuse for weak prioritisation. In fact, when fiscal space is narrow, the quality of public investment becomes even more important.
For the energy and climate policy community, it should also be assessed as a test of whether Pakistan is beginning to align its fiscal policy with its climate vulnerability, energy transition needs, and long-term green development ambitions.
The most interesting feature of the FY2026–27 budget is the introduction and reporting of green-linked fiscal flows. The Budget in Brief identifies roughly Rs2.026 trillion under the green component of revenues. This includes Rs1.676 trillion from the petroleum levy, Rs50 billion from the Climate Support Levy, Rs22.481 billion from the EV Adoption Levy, along with gas development surcharge, oil and gas royalties, GIDC, petroleum levy on LPG, windfall levies and other receipts.
This figure is significant. But it also needs careful interpretation. The petroleum levy, which constitutes almost 83 per cent of this green-linked revenue pool, is not automatically climate finance. It is primarily a general fiscal revenue instrument imposed on fossil fuel consumption and used to finance the broader budget. Calling the entire amount “climate revenue” would therefore be misleading unless the proceeds are earmarked, tracked or reinvested in climate-related outcomes.
Yet this is exactly where the policy question begins. If the state classifies such revenues as green or climate-relevant, then citizens and investors have the right to ask: how much of this revenue is being converted into resilience, energy transition and environmental protection?
The answer, so far, is not reassuring. Climate-tagged allocations, excluding subsidies, stand at around Rs214 billion in FY2026–27. This includes Rs70.462 billion for adaptation, Rs124.067 billion for mitigation and Rs19.490 billion for supporting areas. Compared with FY2025–26, adaptation has declined from Rs85.435 billion, mitigation from Rs603 billion, and supporting areas from Rs28.331 billion. Total direct climate-tagged allocations have fallen sharply.
At the same time, disaster-related allocations have increased from Rs50.2 billion to Rs116.2 billion. This increase is understandable, given Pakistan’s exposure to floods, heatwaves, droughts, GLOFs and other climate-induced hazards. But it also reveals a deeper pattern: Pakistan continues to budget more visibly for recovery than for resilience.
The 2025 floods should have changed this approach. According to the Economic Survey, the floods caused damages of Rs822 billion, resulted in over 1,039 fatalities, displaced more than four million people and affected around 6.5 million people across 70 districts. The agriculture sector alone suffered damages of Rs430 billion, while infrastructure-related damages were estimated at Rs307 billion. The floods also contributed to a downward revision of real GDP growth for FY2026 from the initial target of 4.2 per cent to an estimated range of 3.5–3.9 per cent.
These numbers make one point clear: climate change is not only an environmental concern; it is a macroeconomic risk. Floods damage roads, homes, crops, irrigation systems and public finances. Heatwaves reduce labour productivity, increase health costs and raise cooling demand. Water stress affects agriculture, exports, food prices and urban supply. Air pollution damages human capital and productivity. A climate budget, therefore, should not be treated as a welfare add-on. It should be viewed as economic risk management.
This is where CPEC 2.0 becomes relevant. The development budget reportedly carries an overall national development outlay of Rs3.675 trillion, including Rs1 trillion Federal PSDP, Rs2.224 trillion provincial ADPs and Rs451 billion development spending by state-owned enterprises. CPEC-II appears as one of the few new initiatives, with an initial allocation of Rs1 billion.
This amount should not be criticised in isolation. CPEC is not a normal PSDP scheme; it is a bilateral, investment-driven and project-based cooperation framework. Its financing depends on G2G coordination, Chinese investment, private capital, joint ventures, SEZs, project preparation and commercial viability. Therefore, Rs1 billion should not be read as the full financing envelope of CPEC 2.0.
However, it can be read as a signal. It suggests that CPEC 2.0 is still at a preparatory budgetary stage. The real question is whether Pakistan is creating the domestic fiscal architecture needed to translate CPEC 2.0’s Green Corridor into bankable projects.
CPEC Phase II is framed around five corridors: Growth, Innovation, Green, Openness, and Livelihood. The Green Corridor has been associated with renewable energy manufacturing, electric mobility, climate-smart agriculture, water and climate resilience. These priorities overlap strongly with Uraan Pakistan’s 5Es, especially Energy, Environment, Exports and E-Pakistan.
Budget FY2026–27 already contains some relevant pieces. There are allocations for electricity, renewable energy, solar and wind projects, grid expansion, water projects, sustainable urban development and climate-resistant housing. But these remain scattered unless they are integrated into a coherent Green Corridor investment pipeline.
Pakistan’s policy challenge is to build a fiscal bridge between green-linked revenues and CPEC 2.0’s Green Corridor. This does not mean earmarking the entire petroleum levy for climate action, which is fiscally unrealistic. But it does mean ring-fencing selected instruments such as the Climate Support Levy and EV Adoption Levy for project preparation, resilience-building and energy transition investments.
A practical step would be to establish a Green Corridor Project Preparation Facility. This facility could finance feasibility studies, climate-risk screening, grid integration studies, environmental safeguards, bankability assessments and provincial project pipelines. Without such preparation, Pakistan will continue to announce large visions but struggle to attract implementation finance.
The priority areas are clear: renewable energy manufacturing, battery storage, smart grids, EV and battery value chains, green SEZs, energy-efficient industry, climate-smart agriculture, water resilience, wastewater treatment, resilient housing and urban flood management. These are not only climate projects; they are productivity, export and competitiveness projects.
Pakistan has made progress in climate budget tagging by mapping more than 5,000 cost centres and expanding climate tagging to subsidies, grants and climate-relevant revenues. This is a useful public financial management reform. But tagging is not transformation. Existing projects can be tagged as climate-relevant without necessarily becoming climate-resilient.
The next reform should be climate investment discipline: every major PSDP and CPEC-linked project should be screened for future heat, flood, water, emissions and disaster risks. The government should also publish an annual climate revenue-to-expenditure statement showing what was collected, what was allocated, what was released, what was spent and what outcomes were achieved.
Budget FY2026–27 has made green revenues visible and has given CPEC 2.0 a symbolic budgetary entry. The missing link is a fiscal corridor that connects the two. Without such a mechanism, green-linked revenues will continue to flow into the general treasury, while the Green Corridor will remain a corridor of intent.
Pakistan does not need more climate labels. It needs green revenues to become green investments.
Copyright Business Recorder, 2026
The writer is a Researcher at CPEC Centre of Excellence, PIDE. He specializes in Energy Policy and Management and can be reached at [email protected]
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