The Pakistani government’s decision to continue offering tax exemptions for coal has reignited a debate about the country’s energy policies and their alignment with global sustainability goals.
While some argue these tax breaks support economic growth and energy security, others contend that they undermine efforts to transition towards renewable energy, especially as the world shifts away from fossil fuels.
Recently, the Federal Board of Revenue (FBR) issued a circular granting a 100% tax credit to individuals involved in coal mining projects in Sindh. The tax credit applies specifically to income derived from coal mining operations that supply coal to power generation projects. While coal has long been a part of Pakistan’s energy mix, experts are questioning whether incentivising fossil fuels makes sense in the long term.
A questionable strategy?
Sadya Siddiqui, a policy researcher at The Citizenry, a platform focused on policy research and public awareness, emphasised that coal tax breaks are not a new strategy for the government.
“The real question is whether these exemptions have effectively addressed the country’s energy needs,” she said. This time, the policy is being framed as a way to promote the use of domestic coal instead of relying on imports.
Supply of coal to power houses: 100pc tax credit given to miners in Sindh
However, Siddiqui questioned why similar incentives have not been extended to renewable energy, particularly solar. She noted that Pakistan’s energy policies appear increasingly out of step with global trends, especially given the looming climate goals the country is committed to under its Nationally Determined Contributions (NDCs). “Has there been any serious incentivisation for renewable energy, especially solar?” she asked.
She pointed to Pakistan’s upcoming involvement in COP29, the annual global climate summit, where the country’s climate resilience efforts will be scrutinized. “With the establishment of the Loss and Damages Fund and international climate financing gaining momentum, it’s unclear how Pakistan’s National Adaptation Plan will justify the lack of support for renewable energy while tax breaks for coal continue,” she said.
A misaligned policy?
While the government insists that its climate plan is focused on adaptation, there is a noticeable lack of emphasis on mitigation. Siddiqui argued that offering coal tax breaks at a time when the country should be investing in renewable energy sends a contradictory message.
“Incentivising coal means environmental violations could be overlooked, which poses a serious challenge to both Pakistan’s climate goals and its international reputation,” she warned.
Dr Khalid Waleed, an energy economist and research fellow at the Sustainable Development Policy Institute (SDPI), added that Pakistan is not alone in offering fossil fuel incentives. “Globally, fossil fuels receive subsidies and tax exemptions, but the world is shifting towards greener policies. Pakistan should follow suit,” he said.
Dr Waleed highlighted that coal tax exemptions mask the hidden costs of fossil fuels, including environmental and health impacts. While such incentives may have made sense in the 1990s, he argued that the world has since moved on.
“We need to green our fiscal policy, which means shifting incentives and tax breaks from fossil fuels to renewable energy,” he asserted.
Waleed pointed out that Pakistan’s energy subsidies are nearly equivalent to its Public Sector Development Program (PSDP), underscoring the substantial support given to the fossil fuel sector. Yet, under the International Monetary Fund (IMF) programme, Pakistan’s ability to offer subsidies is limited, making it crucial to prioritise the right incentives.
“Pakistan’s future lies with renewable energy,” Waleed stressed, noting that the country’s exports, especially in the textile sector, are at risk due to the European Union’s Carbon Border Adjustment Mechanism (CBAM). The CBAM imposes fees on carbon-intensive imports, which could hurt Pakistan’s export competitiveness if industries continue to rely on electricity from coal-powered grids.
Conflicting signals
Moulvi raised concerns over the mixed messages coming from the government. “On one hand, they encourage investment in renewables, while on the other, they offer tax breaks to coal. This will stall progress in the renewable energy sector and confuse investors,” he said, adding that investor confidence relies on clear, consistent policy signals.
Waleed echoed these concerns, pointing to a recent renewable energy auction in Pakistan where no bids were received for wind power plants. He attributed this to the volatility and disincentives in the sector. “We need to transform subsidies towards renewable energy and attract more investment in this area,” he urged.
Both Moulvi and Waleed also emphasised the need for a “just transition” for coal industry workers. Many workers in coal power plants and mining are receiving significant incentives, and transitioning to renewable energy could leave them unemployed. Waleed suggested re-skilling these workers for jobs in the renewable energy sector, particularly in mining critical minerals like lithium and cobalt, which are essential for clean energy technologies.
“This is an opportune moment for the government to decide whether to continue incentivizing coal or to use fiscal policy to promote renewable energy development,” Waleed remarked.
The path forward
Pakistan’s energy policies are deeply intertwined with its economic and export strategies, particularly in sectors like textile.
Waleed proposed that the government consider implementing a national carbon pricing policy, which would allow industries to pay emission fees domestically and avoid CBAM costs imposed by the European Union.
“For this to happen, the government needs to withdraw incentives for fossil fuel-based power plants and use the funds collected through carbon pricing to develop the renewable energy sector,” he explained.
Waleed concluded by calling for a holistic approach: “We must re-skill coal workers for renewable energy jobs, implement a green fiscal policy, and use tax exemptions and subsidies to support renewable energy instead of fossil fuels. This is the only way to ensure a sustainable energy future for Pakistan.”
As Pakistan grapples with its energy needs and climate commitments, the decision to offer tax breaks for coal remains a divisive issue. With global pressure mounting to transition to renewable energy, the country faces a critical crossroads: continue supporting fossil fuels or pave the way for a greener, more sustainable future.
The article does not necessarily reflect the opinion of Business Recorder or its owners
The writer is a Reporter at Business Recorder (Digital)
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