Budget 2025-26 from a climate lens

By any measure, Pakistan’s federal budget for FY2025-26 represents a notable evolution in the country's approach to climate change.

For a country that has endured some of the most brutal climate shocks, from the catastrophic floods of 2022 that submerged one-third of the country, to intensifying heatwaves and glacial outbursts, there is little room left to pretend that climate risk is a distant or hypothetical threat. What is now emerging, slowly but undeniably, is the attempt to reflect the urgency of how Pakistan allocates and governs its public finances, which translates into climate action.

For the first time, climate considerations are not simply buried in policy speeches or tucked away in the annexes of economic surveys. Instead, they have been embedded directly into the structure of the national budget. Over 5,000 federal cost centres have now been tagged through Pakistan’s Climate Budget Tagging (CBT) system, which has been integrated into the government’s financial management software.

According to official estimates, 35 per cent of non-tax revenue and 9.4 per cent of gross revenues for FY2025-26 have been classified as climate-relevant. These are not minor milestones. In a region where climate budgeting remains largely fragmented or aspirational, Pakistan’s institutionalisation of CBT makes it one of the early movers among developing economies trying to place climate policy where it matters most – in the hard calculus of fiscal planning.

The numbers themselves are, on the surface, encouraging. For instance, the allocations for mitigation have risen dramatically, with a 183 per cent increase bringing the total to Rs603 billion. Adaptation spending has also grown by 83 per cent, reaching Rs85.4 billion, while supporting sectors such as awareness, capacity building and governance receive an additional Rs28.3 billion. These increases suggest that climate action is no longer being treated as a standalone environmental concern but is gradually being woven into broader development priorities.

While the CBT system allows for tagging of climate-relevant spending across government departments, the actual criteria for what qualifies as climate-relevant remain largely opaque. Without transparent and standardized methodologies for tagging, there is a real risk that routine infrastructure projects or legacy development spending may be counted as climate expenditure, even if their actual mitigation or adaptation benefits are marginal. It is one thing to allocate funds under the climate banner; it is another to ensure that these funds are genuinely targeted, additional and delivering measurable resilience outcomes.

Perhaps the most sobering signal comes from the allocation to disaster preparedness, which has been cut by nearly 30 per cent, bringing it down to Rs33.2 billion. This, in a country that ranks 11th on the World Risk Index, sits directly in the path of intensifying monsoon systems, rapidly retreating glaciers and growing urban heat islands. The allocation for recovery and rehabilitation, on the other hand, has seen a sharp increase of 157 per cent. While post-disaster relief is, of course, necessary, a budget that prioritises recovery over prevention risks perpetuating the reactive cycle that has long plagued Pakistan’s approach to disaster management. Every rupee saved today in preparedness will almost certainly cost the exchequer several multiples more in the aftermath of future floods, droughts or storms.

The trade-offs in environmental protection are equally visible. While wastewater management has received a modest increase of 5.0 per cent, funding for pollution abatement has been slashed by a staggering 66 per cent, leaving just Rs2.2 billion to address worsening air quality and industrial pollution that continue to jeopardise public health across urban centres.

Even on the revenue side, the climate picture is far from straightforward. While the government points to an increase in green revenues, nearly 81 per cent of these continue to be sourced from petroleum levies, a structure that creates a troubling dependency on fossil fuel consumption to fund the very transition meant to move away from fossil fuels. This circular fiscal logic will become increasingly unsustainable as the global energy landscape shifts and as domestic pressures to reduce fossil fuel imports mount.

But perhaps the most crucial and least discussed gap in Pakistan’s climate finance story lies on the domestic front. While the country has made admirable strides in securing international support, including the recent $1.4 billion Resilience and Sustainability Facility (RSF) secured from the IMF to support climate-aligned reforms, there remains a striking absence of any comprehensive mapping of Pakistan’s own domestic climate finance potential. How much can realistically be mobilised from local capital markets, blended finance models, corporate CSR pools, philanthropic channels, sovereign green bonds, or insurance markets? The answer, for now, is that no one truly knows and this is not a minor oversight.

Without a rigorous assessment of domestic climate finance capacity, Pakistan remains excessively dependent on external financing which, while critical in the short term, cannot form the backbone of a credible long-term climate finance strategy. More importantly, this absence of domestic resource mobilisation data weakens Pakistan’s negotiating hand in international climate forums. Global climate finance institutions are increasingly looking for demonstrated need and evidence that recipient countries are mobilising all possible domestic resources before seeking additional external support.

Other developing countries have already begun navigating this terrain with greater precision. For example, Indonesia’s Ministry of Finance has developed a comprehensive Climate Budget Tagging system that is fully integrated with its national development planning and fiscal reporting cycles, while also supported by external third-party audits for data integrity. Crucially, Indonesia has coupled this with the issuance of multiple green sukuks – raising over $5 billion since 2018 directly from domestic and global markets for climate projects, while building local capital market confidence in the process. Such models offer valuable lessons for Pakistan as it seeks to both deepen and diversify its climate finance architecture.

Yet, it would be unfair and inaccurate to suggest that Pakistan’s 2025-26 budget reflects inaction. On the contrary, it represents a maturing of the conversation, an acknowledgement that climate resilience is not a policy add-on but must sit at the core of national development strategy. The integration of climate into public financial management tools, the growth in mitigation and adaptation spending and the efforts to institutionalise climate data into the budgetary process are important steps forward that deserve recognition.

What remains is for Pakistan to move from establishing frameworks to making difficult policy choices. The next phase will be defined by transparency in tagging, prioritisation of preventive disaster spending, fiscal diversification away from fossil fuel-dependent revenue streams, and developing a strong domestic climate finance market.

The scale of Pakistan's climate challenge allows little room for error, but it also offers an opportunity for the country to position itself as a leader among developing nations navigating this complex transition. If Budget 2025-26 is a signal of intent, the hard work of delivery begins now.

The writer is an environmental scientist and leads the programme on ecological sustainability and circular economy at SDPI. 

She tweets/posts @ZainabNaeem7