PAKISTAN November 2022 © 2022 The World Bank Group 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This work is a product of the staff of The World Bank Group with external contributions. “The World Bank Group” refers to the legally separate organizations of the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). The World Bank Group does not guarantee the accuracy, reliability or completeness of the content included in this work, or the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank Group concerning the legal status of any territory or the endorsement or acceptance of such boundaries. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the organizations of the World Bank Group, their respective Boards of Executive Directors, and the governments they represent. The contents of this work are intended for general informational purposes only and are not intended to constitute legal, securities, or investment advice, an opinion regarding the appropriateness of any investment, or a solicitation of any type. Some of the organizations of the World Bank Group or their affiliates may have an investment in, provide other advice or services to, or otherwise have a financial interest in, certain of the companies and parties named herein. Nothing herein shall constitute or be construed or considered to be a limitation upon or waiver of the privileges and immunities of any of the organizations of The World Bank Group, all of which are specifically reserved. Rights and Permissions The material in this work is subject to copyright. Because The World Bank Group encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given and all further permissions that may be required for such use (as noted herein) are acquired. The World Bank Group does not warrant that the content contained in this work will not infringe on the rights of third parties, and accepts no responsibility or liability in this regard. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. Graphic Design: Kayhan Suleman PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT T Acknowledgments Abbreviations A Preface B 1. CLIMATE AND DEVELOPMENT L 1.1 The economic, social, and environmental context 1.2 Climate change vulnerability 1.3 National GHG emission pro le E 2. GROWTH, EQUITY, AND THE FINANCIAL IMPLICATIONS OF CLIMATE RISKS 2.1 Spatial and socioeconomic variation in hazards, exposure, and vulnerability 2.2 Economy-wide impacts of selected physical climate risks O 2.3 Damage from water insecurity 2.4 Damage from air pollution F 2.5 Aggregated impact of climate and environmental risks 3. CLIMATE CHANGE POLICY, INSTITUTIONS AND REGULATORY FRAMEWORK 3.1 Governance and policy for climate change C 3.2 Climate change commitments 3.3 Institutional frameworks for climate change 3.3.1 Federal-Level Institutions O 3.3.2 Provincial-Level Institutions 3.4 Current landscape of climate nance N 4. PIVOTING THE ECONOMY TO AN INCLUSIVE, RESILIENT AND T GREEN DEVELOPMENT PATHWAY 4.1 The Need for an Agriculture-Food System Transformation E 4.1.1 Challenges and Opportunities 4.1.2 Key Policy Recommendations N 4.2 Building Resilient and Livable Cities 4.2.1 Challenges and Opportunities 4.2.2 Key Policy Recommendations T 4.3 Accelerating a Just Transition to Sustainable Energy and Transport 4.3.1 Challenges and Opportunities S 4.3.2 Key Policy Recommendations 5. THE MACRO-FISCAL AND DISTRIBUTIONAL IMPACTS OF CLIMATE AND DEVELOPMENT POLICY ACTIONS 5.1 Policy Packages 5.1.1 Policy Package 1: The Government's IGCEP 2021–30 5.1.2 Policy Package 2: Carbon Taxes, Revenue Recycling, and Feebates 5.1.3 Policy Package 3: Investments in Human Capital Development 5.1.4 Investments in Adaptive Social Protection Policies 5.2 Financing a Resilient and Inclusive Development Pathway 5.3 The Aggregate Effects of Policy Packages on Emissions 6. SUMMARY OF RECOMMENDATIONS 7. BIBLIOGRAPHY PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT Figures, Tables and Maps Figure 1.1: Pakistan's GDP per Capita (PPP Current International $) (left) and Poverty Headcount Ratio at US$3.20 a Day (2011 PPP) (right) Compared with SAR and Lower Middle-Income Countries Figure 1.2: Projected Change in Annual Mean Temperature (left) and Days with Heat Index >35°C (right) up to 2100 in Pakistan (Baseline: 1995–2014, Multi-Model Ensemble) Figure 1.3: Decadal Average of Total Deaths and Economic Damage (percentage of GDP) from Natural Disasters in Pakistan between 1990 and 2019 Figure 1.4: Pakistan's National GHG Inventory in 2018 Figure 2.1: Real GDP Losses from Climate Damage Figure 2.2: Real GDP Losses from Climate Damage Extremes Figure 2.3: Sectoral Impacts of Climate Damage (Pessimistic Scenario) Figure 2.4: Impact on Households from Climate Damage Figure 2.5: Impact of Damage on Household Poverty Rate in the Pessimistic Scenario Compared to the Baseline Figure 2.6: Aggregated impact on GDP associated with climate and environmental threats by 2050 Figure 4.1: Final Energy Consumption 2019–2020 Figure 4.2: Energy Consumption by Sector (above) and by Fuel Type in the Industrial Sector (below) (2019–2020) Figure 5.1: Impact of IGCEP and IGCEP + Electri cation Figure 5.2: Macroeconomic Impacts of Carbon Taxes without IGCEP, with IGCEP, and with IGCEP and Electri cation Figure 5.3: Total Fertility Rate (left) and Population Projections (right) Figure 5.4: Macro impacts of Human Capital Development Figure 5.5: Aggregated Impacts on National GHG Emisisons from Different Policy Scenarios in Comparison to the NDC Target Figure 5.6: Indicative Estimation of Total Climate-Resilient and Low-Carbon Development Needs and Potential Resources through 2030 Table 5.1: Carbon Tax Table 6.1: Criteria for Prioritizing and Sequencing the Recommended Policy Actions Table 6.2: Summary of Policy Recommendations in the CCDR Table 6.3: Proposed Sequencing of the Policy Actions Map 2.1: District-Level Poverty Rates in Pakistan (2004, 2012, and 2019–2020) Map 2.2: Heat Hazard (left) and Population Exposure (right) Map 2.3: Drought Hazards for Agricultural Land during the Kharif (left) and Rabi (right) Cropping Seasons Map 2.4: Expected Annual Impact of Floods on Built-up Assets (left) and on Agricultural Land (right) Map 2.5: PM2.5 Emissions (left) and District-Level Population Exposure (right) PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT ACKNOWLEDGMENTS This Country Climate and Development Report (CCDR) is a collaborative effort of the World Bank (WB), International Finance Corporation (IFC), and Multilateral Investment Guarantee Agency (MIGA), produced by a core team led by Ghazala Mansuri (Lead Economist, WB), Abedalrazq F. Khalil (Program Leader for Sustainable Development, WB), and Shabana Khawar (Principal Operations Officer, IFC). The key section contributors include Adnan Ashraf Ghumman, Asjad Naqvi, Basharat Ahmed Saeed, Catalina Ochoa, Charl Jooste, Christian Schoder, Christine Heumesser, Christopher Ward, Christopher James Warner, Derek Hung Chiat Chen, Erwin W. Knippenberg, Faizan Shamsi, Fiza Salim, Hiba Haider Zaidi, Hina Nagi, Huma Khalid, Jonas Ingemann Parby, Khyati Rathore, Lander Bosch, Lincoln Flor, Lire Ersado, Maximilian Fischbach, Mohamed Boly, Muddassir Shafique, Muhammad Bhatti, Oliver Knight, Saadia Qayyum, Sahar Etezaz, Saima Zuberi, Seher Abbas Haider, Suhaib Rasheed, Tatiana Peralta Quiros, Teuta Kacaniku, Yunziyi Lang, Zaheer Ahmad, and Zishan Karim. Other contributors include Ahsan Tehsin, Akmal Minallah, Aldo Defilippi, Ali Saeed Mirza, Ali Syed, Alisan Dogan, Amjad Zafar Khan, Aroub Farooq, Bilal Khalid, Gonzalo J. Varela, Hector Pollitt, Inga Afanasieva, Ira Irina Dorband, Khurram Mirza, Melis U. Guven, Moritz Meyer, Omair Shabbir, Pragya Shrestha, Raymond Muhula, Roland White, So Seyama, Tamer Samah Rabie, Thomas Michael Kerr, Tu Chi Nguyen, and Viera Feckova. In addition, the CCDR received inputs from: Brent Boehlert, Kenneth Strzepek, and Diego Castillo of the Industrial Economics, Incorporated (IEc) on climate change economic damage estimation for Pakistan; Jamie Pirie and Unnada Chewpreecha of the Cambridge Econometrics (CE) on the macro- modeling of climate policies for Pakistan using the E3ME model; and Sajid Amin, Hina Aslam, and Qasim Shah of Sustainable Development Policy Institute (SDPI) on climate institutional and policy assessment. The CCDR was prepared under the overall direction of Abhas K. Jha (Practice Manger (PM) for South Asia Region (SAR) Climate Change & Disaster Risk Management, WB), Christophe Crepin (PM for SAR Environment, WB), Gailius J. Draugelis (Operations Manager for Pakistan, WB), Josses Mugabi (PM for SAR Water, WB), Loraine Ronchi (former PM for SAR Agriculture, WB), Meskerem Brhane (former PM for SAR Urban, Resilience and Land, WB), Shabih Mohib (PM for SAR Macroeconomics, Trade & Investment, WB), Shomik Raj Mehndiratta (PM for SAR Transport, WB), Simon J. Stolp (PM for SAR Energy, WB), and Stefano Paternostro (PM for SAR Social Protection, WB). Detailed feedback, suggestions, and comments were received from the internal peer reviewers: Hans Timmer (Chief Economist for South Asia Regional Office, WB), Richard Damania (Chief Economist for Sustainable Development, WB), Sameh Naguib Wahba (former Global Director for Urban, Resilience and Land, WB), Somik V. Lall (Lead Economist for Equitable Growth, Finance and Institutions, WB), Stephane Hallegatte (Senior Climate Change Advisor for Sustainable Development, WB), Vivek Pathak (Director for Climate Business Department, IFC), and William Young; as well as external peer reviewer: Adil Najam (Dean, Global Studies, Boston University). The CCDR benefitted from discussions with various external stakeholders in Pakistan, including the Ministry of Climate Change, Finance Division, Ministry of Planning, Development & Special Initiatives, Economic Affairs Division, Ministry of Water Resources, Power Division, academics, civil society organizations (CSOs), the private sector, and development partners. The CCDR was prepared under the guidance of Martin Raiser (Regional Vice President for South Asia Region, WB), Hela Cheikh Rouhou Ep Abid (Regional Vice President, IFC), Najy Benhassine (Country Director, WB), John A. Roome (Regional Director for Sustainable Development, WB), Guangzhe Chen (Regional Director for Infrastructure, WB), Lynne Sherburne-Benz (Regional Director for Human Development, WB), Zoubida Kherous Allaoua (former Regional Director for Equitable Growth, Finance and Institutions, WB), K. Aftab Ahmed (Director for Middle East Region, IFC), and Merli Margaret Baroudi (Director of Economics and Sustainability, MIGA). 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT ABREVIATIONS ADS Accelerated Decarbonization Scenario AFOLU agriculture, forestry, and other land use AQLI Air Quality Life Index ARE Alternative & Renewable Energy BC black carbon BCM billion cubic meters BES biodiversity and ecosystem services BISP Benazir Income Support Programme BPKM billion passenger kilometers BRT Bus Rapid Transport BTKM billion-ton kilometers CCDR Country Climate and Development Report CCT conditional cash transfer (program) CCUS Carbon capture, utilization and storage CDPR Consortium for Development Policy Research CFL compact fluorescent light CH4 methane CO2 carbon dioxide CORE C ollect and Recycle Program CPAT Carbon Pricing Assessment Tool CPEC China-Pakistan Economic Corridor CPEIR Climate Public Expenditure and Institutional Review CSA climate-smart agriculture CT cash transfer (program) DAP dialkyl phosphate (pesticide) DFI development finance institution DISCO (electricity) distribution company EE energy efficiency EE&C Energy efficiency and conservation EGI exposed glacial ice EPA Environmental Protection Agency ES ecosystem services ESCO energy service company ESRM Environmental & Social Risk Management ETS Emissions Trading Scheme EV electric vehicle FAO Food and Agriculture Organization FCV fuel cell vehicle FDI foreign direct investment FI financial institution FY fiscal year GBD Global Burden of Disease GCF Green Climate Fund GCISC Global Change Impact Studies Centre PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 GCM General Circulation Model GDP gross domestic product GEF Global Environment Facility GF global finance GHG greenhouse gas GLOF glacial lake outburst flooding GOP Government of Pakistan GW gigawatts GWh gigawatt-hours ha hectares HCI Human Capital Index HKHK Himalaya, Hindu Kush, and Karakorum (glaciers) IBIS Indus Basin Irrigation System ICT information and communications technology IEA International Energy Agency IFC International Finance Corporation IGC International Growth Center IGCEP Generation Capacity Expansion Plan IMF International Monetary Fund INDC Intended Nationally Determined Contribution IPCC Intergovernmental Panel on Climate Change (of the United Nations) IPS Intended Policy Scenario km kilometer KP Khyber Pakhtunkhwa LCOE Levelized Cost of Electricity LNG liquefied natural gas LPG liquid petroleum gas LT long term/longer term m3 cubic meters MDB multilateral development bank mds Maunds MoCC Ministry of Climate Change MoF Ministry of Finance MPDR Ministry of Planning, Development and Reforms MRV monitoring reporting and verification MT medium term MtCO2e metric tons of carbon dioxide equivalent MTOE million tons of oil equivalent µg/m3 micrograms (one-millionth of a gram) per cubic meter NADRA National Database and Registration Authority NARC National Agricultural Research Centre NBS Nature-based Solution NCCP National Climate Change Policy NCEC National Committee on the Establishment of Carbon Markets NDC Nationally Determined Contribution NDMA National Disaster Management Authority NDS National Development Strategy NEECA National Energy Efficiency & Conservation Authority 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT NEP National Electricity Policy NEPRA National Electric Power Regulatory Authority NEVP National Electric Vehicle Policy NOX nitrogen oxides NPV net present value NSER National Socio-Economic Registry NTDC National Transmission & Despatch Company O3 ozone OECD Organization for Economic Co-operation and Development OSRs own source revenues PKR Pakistani rupee (also Rs) PM2.5 fine particulate matter 2.5 micrometres or smaller PNA Pro Nature Alliance PNG piped natural gas PPP public-private partnership PR Pakistan Railway PVs solar photovoltaics RAP regenerative agriculture practice RCP Representative Concentration Pathway RE renewable energy RISQ Representativity Indicators for Survey Quality RLNG Re -gasified Liquefied Natural Gas Rs Pakistani rupee (also PKR) SBP State Bank of Pakistan SDG Sustainable Development Goal (of the United Nations) SEC Securities and Exchange Commission SECP Securities and Exchange Commission of Pakistan SOC soil organic carbon SOE state-owned enterprise SP social protection sq. km square kilometer SSP Shared Socioeconomic Pathway ST short term SWM solid waste management T&D transmission and distribution TBTTP Ten Billion Tree Tsunami Program TFR total fertility rate UHI urban heat island UIPTs Urban Immoveable Property Taxes UNDP United Nations Development Programme UNFCCC United Nations Framework Convention on Climate Change VSL value of a statistical life WAPDA Water and Power Development Authority WASH water, sanitation, and hygeine WBGT Wet Bulb Globe Temperature WHO World Health Organization WWF World Wildlife Fund YLD years lived with disability PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 PREFACE Climate action is the most important priority for the government and people of Pakistan today  In 2022, Pakistan endured devastating droughts and floods that destroyed assets, lives, and livelihoods on a massive scale. First, a severe heatwave, previously a 1-in-1000-year event, saw temperatures continuously above 45°C, resulting in crop losses, power outages, and forest fires. Then came the unprecedented monsoon rains, the heaviest and most concentrated ever recorded. Across the south, hundreds of lives were lost, millions were displaced, and some 2 million houses were damaged or destroyed. Critical infrastructure such as roads and dams were washed away, 22,000 schools were damaged and forced to close, and for many, there was a near-complete loss of livestock and the summer (kharif) crops. The worst is not yet over: the secondary impacts from disease and lack of food and clean water are still to come, as are the knock-on effects from lost income and school closures. The recently published Post-Disaster Needs Assessment (PDNA) for the 2022 floods estimates total damages in excess of US$14.9 billion and total economic losses of about US$15.2 billion, a near knock-out blow to growth. Estimated needs for rehabilitation and resilient reconstruction are at least US$16.3 billion, not including much-needed new investments, beyond affected assets, to support Pakistan's adaptation to climate change and build the resilience of the country to future climate shocks. As a direct consequence of the floods, the national poverty rate is projected to increase by 3.7 to 4.0 percentage points, pushing an additional 8.4 and 9.1 million people into poverty. As the likelihood of these devastating climatic shocks continues to rise, the impacts on Pakistan's people and their livelihoods, on ecosystems and the economy, and on poverty will grow ever worse. Action is essential—and urgently so. It will require firm, clear decisions from the government and the engagement of the entire population in the effort to turn the situation around. Pakistan needs to act on the recommendations of this report to “build back better” and undertake the transformation of the key sectors identified. The country needs to transform its agriculture-food-water system to become more resilient, inclusive, sustainable, and climate-smart. It needs to support the development of resilient, clean, and livable cities and to accelerate a just transition to sustainable energy and low-emissions transport. And it needs to strengthen its human capital because, as hazards intensify, having a more resilient population has never been more critical to breaking the cycle of disaster-induced poverty. An opportunity to make an immediate start is at hand. The reconstruction and rehabilitation from the floods need to be climate-resilient, inclusive, and people-centric, leveraging the power of community. At the same time, Pakistan needs to build on the lessons from these floods to build longer-term systemic resilience as a hedge against future events. The country can and should begin to act on the recommendations of this report, which proposes an agenda for maintaining and accelerating reforms in identified priority areas. The government needs to make smart but tough decisions, even within its limited fiscal space, and create an enabling environment to raise revenue while also attracting further international finance. Pakistan must also act to correct the structural inequality and inefficiency in its systems, institutions, and policies, which have been holding the country back from achieving its vision of equitable and sustainable growth for all. The leadership needs to ensure appropriate devolution of responsibilities and resources to local governments, including arrangements for the mobilization of revenue, and provide avenues for citizens to hold service providers accountable. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1. CLIMATE AND DEVELOPMENT PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 1. CLIMATE AND DEVELOPMENT 1.1.The economic, social, and environmental context Pakistan has made significant progress over the past two decades in reducing poverty and has reached middle-income status, but it continues to face considerable macro-fiscal fragility, which could place significant constraints on its ability to sustain growth and further enhance equity. Between 2001 and 2015, more than 48 million Pakistanis came out of extreme poverty. Extreme poverty, measured as US$1.90 or less per person per day, was virtually eliminated over this 14-year period, decreasing from 28.2 percent to 3.6 percent. Over the same period, poverty at the lower middle-income line of US$3.20 per person per day also declined from 73.5 percent to 35.5 percent and by 2018 stood at 34.3 percent (see Figure 1.1). This sustained decline was driven primarily by the expansion of off-farm economic opportunities and an increase in out-migration, with its associated foreign remittances. The overall pace of poverty reduction since 2001 makes Pakistan the most successful country in the South Asian Region (SAR) in reducing extreme poverty. However, significant geographical inequities remain. In 2018, rural poverty at 43.5 percent was more than twice as high as urban poverty (18.5 percent), and there are important disparities across districts which extend beyond monetary poverty and include access to basic services, critical infrastructure, and employment opportunities. Pakistan ranks 38th, 22nd, 26th, and 31st below the global median on the resilience, inclusion, sustainability, and efficiency dimensions, respectively (see more details in Annex 1: Pakistan's Performance on Development Indicators). Figure 1.1: Pakistan's GDP per Capita (PPP Current International $) (left) and Poverty Headcount Ratio at US$3.20 a Day (2011 PPP) (right) Compared with SAR and Lower-Middle-Income Countries GDP per capita, PPP (current international $) Poverty headcount ratio at $3.20 a day (2011 PPP) 8000 80 Lower middle income 70 6000 South Asia Pakistan 60 4000 50 South Asia 2000 Lower middle 40 income Pakistan 2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 Source: World Development Indicators (NY.GDP.PCAP.PP.CD, SI.POV.LMIC) The country's per capita gross national product (GDP) reached US$4,877 in 2020, but annual per capita GDP growth has been volatile and low at 2 percent—less than half of the regional average. The recent hikes in global commodity prices have exacerbated the macro-fiscal risks facing the economy and highlighted its underlying structural fragility. Investment rates and the tax to GDP ratio remain low, with investment accounting for just 14 percent of GDP in 2021 and tax revenues accounting for only 10 percent of total GDP. Public expenditure on health and education has also remained low at just 1.2 percent and 1.8 percent of GDP in 2021, respectively. Additionally, there are large and unproductive subsidy regimes in the energy, agriculture, and irrigation sectors, which underlie the chronic fiscal stress faced by the country. The current account deficit worsened significantly in FY22 reaching US$17.4 billion (or 4.6 percent of GDP) due to the sharp increase in global commodity prices, exacerbated by the Ukraine-Russia war, as well as higher domestic energy demand. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT These external imbalances, together with the continued political and policy uncertainty, have contributed to a loss of investor confidence and a weakening currency. In July 2022 alone, the rupee depreciated 14.4 percent against the US dollar, and fell a total of 23.1 percent in FY22. Foreign reserves have also dwindled. The weakening exchange rate, together with the high energy and commodity prices as well as the overheating economy, has raised inflation to an average of 12.1 percent in FY22, an 11-year high. The high inflation rate prompted the government to implement an energy price relief plan from March to June 2022. As a result, fiscal expenditures that were already high ballooned further, and fiscal space has been shrinking rapidly. Accordingly, public debt has risen to more than US$200 billion, equivalent to more than three-quarters of annual GDP. Considering the difficult economic and fiscal conditions, rating agencies have downgraded Pakistan's government bonds, while bond yields have risen sharply. These factors, combined with the country's low investment rate and low export volume, have limited growth, and pose long-standing challenges to its ability to grow sustainably and further reduce poverty. Pakistan also faces a daunting unfinished agenda on human development, which compounds its structural macro fragility. The country currently ranks 141 out of 174 countries on the Human Capital Index (HCI), with a score of 41 out of 100. The stunting rate of children under age 5, at 38 percent, remains among the highest in the world and affects even those in the highest income quintiles. This reflects the near-complete lack of public investment in the provision of safe water and sanitation. Studies have shown that between one-third and one-half of water used for drinking is bacterially contaminated with e. coli at source, and this includes piped water. The near-absence of in-home water treatment of any type increases the bacterial contamination of water to between 60 and 75 percent when water is tested at point-of-use. Nitrate contamination is also endemic in rural areas because of the excessive use of chemical fertilizers and the lack of wastewater treatment. This is responsible for adverse health outcomes across the population but manifests particularly perniciously in the persistence of stunting among children, despite the remarkable decline in extreme poverty. The economy-wide impacts of child stunting alone are large and include reduced educational attainment, lifelong health challenges due to compromised immune systems, and attendant cognitive deficits that significantly impact lifetime earnings.1F Intergenerational educational mobility and labor mobility also remain extremely low, underscoring structural inequalities in opportunity. Educational attainment rates are low across the board, and an estimated 22.9 million children aged 5–16 years, or 44 percent of the age group, remain out of school, of which the majority are girls and young women. At 75 percent before the pandemic, Pakistan's learning poverty rate—the percentage of children unable to read and understand a short age- appropriate text by age 10—is more than 16 percentage points higher than the average for South Asia and more than 19 percentage points higher than the average for lower-middle-income countries. The once declining trend in Pakistan's fertility rate has also stagnated. While much of the region, except for Afghanistan, has reached replacement fertility, Pakistan's fertility rate is still at 3.3 in 2020.3F An accelerated decline in fertility would have beneficial impacts across the economy. It would increase the prospects for food and water security, decrease stress on natural capital and biodiversity, enhance urban resilience and basic service provision, and lower fiscal stress and macro-fiscal fragility. It would also have very significant impacts on gender equity. Studies show that with a decline in fertility, there is an increase in the educational attainment of girls and increased participation by women in income-generating activities, with beneficial impacts on household income and investments in children's education and health. The country is also experiencing a youth bulge, with 2.1 million young people (ages 15–24) entering the labor pool every year,4F but many are poorly skilled and will increasingly face greater health (including cognitive-deficit) challenges. Mansuri et al., When Water Becomes a Hazard: A Diagnostic Report on The State of Water Supply, Sanitation, and Poverty in Pakistan and Its Impact on Child Stunting. (Washington DC: World Bank Group, 2018), https://openknowledge.worldbank.org/handle/10986/30799?show=full. World Bank, Pakistan Human Capital Review (Draft) (Washington, DC: World Bank Group, 2022). World Bank, “Fertility rate, total (births per woman) – Pakistan,” 2020, last accessed September 5, 2022, https://data.worldbank.org/indicator/SP.DYN.TFRT.IN?locations=PK. Pakistan has the ninth-largest labor force globally. See Government of Pakistan, Finance Division, Pakistan Economic Survey 2020–21 (2021), https://www.finance.gov.pk/survey_2021.html. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 Pakistan is endowed with considerable renewable natural capital, but much of it is at risk. Pakistan ranks among the top 10 countries in the world most heavily impacted by the loss of biodiversity and ecosystem services (BES). Many factors contribute to this: Deforestation has exacerbated soil degradation and diminished its water-retention capacity; unmanaged grazing has put stress on pastures; the expansion of crop area has reduced rangelands; and the excessive use of chemical fertilizers and pesticides has damaged soil fertility and biodiversity and contaminated ground water. This is compounded by extremely high levels of environmental pollution brought about by unplanned urban growth and urban sprawl, including nearly unchecked pollution from industrial processes and chemicals, untreated wastewater, and poor solid waste management. 1.2 Climate change vulnerability Climate change is a risk multiplier, with potentially highly negative consequences that can have ripple effects. Pakistan ranks among the top 10 countries worldwide most affected by climate change and natural disasters. The country faces further warming of its already hot climate at a rate considerably above the global average. By the end of the century, the number of days a year with a heat index greater than 35°C is projected to rise by 9–13 days under the SSP1-1.9 scenario, 16–30 days under SSP2-4.5, and 21–39 days under SSP3-7.0 scenario (Figure 1.2). There is a significant probability of ever more climatic variability and extreme events. Progressive warming of the air and soil will result in the reduced availability of water. Periodic heatwaves will intensify these effects and contribute to more severe, more frequent, and longer droughts. Climate change and deposits of anthropogenic black carbon (BC) will hasten the melting of the Himalaya, Hindu Kush, and Karakorum (HKHK) glaciers, leading to changes in the flow of the vital Indus River system and seriously affecting Pakistan's economy and ecology.11F A more variable monsoon regime, and likely more intense storm and cyclone events, will result in floods and induce landslides. Continued and accelerating sea-level rise will cause the ocean to encroach on coastal settlements and infrastructure and commit low-lying coastal ecosystems to submergence and loss. Figure 1.2: Projected Change in Annual Mean Temperature (left) and Days with Heat Index >35°C (right) up to 2100 in Pakistan (Baseline: 1995–2014, Multi-Model Ensemble) Projected changes in mean-temperature (°C) Projected changes in days with heat index > 35°C 6 40 Historical 4 SSP1-1.9 20 2 SSP2-4.5 SSP3-7.0 0 0 -20 1995 2025 2050 2075 2100 1995 2025 2050 2075 2100 Source: World Development (2022). https://climateknowledgeportal.worldbank.org/country/pakistan/climate-data-projections Oliver Schelske, Bernd Wilke, Anna Retsa, Gillian Rutherford-Liske, and Rogier de Jong, Biodiversity and Ecosystems Services Index: measuring the value of nature (Swiss Re Institute, September 24, 2020), https://www.swissre.com/institute/research/topics-and-risk-dialogues/climate- and-natural-catastrophe-risk/expertise-publication-biodiversity-and-ecosystems-services.html#. German Watch, Global Climate Risk Index 2021, https://www.germanwatch.org/en/19777. A total of 33 glacial lakes have been assessed by Ministry of Climate Change to be prone to hazardous glacial lake outburst flooding (GLOF), which could unleash millions of cubic meters of water and debris, putting 7 million people at risk. Muthukumara Mani, Glaciers of the Himalayas: Climate Change, Black Carbon, and Regional Resilience (Washington DC: World Bank Group, 2021), https://openknowledge.worldbank.org/handle/10986/35600. World Bank, “Pakistan: Climate Projections,” Climate Change Knowledge Portal, last accessed June 10, 2022, https://climateknowledgeportal.worldbank.org/country/pakistan/climate-data-projections. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT Box 1.1 The Alarming Consequences of Climate Change in Pakistan: The 2022 Floods Physical Impacts The 2022 floods have shown Pakistan's high vulnerability to climate change despite contributing less than one percent of global greenhouse gas emissions. One-third of the country has been under water, and 33 million people have been affected. Nearly 8 million people are reportedly displaced. The floods have taken the lives of more than 1,700 people, one-third of which were children. The total damage is estimated at US$14.9 billion, total loss at US$15.2 billion, and total needs at US$16.3 billion. Housing, Agriculture and Livestock, and Transport and Communications sectors suffered the most significant damage, at US$5.6 billion, US$3.7 billion, and US$3.3 billion, respectively. Sindh is the worst affected province with close to 70 percent of total damages and losses, followed by Balochistan, Khyber Pakhtunkhwa, and Punjab. The scale of the disaster is unprecedented in Pakistan, exceeding the damage of the 2010 floods. The 2022 flooding has further exposed underlying institutional and systemic challenges, including poor urban planning and water resource management, lack of systems for infrastructure maintenance, complex governance, structural inequalities, and limited disaster risk reduction capacity. Macroeconomic and Human Impact The total damage is equivalent to 4.8 percent of FY22 gross GDP, while recovery and reconstruction needs are projected to be sizable at 1.6 times the budgeted national development expenditure for FY23. Overall decline in GDP as a direct impact of the floods is projected to be around 2.2 percent of FY22 GDP. The disaster will have profound impact on lives and livelihoods. Preliminary estimates of the PDNA suggest that the national poverty rate will increase by 3.7 to 4.0 percentage points, pushing an additional 8.4 to 9.1 million people into poverty. Similarly, multidimensional poverty will increase by 5.9 percentage points, meaning that an additional 1.9 million households will be pushed into non-monetary poverty. The impact of the floods is likely to exacerbate already existing inequalities, revealing serious differences in safety, education, decision-making, and employment. Vulnerable groups, such as women, children, people with disabilities, and refugees, are likely to be disproportionally affected by the floods due to their limited access and availability to social protection and coping mechanisms. Source: PNDA (October 2022): https://thedocs.worldbank.org/en/doc/4a0114eb7d1cecbbbf2f65c5ce0789db-0310012022/ original/Pakistan-Floods-2022-PDNA-Main-Report.pdf The adverse impacts of climate change on Pakistan's natural and human capital are likely to be severe. Over the past three decades, climate-related disasters have caused significant loss of life, economic damage, and a reversal of development gains (Figure 1.3). Between 1992 and 2021, climate- and weather-related disasters in Pakistan resulted in a total of US$29.3 billion of economic losses (inflation-adjusted to 2021 US dollars) from damage to property, crops, and livestock, equivalent to 11.1 percent of 2020 GDP.13F The flood in 2010 alone resulted in an adjusted economic loss of 4.5 percent of 2020 GDP. The full impact of the 2022 monsoon floods on GDP will emerge over time but an early assessment indicates higher impacts than 2010 (Box 1.2). Climate change will increasingly put pressure on food production and access. It will also enhance the impact of air and water pollution on human health. Further, labor productivity is likely to decline across the board because of extreme heat. Precipitation changes and declining water availability could damage riverine ecology, impair water security, and affect hydropower production. Sea-level rise will contribute to the further salinization of soils and coastal erosion, and inundation will harm fisheries and aquaculture. Over time, there is likely to be a partial collapse in the natural systems that underpin Pakistan's economy.14F EM-DAT, CRED/UCLouvain (Brussels, Belgium), last accessed April 08, 2022, www.emdat.be. H.-O. Pörtner et al., eds., “Summary for Policymakers,” in Climate Change 2022: Impacts, Adaptation, and Vulnerability, IPCC Sixth Assessment Report, ed. H.-O. Pörtner, D.C. Roberts, M. Tignor, E.S. Poloczanska, K. Mintenbeck, A. Alegría, M. Craig, et al. (Cambridge University Press, in press), https://www.ipcc.ch/report/ar6/wg2. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 Rising risks from climate change are poised to significantly compromise Pakistan's development ambitions. At the macro level, these shocks will impact all aspects of the economy and could have cascading impacts that further dampen growth projections in a country that is already fiscally constrained and that has seen relatively low growth, especially over the past few years. The GDP losses that Pakistan is already facing owing to the degradation of its environment and its low human capital will only be magnified if extreme climate-related events unravel development gains and divert limited public financing toward recovery efforts. In particular, the agriculture sector is likely to be severely impacted, increasing the risk of extreme poverty, food insecurity, and malnutrition. This will make sustained progress on poverty reduction and human development far more challenging than it is today. These interrelated risks could also set the stage for major societal disruptions, including the displacement of people and greater pressure on cities that are unprepared for the influx of displaced migrants on top of those they currently host.15F Figure 1.3: Decadal Average of Total Deaths and Economic Damage (percentage of GDP) from Natural Disasters in Pakistan between 1990 and 2019 Natural Disasters Drought Damage (%GDP) Earthquake 1 Including 2005 Kashmir earthquake 4 Extreme temperature Including 2010 floods Flood 8 Including 1970 East Pakistan cyclone Landslide Frequency 30 Storm 20 1960-1969 1970-1979 1980-1989 1990-1999 2000-2009 2010-2019 10 Year Note: Decadal figures are measured as the annual sum over the subsequent ten-year period. Source: The international disasters database 1.3. National GHG emission profile Pakistan is a relatively minor contributor to climate change, nonetheless, it should seize the opportunity of global decarbonization efforts to help decouple its socio-economic growth from costly, polluting, and emissions intensive fossil fuels. In 2018, the country's total GHG emissions were estimated at 499 million metric tons of carbon dioxide equivalent (MtCO2e), inclusive of land See V. Mueller, C. Gray, and K. Kosec, “Heat stress increases long-term human migration in rural Pakistan,” Nature Clim Change 4(2014): 182–185, doi: https://doi.org/10.1038/nclimate2103; and Jose Luis Cruz and Esteban Rossi-Hansberg, The Economic Geography of Global Warming, Becker Friedman Institute Working Paper no. 2021-130 (2021), https://bfi.uchicago.edu/insight/research-summary/the-economic- geography-of-global-warning. EM-DAT, CRED/UCLouvain (Brussels, Belgium), last accessed April 8, 2022, www.emdat.be. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT use and forestry, which accounted for less than 1 percent of global GHG emissions. As illustrated in Figure 1.4, emissions are driven largely by two sectors: agriculture, forestry, and other land use (AFOLU) and energy, which account for 46 percent and 45 percent of total national emissions, respectively. Given Pakistan's large population, high energy intensity and growth aspirations, future GHG emissions will become globally material unless actions are taken to curb the growth rate of emissions. Figure 1.4: Pakistan's National GHG Inventory in 2018 3% 2% Rice cultivation Fugitive fuel 32% 21% emissions 14% Others Manufacturing Land (commerical, industries and residential, construction agricultural) Agriculture, Forestry and Other Land Use 49% Livestock 4% Energy (AFLOU) (21.72) 5% Waste (25.76) IPPU 34% 24% Managed Transport soils 21% Energy industries 498.87 2018 GHG 46% Inventory (223.46) (MtCO 2 e) AFLOU 4% 1% Waste incineration 11% Others (paper & pulp, and open burning Chemical food 7 beverages) 44% industry (218.94) Energy Industrial Processes and Waste Product Use (IPPU) 52% 44% Wastewater 88% Solid waste treatment and Mineral disposal discharge industry Global Change Impact Studies Centre, National Greenhouse Gas Inventory Information for Pakistan. See World Resources Institute, “Global Historical GHG Emissions,” CLIMATEWATCH (2022), https://www.climatewatchdata.org/ghg- emissions?end_year=2018®ions=PAK&start_year=1990. The total GHG emissions estimated by Climate Watch for Pakistan in 2018 was 428.62 MtCO2e. This is slightly lower than Pakistan's own estimate, prepared by GCISC. GCISC, National Greenhouse Gas Inventory Information for Pakistan. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 2. GROWTH, EQUITY, AND THE FINANCIAL IMPLICATIONS OF CLIMATE RISKS 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 2. GROWTH, EQUITY, AND THE FINANCIAL IMPLICATIONS OF CLIMATE RISKS 2.1 Spatial and socioeconomic variation in hazards, exposure, and vulnerability Understanding the spatial dimensions of climate risk and the extent to which such risks intersect and interweave with other social disadvantages is essential for ensuring equity in climate actions. Spatial disparities in poverty and socioeconomic outcomes remain significant, with large gaps across the urban-rural divide and across districts within provinces. Map 2.1 shows that although poverty rates have fallen substantially since 2004, significant variation across districts persists. Districts in South Punjab and north and Sindh still have poverty rates as between 26 and 39 percent, while districts in south east Sindh, most of Baluchistan and bordering areas between KP and Baluchistan have poverty rates between 40 and 60 percent.23F These areas are also deprived along many other dimensions—from schooling and access to health services to water and sanitation and access to electricity—making them more vulnerable to a range of hazards when they do strike. Map 2.1: District-Level Poverty Rates in Pakistan (2004, 2012, and 2019–20) Heatwaves are a major threat to Pakistan's labor force. Pakistan has some of the highest observed temperatures in Asia. The 2022 heatwave put millions at risk of heat stress and accelerated glacier melt.25F Even in years with average weather, temperatures in most regions exceed 30°C for several months, and maximum temperatures routinely exceed 40°C, placing human health and infrastructure at risk. Urban heat islands (UHIs) occur in highly populated cities that lack natural cover and where dense concentrations of concrete, pavement, and buildings absorb and retain heat, compounded by heat from congested traffic and poor air quality. Extreme temperatures and air pollution can directly impact health. Indirect long-term threats such as outbreaks of malaria, dengue, and severe gastroenteritis have been observed in Pakistan in the aftermath of a heatwave.28F Map 2.2 shows the distribution of heat stress for a 20-year return period (left) and population exposure to such hazards (right). In central and eastern Punjab, more than 700,000 residents are exposed to Using small area estimates and the national poverty line. World Economic Forum, “Record-breaking heat wave strains 'limits of human survivability' in India and Pakistan,” WEF, May 9, 2022, last accessed September 4, 2022, https://www.weforum.org/agenda/2022/05/record-breaking-heatwaves-limit-human-survivability-india-pakistan. Maryam Salma Babar et al., “Impact of climate change on health in Karachi, Pakistan,” The Journal of Climate Change and Health 2 (May 2021): 100013, doi: https://doi.org/10.1016/j.joclim.2021.100013. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 heatwaves.29F The higher temperatures in the northern areas pose a grave risk to the glaciers and can lead to dangerous glacial lake outburst flooding (GLOF). Frequent landslides and soil erosion often cut off th risk of isolationese areas and put the population at and resource shortages. Map 2.2: Heat Hazard (left) and Population Exposure (right) Related to the extreme heat, Pakistan is experiencing a significant increase in the frequency and severity of droughts. It ranks 43rd among countries in drought risk.30F Droughts severely affect food security and frequently warrant humanitarian relief efforts in vulnerable districts throughout the country. In January 2019, 3 million people in Sindh and 1.8 million in Balochistan were impacted by moderate to severe droughts when annual precipitation dropped by 24.4 percent relative to the expected rainfall. The problem is longstanding but has become more severe in recent times. Two decades earlier, from 1999 to 2001, consecutive droughts resulted in crop failure, mass famine, and livestock starvation, causing US$247 million worth of damage. Climate models project that drought events in Pakistan are likely to intensify in frequency. Drought stress, felt across the country, generates immediate health, income, and food security risks. Map 2.3 shows the percentage of years during which at least 30 percent of agricultural land experienced drought stress over the two cropping seasons, Kharif (April–June) and Rabi (October–December). Although the geographic footprint of drought stress is largest in Punjab because of the concentration of both agricultural activity and population, the frequency of large-scale droughts is considerably higher in Sindh and Balochistan. In Balochistan, this frequency is higher during the Kharif season, whereas in Sindh, it is higher during the Rabi season, when canal irrigation is less available as an alternative to rain. Immediate drought impacts come from declines in crop yield and livestock productivity, which threaten the incomes of agriculture-dependent households and, broadly, food security for Pakistan. Further, the resulting land degradation and the decline in groundwater reserves can increase other water stress-related risks, particularly the availability of safe drinking water. The WBGT measures the heat stress caused by direct sunlight to people in a local area, taking into account not only the temperature but also the humidity, sun's angle, cloud cover, and wind speed. It indicates the apparent, not the thermometer, temperature outside and therefore tells you how stressful the conditions are. World Bank and Asian Development Bank, Climate Risk Country Profile: Pakistan (Washington, DC and Manila: The World Bank Group and the Asian Development Bank, 2021), https://openknowledge.worldbank.org/handle/10986/36372. World Bank and ADB, Climate Risk Country Profile: Pakistan. Kisan Dilip Algur, Surendra Kumar Patel, and Shekhar Chauhan, “The impact of drought on the health and livelihoods of women and children in India: A systematic review,” Children and Youth Services Review 122 (March 2021): 105909, doi: https://doi.org/10.1016/j.childyouth.2020.105909. Sadia Mariam Malik, Haroon Awan, and Niazullah Khan, “Mapping vulnerability to climate change and its repercussions on human health in Pakistan,” Globalization and Health 8, no. 31 (2012), doi: https://doi.org/10.1186/1744-8603-8-31. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT Map 2.3: Drought Hazards for Agricultural Land during the Kharif (left) and Rabi (right) Cropping Seasons Flood-related infrastructure and other asset losses remain high. Pakistan has been experiencing significant pluvial and fluvial flooding, notably the 2022 floods, with widespread impacts on life and livelihoods, infrastructure, settlements, education, and the rural economy. The extent of the associated damage to infrastructure, crops, and livestock, and mortality and morbidity varies substantially with water depth, land use, and population density. Map 2.4 shows the spatial distribution of flood-related impacts on built-up assets and agricultural land. The largest exposure of agricultural land to floods is in the floodplains of Punjab and parts of Sindh. Map 2.4: Expected Annual Impact of Floods on Built-up Assets (left) and on Agricultural Land (right) World Bank and ADB, Climate Risk Country Profile: Pakistan. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 2.2 Economy-wide impacts of selected physical climate risks Damage induced by climate-related extreme events will likely have economy-wide impacts on growth, fiscal space, employment, and poverty. Global warming and extreme events affect economic activity through multiple transmission channels: impacts on lives, on infrastructure and assets, and on livelihoods, which can result in lost economic growth, worsening poverty and longer-term threats to human capital and productivity. Existing macro models can help assess the expected scale of such events, despite their limitations in capturing the full range of potential impacts, direct and indirect. It should, however, be borne in mind that because of high future uncertainty and the limitations of current models, any economy-wide climate impact assessment will be incomplete, especially since projections include events that may occur decades from now. Therefore, model results are likely to show averages that may very well represent lower bound averages of expected climate damages. The CCDR employed two climate macroeconomic models, MFMod and E3ME, to evaluate the potential impacts of the selected climate threats on infrastructure, agriculture and labor productivity, and their follow-on effects on growth, employment, fiscal stress, and poverty. The two models differ in their structure and therefore in the way that transmission channels are modeled (see more details in Annex 2: Climate Macroeconomic Modeling Methodology and Assumptions). Figure 2.1: Real GDP Losses from Climate Damage 0 % change from baseline -2 -4 -6 -9 -10 2025 2030 2040 2050 2025 2030 2040 2050 2025 2030 2040 2050 Optimistic (MFMod) Intermediate (MFMod) Pessimistic (MFMod) 0 -2 % change from baseline -4 -6 -9 -10 2025 2030 2040 2050 2025 2030 2040 2050 2025 2030 2040 2050 Optimistic (E3ME) Intermediate (E3ME) Pessimistic (E3ME) Flood impact on Heat impact on Flood impact infrastructure agriculture and livestock labor productivity and health Figure 2.1 shows predicted GDP losses for three scenarios—optimistic, intermediate, and pessimistic—across the two models using three transmission channels: flood impact on selected capital stock and infrastructure, heat impact on agricultural crops and livestock, and heat impact on labor productivity and health. A consideration of these selected climate threats from heat, droughts World Bank and ADB, Climate Risk Country Profile: Pakistan. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT and floods suggests a loss of up to 9 percent of GDP by 2050 in the pessimistic scenario, relative to business as usual (BAU), which models counterfactual annual GDP growth at a steady 4% till 2050, assuming no further change in climate. The magnitude of damages varies considerably across the three climate scenarios considered. In the optimistic scenario, GDP is projected to fall by 4.5-6.5 percent, under MFMod and E3ME, respectively, relative to BAU. In the pessimistic scenario, GDP is projected to fall by 7 to 9 percent by 2050, under MFMod and E3ME, respectively. These are sizeable impacts, given that the models consider only selected threats and transmission channels. It is also important to highlight that the most severe instances of climate damage, relative to baseline, are expected to increase exponentially after 2050. In the intermediate to pessimistic scenarios, multiple climate hazards are likely to occur simultaneously, compounding the direct and indirect risks as economic shocks cascade. These complex and nonlinear interactions cannot be fully captured because of the limitations of the models. A focus on extreme scenarios magnifies these impacts and highlights the importance of heat related impacts on labor productivity, crop loss and health. To get a sense of what adaptation measures the country should focus on, Figure 2.2 assesses projected climate damages from three extreme pessimistic scenarios: wet, dry, and hot (as discussed in Annex 2). The effects of heat on labor productivity and health drives the decline in GDP compared to BAU. These shocks account for up to 6 percent of the loss in GDP by 2050. The impact of heat on crop loss and livestock accounts for up to 3 percent of GDP loss by 2050. Floods destroy physical capital and infrastructure, which triggers cascading effects on labor productivity. This accounts for up to 1 percent of GDP loss by 2050. In E3ME, the magnitude of the impact of the three shocks is larger than in MFMod, specially for the pessimistic hot scenario. This reflects the differences in the models. For example, E3ME can capture the impact of international trade better. Crop loss leads to higher domestic food prices, which leads to more imports and less export of food, which creates a larger crop loss related decline in GDP. Figure 2.2: Real GDP Losses from Climate Damage Extremes 1 0 -1 % change from baseline -2 -3 -4 -5 -6 -7 -8 -9 -10 2025 2030 2040 2050 2025 2030 2040 2050 2025 2030 2040 2050 Optimistic-wet (MFMod) Intermediate-dry (MFMod) Pessimistic-hot (MFMod) 1 0 -1 % change from baseline -2 -3 -4 -5 -6 -7 -8 -9 -10 2025 2030 2040 2050 2025 2030 2040 2050 2025 2030 2040 2050 Optimistic-wet (E3ME) Intermediate-dry (E3ME) Pessimistic-hot (E3ME) Flood impact on Heat impact on Flood impact infrastructure agriculture and livestock labor productivity and health PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 Breaking down the aggregate GDP decline by sector indicates much larger effects on agriculture and industry compared to services. XF According to Figure 2.3, under the E3ME model, if global climate actions are delayed, sectoral GDP in both agriculture and industry could decline by 7–8 percent by 2030, and by as much as 17–18 percent by 2050. In contrast, the services sector, which is impacted through indirect income and saving losses, that translate into lower investment levels, declines by 4 percent by 2030 and 11 percent by 2050. Sectoral declines are more moderate in MFMod since the model assumes the economy returns to full equilibrium after 3–5 years, whereas in E3ME, structural unemployment of both labor and capital is possible over the long run. Figure 2.3: Sectoral Impacts of Climate Damage (Pessimistic Scenario) 0 -10 % change from baseline -20 -30 -40 -50 2025 2030 2040 2050 2025 2030 2040 2050 Pessimistic (MFMod) Pessimistic (E3ME) Agriculture Industry Services Household poverty is expected to decline over time, but even a 9 percent decline in GDP by 2050 is enough to stall poverty reduction, with disproportionate impacts on rural households. As shown in Figure 2.4, under BAU, based on historical trends, poverty is expected to continue to fall, declining from 34.4 percent to 25 percent by 2040, and then to 19 percent by 2050. Figure 2.4 also highlights the disparities across rural and urban households. Under BAU, this disparity between rural and urban poverty continues. By 2030, the urban poverty rate is expected to be half that of rural areas. By 2050, urban poverty is projected to decline further, falling to 10 percent, while rural poverty remains in the 25–28 percent range. Under a pessimistic climate scenario, however, the decline in both urban and rural poverty slows down significantly, and by 2040, under E3ME, there is no further decline in poverty as climate damages starts to intensify. This is more the case for rural poverty, where there is virtually no poverty decline between 2020 and 2050 under the E3ME model. For the agriculture sector, the macroeconomic models capture only livestock, which constitutes only half of the sector's total GDP. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT Figure 2.4: Impact of Damage on Household Poverty Rate in the Pessimistic Scenario Compared to the Baseline MFMod E3ME 50 50 40 40 30 30 20 20 Poverty rate (%) Poverty rate (%) 10 10 0 0 2030 2040 2050 2030 2040 2050 Rural–baseline National–baseline Urban–baseline Rural–Pessimistic National–Pessimistic Urban–Pessimistic 2.3 Damage from water insecurity The use of water for non-agricultural purposes is likely to increase significantly with climate change. Under a high-growth (4.9 percent per year) and high-warming (3°C by 2047) scenario, water demand is projected to increase by almost 60 percent, with the highest rates of increase coming from the domestic and industrial sectors. Climate warming will account for up to 15 percent of this increase in demand. This heightened demand will result in unintended consequences that deprive downstream areas of water rights. The competition among sectors will necessitate inter-sectoral tradeoffs that will likely be made at the expense of water for agriculture. It is projected that, in the next three decades, about 10 percent of all irrigation water will need to be repurposed to meet non-agricultural demand.38F Freeing up 10 percent of irrigation water without compromising food security will be a complex challenge that will require substantial policy reforms to incentivize water conservation and increase water use efficiency in the agricultural sector and a shift away from water thirsty crops as well as better environmental management. The projected costs of a forced reallocation of water out of agriculture, to meet non-agriculture demands, without such steps, could reduce GDP in 2047 by 4.6 percent. The losses projected here are thus the costs of forced reallocation of water to serve other urgent needs, including allocations for WASH and urgent environmental flows to sustain critical ecosystem services. See William J. Young et al. Pakistan: Getting More from Water (Washington, DC: World Bank Group, 2021), https://openknowledge.worldbank.org/handle/10986/31160; and Stephen Davies and William Young, “Unlocking Economic Growth Under a Changing Climate: Agricultural Water Reforms in Pakistan,” in Water Resources of Pakistan: World Water Resources, vol. 9, ed. M.A. Watto, M. Mitchell, and S. Bashir (Cham, Switzerland: Springer, 2021), PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 Box 2.1 Precipitation Changes and Water Availability Snow and glacial melt and rainfall are the main contributors to river flow in Pakistan, and account for about 70 percent of groundwater recharge. Precipitation models show great variation in projected climate impacts. In the past, the large fraction of river runoff coming from glacial melt (about 40 percent) during peak summer months was considered a buffer for this uncertainty. Till the middle of the 21st century this is expected to continue—with some models projecting increased river ows due to higher melting under both RCP 4.5 and RCP 8.5. However, recent modelling work shows that (i) a much larger component of “melt water” is snow (both on land and on ice)—accounting for about 73 percent of river runoff—while only 3 percent comes from exposed glacial ice (EGI); and (ii) that due to increasing temperatures there will be a shift toward more liquid precipitation—that is, more rain instead of snow. Taking these ndings together, it is likely that seasonal river ow patterns will change so that the western rivers rise earlier than usual to align with winter rainfall in the upper Indus Basin, but reduced snow may mean that early summer temperatures are not suf cient to generate runoff from EGI, leading to low river ows at the start of the Kharif season. Source: A.F. Lutz, W.W. Immerzeel, A.B. Shrestha, and M.F.P. Bierkens, “Consistent increase in High Asia's runoff due to increasing glacier melt and precipitation.” Nature Climate Change 4 (2014): 587–592, doi: https://doi.org/10.1038/nclimate2237; Richard L. Armstrong et al., “Runoff from glacier ice and seasonal snow in High Asia: separating melt water sources in river flow,” Regional Environmental Change 19 (2019): 1249–1261, doi: https://doi.org/10.1007/s10113-018-1429-0 2.4 Damage from air pollution Air pollution shortens the average Pakistani's life expectancy by 4.3 years, relative to what it would have been if the WHO guideline was met. The most harmful emissions are fine particulate matter, or PM2.5, and NOX. Pakistan's PM2.5 concentrations levels, on average, are estimated at 49.5 µg/m3, five times higher than the WHO's recommended limits, and pose a serious health hazard.41F The left side of Map 2.5 highlights the concentration of PM2.5 in regions with high agricultural and industrial economic activity, mostly in the Punjab and Sindh. The right side shows population-weighted exposure at the district level. In the highly urbanized cities, especially Lahore, Karachi, and Peshawar, more than 1 million citizens are at increased mortality risk from air pollution. XF Map 2.5: PM2.5 emissions (left) and district-level population exposure (right) Air Pollution Air Pollution Fine particulate matter Increased mortality due (PM2.5) to HIGH air pollution [PM2.5] Mean 1998-2019 Mean 1998 - 2019 [µg/m3] Administation level 2 [Population] Air Quality Life Index, Country Spotlight: Pakistan (2022), https://aqli.epic.uchicago.edu/country- spotlight/pakistan/#:~:text=Pollution%20Ranking&text=Pakistan%20is%20today%20the%20world's,(WHO)%20guideline%20was%20met. Air Quality Life Index, Country Spotlight: Pakistan. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT Damage from air pollution is estimated to impose an additional loss of 6.5 percent of GDP per year. Pollution-related economic losses are assessed through two channels: (a) pollution-attributable GDP losses associated with mortality and years lived with disability43F and (b) premature mortality using the value of a statistical life.44F Addressing air pollution would bring significant climate co-benefits because the associated pollutants (for example, methane and black carbon) are also potent global- warming agents. 2.5 Aggregated impact of Figure 2.5: Aggregated impact on GDP climate and environmental associated with climate and environmental risks threats by 2050 The combined risks from the intensification Optimistic scenario Pessimistic scenario of climate change and environmental 0 degradation, unless addressed, will further aggravate Pakistan's economic fragility; -6.5% and could ultimately reduce annual GDP by -5 -9.0% % change from baseline 18 to 20 percent per year by 2050, based on the optimistic and pessimistic scenarios, -4.6% respectively. Between 6.5 and 9.0 percent -10 -4.6% of GDP will likely be lost to climate change (the optimistic and pessimistic scenarios, -6.5% -15 respectively) as increased floods and heatwaves reduce agriculture and livestock -6.5% yields, destroy infrastructure, sap labor -20 productivity, and undermine health. Additionally, water shortages in agriculture could reduce GDP by more than 4.6 percent, -25 and air pollution could impose a loss of 6.5 percent of GDP per year. This is a simplified High Temperatures & Floods view that aggregates the modeled impacts of selected climate threats, water insecurity, Water Insecurity and air pollution on real GDP. However, the above modeling exercise does highlight the Air Pollution potential magnitude of impacts, laying out some transmission channels. That the risks and possible impacts are a very real threat to Pakistan's sustainable and equitable growth path has been demonstrated by the immediate and likely longer-term costs of the tragic floods of 2022. India State-Level Disease Burden Initiative Air Pollution Collaborators, “Health and economic impact of air pollution in the states of India: the Global Burden of Disease Study 2019,” Lancet Planet Health 5, no. 1 (January 2021): e25-e38, doi: https://doi.org/10.1016/S2542- 5196(20)30298-9. See Urvashi Narain and Chris Sall, Methodology for Valuing the Health Impacts of Air Pollution: Discussion of Challenges and Proposed Solutions (Washington, DC: World Bank Group, 2016), https://openknowledge.worldbank.org/handle/10986/24440; and Organization for Economic Co-operation and Development, Mortality Risk Valuation in Environment, Health and Transport Policies (Paris: OECD Publishing, 2012), doi: https://doi.org/10.1787/9789264130807-en. The VSL does not represent the value of individual lives. Rather, it is a measure of the rate at which individuals are willing to exchange money to reduce small risks of death within a certain period. This concept is used in benefit-cost analysis to assign a monetary value to averted mortality due to a carbon price policy. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 3. CLIMATE CHANGE POLICY, INSTITUTIONS AND REGULATORY FRAMEWORK 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 3. CLIMATE CHANGE POLICY, INSTITUTIONS AND REGULATORY FRAMEWORK 3.1 Governance and policy for climate change Globally, a gradual but observable evolution is taking place in the governance, policy, and political economy of climate change as more and more countries and international actors gain awareness that climate change, fundamentally, is a multiplier of environmental threats and therefore needs to become a central component of both global-, national- and subnational-level development policy. The structural shortcomings in governance and policy in Pakistan that were highlighted in Chapter 1 particularly constrain the country's capacity to respond to climate challenges. Part of Pakistan's challenge is a lack of consistency and continuity within the policy space. Policies, budgets, and programs related to climate risk have been subject to changing political currents. The result is that, although climate-change issues have indeed featured in Pakistan's overall development policies since the 2012 National Development Strategy (NDS), actual specific actions or implementation steps have been lacking. The first National Climate Change Policy (NCCP 2012) provided guidelines for developing national adaptation and mitigation plans across sectors, but in practice, it had little impact on sectoral programs. Three years later, in its first Intended Nationally Determined Contribution (INDC 2015),46F Pakistan made a handful of very limited commitments to mitigation and adaptation but has not moved significantly beyond that point. One reason is that, for several years, government ownership of climate change policy and responsibilities for action has been fragmented because it has shifted between several different institutions and levels, tossed from one agency to another, with blurred lines of responsibility and weak forms of accountability. The institutions that were meant to be established under the 2017 Climate Change Act, for example, have never come into existence, partly because of the lack of technical capacities, financial resources, and an institutional framework. In recent years, however, the government has assumed a strongly proactive stance toward climate change, and as a consequence, climate change-relevant policy is being strengthened. Despite its infancy, the five-year-old Ministry of Climate Change (MoCC), established in August 2017, has already assumed several major responsibilities, and gained oversight of key functions of environmental action and disaster risk management. Provincial governments, which are closer to rural and poorer subpopulations, are also by and large committed to addressing the adverse impacts of climate change. In 2021, a revised NCCP47F was launched, linking climate action and economic growth, with a strong focus on mainstreaming and integrating climate change policy with other policies. There have been several other meaningful developments. For example, a number of new sectoral policies that support decarbonization effort have been adopted. For instance, the 2019 Alternative Renewable Energy (ARE) Policy aims at creating an environment and framework for sustainable growth of Pakistan's ARE sector. The promotion of energy efficiency and conservation are now supported by the Strategic Plan for Energy Efficiency & Conservation (2020–2023), and the 2019 National Electric Vehicle Policy (NEVP) for 2020–202548F is promoting the development of the transport supply chain (for example, reduced import duties on batteries and charging equipment) and the use of electric vehicles (EVs). Taken together, these committed initiatives, reforms, and policy changes clearly signal a new momentum toward taking fuller ownership of the climate change challenges and crises the country currently faces. United Nations Climate Change, Nationally Determined Contributions Registry (2021), https://unfccc.int/NDCREG. Government of Pakistan, Ministry of Climate Change, Policies: Final Updated National Climate Change Policy (2021), http://www.mocc.gov.pk/Policies. Government of Pakistan, Ministry of Climate Change, Policies: National Electric Vehicle Policy (2019), http://www.mocc.gov.pk/Policies. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 It is crucial that Pakistan sustain this momentum toward implementing transformative policy actions that simultaneously address both development and climate challenges. To strengthen public engagement, national discourse, and hence official accountability, the benefits of these comprehensive policy shifts need to be better explained and conveyed to the public. The combination of a favorable political economy and increasing awareness—both within the government and in the broader society—of the risks, reality and gravity of climate change suggests that Pakistan is ready to move to a new level of commitment and action on climate threats. The updated Nationally Determined Contributions (NDC 2021), presented at COP26 in Glasgow, bear witness to this high-level commitment. It is hoped that this trend will be sharpened by recent events, particularly the droughts and floods of 2022. Nonetheless, risks remain owing to the tightening fiscal space and the country's pattern (at least in the past) of frequent and discontinuous political transitions. There is also the risk that the challenges of the environment and climate change could outpace and overwhelm the implementation of many governance reforms. These risks underline the need to tie environmental and climate actions closely into the green-growth agenda in order to bring sustainable and broad-based benefits, including improving both human and natural capital. In tandem, there is a critical need to strengthen both public engagement and official accountability. Which levels of government have what mandate for climate action, and who should be held accountable for what, need to be clarified. XF 3.2 Climate change commitments Pakistan's updated NDC 2021 represents a paradigm shift toward an inclusive, innovative, whole-of- economy approach to tackling climate change challenges through targeted adaptation and mitigation actions. The high-priority adaptation actions include (i) the Recharge Pakistan Program (reducing flood risk and enhancing water recharge at six sites in the Indus Basin, building the resilience of 10 million people, and strengthening vulnerable ecosystems) and (ii) expanding protected areas from 12 percent of Pakistan's geographical area to 15 percent by 2023. Pakistan has committed to unconditionally reducing its overall emissions by 15 percent by 2030, relative to its projected emissions. It has also committed to reducing emissions by an additional 35 percent conditional on the availability of climate finance (see Figure 5.5). High-priority mitigation measures include (i) expanding renewable energy (RE); (ii) greening transportation (30 percent of all new vehicles sold in Pakistan in various categories must be EVs by 2030); and (iii) reducing dependence on coal (there is a moratorium on new coal power plants from 2020 onward, a ban on imported coal, the shelving of plans for two new coal-fired power plants in favor of hydro-electric power, and a focus on coal gasification and liquefaction for indigenous coal). The NDC has committed to continue investments in nature-based solutions (NBSs) such as the Ten Billion Tree Tsunami Program (TBTTP), a four-year project that will have the triple benefits of natural capital restoration, carbon sequestration, and livelihood improvements. There are compelling indications that the government recognizes that its success in implementing the NDC will in part depend on improving the measurement and transparency of climate action achievements, gaps, and needs. To regularly track the implementation status of the NDC in compliance with the Enhanced Transparency Framework—a core component of the Paris Agreement—the government has developed a broader GHG monitoring reporting and verification (MRV) system called RISQ (Representativity Indicators for Survey Quality). This is a web platform for the compilation of a national MRV database, with support from the Global Change Impact Studies Centre (GCISC) under the MoCC. The RISQ platform will be deployed through agreements with key data- providing national agencies. Similarly, efforts are underway to create a national adaptation Monitoring and Evaluation system by developing a roadmap for its future setup, based on a pilot experiment in the agriculture sector. World Bank, Opportunities for a Clean and Green Pakistan: A Country Environmental Analysis (Washington DC: World Bank Group, 2019), https://openknowledge.worldbank.org/handle/10986/32328. Priorities include (i) ensuring greater and more transparent disclosure of environmental and climate data and of data on the health impact of air and water pollution; (ii) strengthening the capacity to engage citizens on climate and environmental issues, urban development, and broader planning processes; and (iii) supporting education and awareness-raising to empower citizens, including schoolchildren, parents, and rural dwellers. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT Box 3.1 Pakistan's Methane Pledge In 2021, Pakistan signed the Global Methane Pledge to curb its methane emissions by 30 percent from the 2020 level (141 million MtCO2e), to about 99 million MtCO2e, by 2030. To achieve this methane emissions target, Pakistan could adopt a mix of investment and policy options across different transition pathways, discussed in Chapter 4. In 2018, methane accounted for 28 percent (or 138.23 MtCO2e) of the total annual GHG emissions of Pakistan. Livestock is the single-largest contributor (99.99 MtCO2e), followed by solid waste (12.53 MtCO2e), wastewater treatment and discharge (8.96 MtCO2e) and rice cultivation (7.83 MtCO2e). According to the IPCC Sixth Assessment Report, methane is a short-lived climate pollutant with a global warming potential (GWP) of 81-83 over 20 years or 27-30 over 100 years, which is more potent than carbon dioxide that has a GWP of 1 regardless of the time period. Therefore, reducing methane emissions as rapidly as possible would be especially effective addressing climate change and air pollution. The government also recognizes that mainstreaming decarbonization, resilience, and green growth across all sectoral and provincial-level programs is vital to enabling climate mitigations and adaptations. Although mainstreaming has, in principle, been government policy for over a decade, until now there has been no institutional mechanism for effecting it across sectors or coordinating the policy between the federal and the provincial governments. To address this, the NDC (2021) propose the development of a National Action Plan (NAP) to provide the framework for mainstreaming medium- and long-term climate-change actions into national sectoral policies, strategies, and programs to enable a coordinated approach among the different tiers of government. Launched in March 2021, the two-year NAP is under preparation through support from the UN Environment Programme (UNEP), with total funding of US$2.7 million from the Green Climate Fund (GCF). It will be developed along with its constituent Provincial Adaptation Plans for each of the provinces. The implementation of the NAP has experienced some delays, but it finally was initiated in August 2022. Furthermore, the government has initiated the process of formulating its long-term, low-emissions development strategy (LT-LEDS or LTS) in response to Article 4.19 of the Paris Agreement and the Glasgow Climate Pact, with support from the 2050 Pathways Platform. 3.3 Institutional frameworks for climate change 3.3.1 Federal-Level Institutions Although Pakistan is one of the few countries that has a dedicated climate change ministry, the MoCC, to date this ministry has had limited influence on outcomes, primarily because of capacity and resource constraints. The MoCC is responsible for climate change policymaking and acts as a facilitator and coordinator, encouraging the mainstreaming of climate-change policies and programs of federal and provincial departments. It is also charged with monitoring progress on international climate-change agreements and accessing funding from the international community. Additionally, it has federal-level oversight of environmental protection as well as disaster risk management. However, because the responsibilities of policy implementation are devolved from the federal government to the provinces (see Section 3.3.2 for further information), the influence of the MoCC is somewhat limited. Overall, although the MoCC has on paper been given an ambitiously configured role, in practice it is poorly placed and inadequately resourced to influence outcomes. It has a limited budget and program execution capability and lacks the weight to lead and coordinate federal ministries and provincial departments. The mainstreaming of climate change actions into sectoral policies, such as through the Planning and Development Departments, might prove more effective, for example, through the incorporation of climate considerations into project and program development during the preparation of the government's Annual Development Plans and Budgetary Framework. Government of Pakistan, Updated Nationally Determined Contributions 2021 (Government of Pakistan, 2021), https://unfccc.int/sites/default/files/NDC/2022-06/Pakistan%20Updated%20NDC%202021.pdf. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 3.3.2 Provincial-Level Institutions Devolution has the potential to enhance provincial and local ownership of climate policies and actions in Pakistan. The government's ambitious devolution scheme was designed to strengthen local ownership and action. The 18th Amendment to the Constitution in 2010 significantly increased provincial autonomy and devolved to the provinces many key service delivery functions. These include education, health, water, sanitation, and solid waste management as well as support to major economic activities such as agriculture, irrigation, industry, and business, together with responsibility for environmental and climate change. Policies are coordinated across the country by the Council of Common Interests, which consists of the Prime Minister and provincial Chief Ministers. Fiscal-transfer decisions are made by the National Finance Commission. However, the process of devolution is still evolving, and there are still major constraints on effective implementation of the committed policies and programs. There are also fiscal challenges: the provinces have very limited revenue-raising capacity, are largely dependent on the federal government for their budgets and have small budgets in comparison to the nature and size of the devolved tasks. Additionally, there is often a lack of coherence between the objectives of the federal and provincial budgets. Inadequate policy coordination between the federal and provincial levels constrains Pakistan's ability to operate as a single, integrated political economy. There are also challenges in managing transboundary issues, such as environmental and water resource management. Institutional and capacity challenges also exist, with weak policy formulation and implementation capacity, especially at the provincial level. The mechanisms and incentives to induce cooperation and joint action, both within the provinces and between the federal and provincial levels, are weak. Taken together, these structural impediments severely undermine the country's ability to design and implement the kind of sustainable green-growth policies that it needs to successfully manage transboundary issues and adopt a coordinated response to climate threats. Additionally, challenges exist in transferring environmental, water, agriculture and climate-change policies and programs from the national level down to the provincial level, and across sectors. With the advent of devolution in Pakistan, the provinces became responsible for sectoral policies and implementation within their respective jurisdictions. As a result, although the MoCC has the overall mandate for climate change policy, each province has its own Environmental Protection Agency (EPA) responsible for environmental policy and programs within that province. This includes climate-change mitigation and adaptation measures. Two provinces have also set up climate-change centers under their EPAs. However, provincial capacity remains weak. In addition, most climate and environment actions require close coordination and coherence across departments within the provincial governments, as well as across provincial boundaries and with federal departments, but the capacity and skill to develop that level of coordination and coherence are lacking. The same applies to the irrigation and agriculture departments. In recent years, nevertheless, three of the country's four provinces—the exception is Baluchistan —have developed specific policies, strategies, or action plans to address climate change, and encouraging examples of provincial action exist under green-growth programs and the national afforestation program. Khyber Pakhtunkhwa's Green Growth Initiative and Punjab's Punjab Green Development Program both provide compelling examples. Both programs include some measure of alignment between provincial and national policies and with the private sector. The cabinet in Sindh recently approved the Climate Change Policy 2022 and set up a dedicated Directorate under the Sindh Environment, Climate Change & Coastal Development Department. The lesson that emerges here is that substantial change can occur under the influence of strong political determination: provincial- level commitment, especially when triggered by real problems such as Punjab's appalling smog, can begin to overcome preexisting institutional constraints and drive the implementation of broad-based environmental action. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 3.4 Current landscape of climate finance The NDC (2021) estimates that, by 2030, the total cost of NDC implementation will reach nearly US$200 billion. It is estimated that the clean energy transition alone will require a total of US$101 billion. The cost of adaptation largely associated with disaster response and recovery is at present hard to gauge—one estimate from the MoCC51F using a top-down approach is about US$10.7 billion a year, with a total estimation of US$85.6 billion for 2022–2030. The PDNA for the 2022 floods has proven that this estimation for disaster recovery needs is sensible, which could potentially rise if no timely and effective adaptation and mitigation measures take place. Chapter 5 will aim to build on this cost estimation, integrate the cost of additional resilience measures across critical sectors, and identify potential financing sources. Overall, public spending on climate actions has been relatively low, but relatively higher at the provincial level. Between 2011/2012 and 2014/2015, actual public spending on climate actions went up from 6.6 to 8.3 percent of total federal and provincial expenditures.52F During the same 3- year period, the average climate-related public expenditure was 6.9 percent (US$4.1 billion out of US$59.4 billion), including both development and current expenditure. Several provinces made significant financial commitments to climate action within a green-growth approach. For example, Khyber Pakhtunkhwa (KP) allocated close to 9.7 percent of its 2014–2015 expenditure and 8.9 percent of its 2015–2016 expenditure to climate-related activities. Punjab allocated 9.3 percent of its 2014–2015 expenditure and 13.7 percent of its 2015–2016 expenditure to climate change-related activities. Green bonds are an increasingly important climate financing instrument worldwide but relatively new in Pakistan and requires macro-fiscal stability as a precondition. In 2021, the Water and Power Development Authority (WAPDA) launched the country's first-ever 10-year green bonds and has raised US$500 million to support hydropower generation. Given the encouraging market response, WAPDA is considering launching additional green bonds. Pakistan may launch additional bonds in other sectors. The Securities and Exchange Commission of Pakistan (SECP) has approved national guidelines for the issuance of green bonds or sukuk53F financing by the corporate sector, that will encourage innovative financing mechanisms in several sectors for both adaptation and mitigation. For the development of the domestic bond market, macro-fiscal stability is a precondition. Considering the current macro- fiscal and external position of the country, its access to global capital markets is likely to remain limited. Although Pakistan has received only relatively low levels of concessional international climate finance, it has received significant climate-related financing from multilateral development banks (MDBs). The main source of international climate finance for Pakistan has been from MDBs, which provided about US$6.4 billion for climate-related investments over the 2015–2020 period. A large share of World Bank lending to Pakistan (44 percent in FY21) is now linked to climate co-benefits, and 50 percent of the portfolio of International Finance Corporation (IFC) is climate-tagged. The role of the private sector is clearly indispensable to meeting the investment needs of NDC commitments, but overall investment level has been low. XF Pakistan's total investment-to-GDP ratio remains around 15 percent, compared to South Asia's regional average of over 30 percent, and private investment has remained at around 10 percent of GDP over the last decade. The ratio of foreign direct investment (FDI) to GDP, at 0.7 percent in 2020, is also low compared to South Asia's regional average of 2 percent, because of an unfavorable investment environment and the elevated perception of risk. In 2019, the total private sector investments from households, corporations, and commercial financial institutions (FIs) in climate actions, mostly in mitigation, was US$1.4 billion, or 0.5 percent of GDP. Aslam Amin Malik, et al., National Economic and Environmental Development Study (NEEDS) (Ministry of Climate Change, Government of Pakistan, 2011), https://unfccc.int/files/adaptation/application/pdf/pakistanneeds.pdf. Pakistan CPEIR (2017). A sukuk is a sharia-compliant, bond-like instrument used in Islamic finance. IFC (2021). Creating Markets in Pakistan: Country Private Sector Diagnostic (CPSD). (Washington, DC: World Bank Group, 2021). https://www.ifc.org/wps/wcm/connect/publications_ext_content/ifc_external_publication_site/publications_listing_page/cpsd-pakistan. World Bank, “Foreign Direct Investment, Net Inflows (% of GDP) – Pakistan” (World Bank website, 2020), https://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS?locations=PK. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 4. PIVOTING THE ECONOMY TO AN INCLUSIVE, RESILIENT AND GREEN DEVELOPMENT PATHWAY 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 4. PIVOTING THE ECONOMY TO AN INCLUSIVE, RESILIENT AND GREEN DEVELOPMENT PATHWAY Pakistan's development challenges and high exposure to climate risks highlight the importance of broad sectoral transitions, in addition to the imperative of strengthening human capital. This chapter proposes three multisectoral transitions to help the country accelerate the achievement of the targets it has articulated under the NDC (2021). The first is a transformation of the agri-food system to make it resource-efficient and climate-resilient. The second transition involves needed changes in urban development to make cities livable and resilient. The third is a shift to domestically sourced sustainable energy and low-carbon transport. There are challenges to each of these transitions but also enormous opportunities for shifting the trajectory of Pakistan's development into a more equitable and sustainable direction, with less macro-fiscal instability, more shared prosperity, and greater resilience in the face of the physical and transitional risks that will come with climate change over the coming decades. The focus overall is on adopting a no-regrets approach. The recommended actions are needed to cope with the development and fiscal challenges the country is already facing and the climate-related damage it is already enduring. These challenges, vividly highlighted by the devastating floods of 2022, will almost certainly intensify this century regardless of the speed at which climate change issues are addressed globally or nationally (?). 4.1 The Need for an Agriculture-Food System Transformation Pakistan's agri-food system is vital to the economy—to growth, jobs, poverty reduction and food security—but is struggling to cope with the pressures of population increase, urbanization, and climate change. The agriculture sector contributes over 40 percent of Pakistan's labor force, including most employed women. It contributes 23 percent to the country's GDP and is the largest source of export earnings. More than 63 percent of Pakistan's people reside in rural areas and are largely dependent on agriculture. Livestock, including pastoral livestock, contributes more than 50 percent of agriculture GDP and about 12 percent of national GDP. It also provides income security for many rural households, especially those with insecure rights to land. Pakistan has the world's fifth-largest beef herd and produces 6 percent of the world's milk supply, but access to animal protein and dairy is both inadequate and highly unevenly distributed. The extreme climate vulnerability of the food system was highlighted in the catastrophic floods of 2022. 4.1.1 Challenges and Opportunities Inefficient and wasteful use of water, environmentally damaging agronomic practices and crops, and inadequately developed value chains have diminished the agriculture-food system's contribution to sustainable growth, poverty reduction, and food security. Distortionary and inequitable fiscal policies, highly unequal land ownership, tenure insecurity, and vested political interests have locked smallholder farmers in low-value, low-nutrition production and hindered the large-scale adoption of improved agronomic practices, crop diversification and water conservation. This, compounded by negligible investment in research, extension, and the development of markets, has resulted in virtually World Bank, “Agriculture, forestry, and fishing, value added (% of GDP) – Pakistan” (World Bank website, 2021), https://data.worldbank.org/indicator/NV.AGR.TOTL.ZS?locations=PK. World Bank, “Rural Population (% of total population) – Pakistan” (World Bank website, 2021), https://data.worldbank.org/indicator/SP.RUR.TOTL.ZS?locations=PK. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 no improvement in seed quality, production methods or farm machinery and technology for years. This disproportionately disadvantages smallholder farmers, who constitute the bulk of farm households, yet suffer from inadequate access to finance and high-quality affordable inputs, and unfair farm gate prices. Smallholder systems have limited resilience in the face of climate and disaster-related shocks. The disproportionate focus on the development of irrigated crop agriculture has also limited investment in the management of rangelands, pastures, wetlands, and marine landscapes, thus limiting their contribution to the agriculture-food system. Livestock accounts for more than half of agriculture GDP and has traditionally buffered the impacts of economic and weather shocks on low-income and land-poor households, but livestock productivity is low. While livestock numbers are increasing at an estimated 3 percent per annum, the sector is ill-equipped to meet the growing demand for animal products sustainably. The genetic pool of Pakistan's dairy animals has been deteriorating and is compounded by poor animal health, limited access to vaccines and veterinary extension services, lack of technical skills among farmers. and inadequate feed. Over 40 percent of livestock feed comes from pastures and rangelands, which are facing accelerating degradation, raising serious concerns about ecosystem integrity and functionality. Rangeland productivity has slumped to just 25–50 percent of its potential, diminishing a wide range of other ecosystem services. Inefficiencies in off-farm value addition and commercialization further impair livestock productivity due to poor aggregation, processing, storage, and farm-to-market transport. The inefficiencies of the agriculture-food system have historically been compensated for by Pakistan's abundant water and arable land, which have thus far enabled the system to keep pace with demand. Agricultural growth has therefore been driven not by technological change or innovation but by the intensification of water, fertilizer, and pesticide use, and by bringing new land under cultivation. This process is rapidly approaching its natural limits. It is under stress from environmental degradation and the increasing need of water and land for non-agricultural uses. Post-harvest losses worsen this wasteful use of resources. Some 35–40 percent of harvested fruits and vegetables, 10–15 percent of cereal grains, and 20 percent of milk never reach the market. Agricultural productivity and poverty reduction statistics reflect these chronic issues. The yields of major crops are 1.5 to 4.2 times below their field potential, and 2.1 to 5.6 times below international best practice. Sectoral growth, at 2.1 percent per year, has been sluggish over the last decade and labor productivity in agriculture has been virtually stagnant over the past three decades. Rural poverty has also declined much more slowly, opening up a large rural-urban poverty gap. At the same time, there is a significant structural shift under way within the sector. As men move to non-farm work, women are taking on more decision-making roles on the farm. This increasing feminization of agriculture is set to pose new challenges unless there is a clear pivot toward providing agricultural services to women, such as training in agronomic practices and technologies, gender-sensitive and female-led extension services, formal land titles, access to credit and markets and, where feasible, machinery that is appropriate for use by women. Climate change has introduced significant new risks into this already unsustainable state of affairs. The prolonged and early heat wave in Spring 2022 sounded an advance warning of the potential impact of rising temperatures on crop yields. The wheat crop across South Asia was seriously impacted. Further, the monsoon caused widespread flooding that washed away precious topsoil and disrupted the growth of Kharif season crops. According to the World Food Programme, a third of all districts are highly vulnerable to the dual threat of recurring food insecurity and the high probability of natural hazards. Over the coming decades, the threat of hydro-climatic disasters is expected to intensify—with uncertain shifts in monsoon onset and duration, attendant floods and droughts, and an increase in the severity and frequency of extreme heat events. This has enormous implications for food and water security. Crop yields are projected to further decline, by between 14 and 50 percent under some climate change scenarios. Climate warming will also add to the already rising demand for water, pushing it to a projected 60 percent increase over current levels by 2047. Livestock productivity is expected to decline further because of reduced water availability, deterioration in fodder and feed quality and quantity, the increased risk of disease epidemics, and increased costs of feed, water, energy, and cooling systems. A further loss of 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT ecosystem services is also likely, while demand for these same services will increase because of population growth, economic growth, and urbanization. The climate projections will impose an additional layer of stress on a chronically underproductive system. To avoid unmanageable levels of water and food insecurity, environmental decline, and deepening poverty, a transformation is necessary. Investment in water management and regenerative and climate-smart agriculture (CSA) practices could reverse the decline in productivity and enhance the viability of the agri-food system by revitalizing the degraded ecosystems on which it depends. This will also build a more equitable sector where smallholder farmers and livestock herders earn more sustainable and higher incomes, and poor urban consumers have better access to a diverse set of foods. The national emphasis on building climate resilience through NBSs provides an entry point to scaling up water management and climate-smart practices, including a shift to more regenerative agriculture practices (RAPs). Regenerative agriculture focuses on improving farm productivity through a range of practices that improve soil health and sequester carbon while producing co-benefits such as increased soil water-holding capacity, hydrological function, biodiversity, and greater resistance to temperature extremes, floods, and droughts. A shift to more climate-smart and regenerative crop and livestock management practices and more diverse and higher-value production systems has the potential to reduce water, soil and air pollution and contribute significantly to reducing GHG emissions. The agri-food sector provides perhaps the strongest case for a development-resilience-mitigation triple win. The needed policy actions to boost productivity and export would deliver broad-based development benefits, enhance equity, and provide climate resilience. They would reduce GHG emissions, including through soil carbon sequestration, and are immediately implementable. To realize these triple wins, Pakistan must pivot away from its current policy practices, which have systematically eroded the system's resilience and development potential. Agriculture and Water: A Wasteful and Environmentally Unsustainable Nexus The annual supply of water will likely remain fixed for the next several decades, but its timing will become more variable because of climate change, and its availability for agriculture will decline with rising non-agricultural domestic, industrial, and environmental demand. At US$0.37/m3, agricultural water productivity in Pakistan is in the lowest decile globally. Irrigation productivity is particularly low for major crops. It is estimated that under a high global-warming scenario (3oC by 2047), agriculture could maintain its current levels of surface water consumption up to 2037. Beyond that, it will have to give up water to meet industrial and domestic needs. The outlook for groundwater is bleaker. Current levels of use in agriculture can be sustained up until 2030 without taking away from other sectors. Further, maintaining the current levels of groundwater overuse in agriculture will limit its role as a buffer in water-scarce and drought years. About one-tenth of current irrigation withdrawals—12 billion cubic meters (BCM)—will need to be reallocated in the next three decades. The performance of the Indus Basin Irrigation System (IBIS) will be a critical lever for that. The services of the IBIS are poorly designed and financially unsustainable. Surface water entitlements are tied to land size, and water is supplied during pre-determined time slots. As a result of chronic water shortages and endemic water theft upstream, the system penalizes farmers at the tail (downstream) end of canals. Further, the irrigation tariff structure provides no incentive for conserving water. The tariff (abiana) is a flat-rate levied per unit of cultivated area and does not account for water consumption or—in Punjab and KP—the crops grown. In Punjab and Sindh, the current estimated annual indirect subsidy to the irrigation sector is about US$66 million: the Sindh government collects only 6 percent of operations and maintenance costs, and Punjab collects 25–30 percent. The resulting deferred maintenance of the system, coupled with the need to modernize the infrastructure, will require annual capital investments of up to US$100 million over the next two or three decades. However, current revenue patterns do not even cover routine maintenance. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 The tariff collection system is archaic and nontransparent. Irrigation departments provide the service and assess the tariff, but it is collected by revenue officials and transferred to provincial revenue departments. The distributional incidence of the collected tariffs therefore remains obscure, raising concerns about inequity. The collection rates of assessed abiana vary from year to year. Overall collection rates have been improving in Punjab: While only 39 percent of assessed charges were collected in FY15, close to 100 percent were collected in FY19, with some year-to-year volatility. In Sindh, collected abiana remains chronically low, reaching just 40 percent in FY20. The supply-driven design and operation of the IBIS infrastructure make it harder to transition to a flexible and demand-responsive service delivery and equitable use-based charges. Without it, crop diversification and CSA could be difficult to scale, especially in areas that depend primarily on surface water. In Punjab, the rigidity of surface water supplies is typically addressed by accessing groundwater, accounting for over 50 percent of irrigation. In the IBIS, these are not independent systems and leakages account for two-thirds of groundwater recharge. Excess supply in some areas causes waterlogging, while shortages in others contribute to depletion. Flexibility in surface water delivery is critical for conjunctive management. There are also distortions in groundwater management. Unsustainable usage is driven by the absence of regulations to limit extraction. The electricity tariff subsidy for tubewells compounds the problem and creates a fiscal sink. Stored groundwater in the Indus Basin is a buffer against low precipitation, unreliable surface water flows, and drought. The need for this will increase with rising temperatures and irregular precipitation patterns, but unregulated pumping is threatening the resource, creating depletion and increased salinity. The fiscal cost to the federal and provincial governments is high—some US$420 million each year. Yet the subsidy benefits only the few, better-off owners of electric tubewells (see more details in Annex 3: Groundwater Irrigation in Punjab). In Balochistan, only a tiny fraction of the population (0.3 percent) benefits, yet the cost of rapidly depleting groundwater levels (estimated at 30-40 feet per year in some areas) is borne by all. Agriculture-linked degradation is pushing water and land resources beyond the threshold of safe use and causing ecosystem decline across landscapes. Some 35 percent of irrigated land is waterlogged and 30 percent highly saline, making it unfit for agricultural production. Uneven, inefficient, and excessive use of synthetic fertilizer, dominated by urea (nitrogen), has culminated in soil nutrient imbalances and low levels of soil organic matter. Additionally, excessive pesticide application (especially for cotton) harms biodiversity and poisons about 500,000 Pakistanis every year. High surface water withdrawals and polluted return flows affect river ecology and reduce the water available for downstream environmental use. The formerly productive delta marine fisheries have been decimated, and the mangrove forests are under threat. The annual cost of environmental damage to the delta is estimated at between US$1 billion and US$2 billion. Marine and inland fisheries could add more value to the agri-food system, but with the degradation of wetlands and marine-coastal ecosystems, the economic potential of these landscapes is diminishing. Unmanaged grazing is impairing the health of rangelands and diminishing a wide range of other critical ecosystem services, including the regulation of water flow, the conservation of soil and biodiversity, protection from land erosion, and carbon sequestration. Rangeland productivity has slumped to just 25–50 percent of its potential, and desertification affects 43 million hectares (ha). Agriculture-to-urban land conversion is a concern in all provinces, driven by poor land-use planning, the low profitability of agriculture, and higher land prices offered by urban developers. It is projected that all agriculture land on the fringes of Lahore will have been converted by 2030, while urban housing in Multan and Hyderabad has replaced more than 7600 ha of cultivated land in the last two decades. This has taken place in the context of a weak land policy framework, poor regulation, and weak protection of the interests of the local people. Costly and poorly targeted subsidies drive the sector's poor performance The agri-food system is awash in inefficient, costly, inequitable subsidies that are an economic burden and create a distorted incentive structure, which plays a significant role in the sector's poor performance. In recent years, direct and indirect subsidy support to agriculture and irrigation in 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT Punjab and Sindh has accounted for about US$2.2 billion to US$2.7 billion in public spending per year. This includes direct subsidy programs, tax relief for inputs, import and export subsidies, and revenue gap financing. Support to wheat production was originally intended to help achieve national self-sufficiency, ensure a steady supply of flour to urban consumers, support poor farmers, and maintain price stability. In practice, it has brought scant benefit to small farmers, has discouraged diversification into higher- value crops, and is a significant drain on fiscal resources. The Government of Sindh spent over US$60 million in 2019–2020 to support wheat production (265 percent of the province's investment in agriculture that year). Similarly, the Government of Punjab spent over US$454 million in 2020–2021 (407 percent of the province's investment in crop agriculture that year). The wheat procurement system is regressive because it benefits mainly large and medium farmers, commercial banks, and millers. Cumulative outstanding debt from wheat commodity operations is at nearly U$4.5 billion—creating a circular debt-like situation. Poor smallholders benefit little because most of their production (about 95 percent in Sindh, for example) is for subsistence. The procurement system also incurs losses through poor storage, which costs Punjab an estimated US$1.6 billion annually. Wheat remains the primary cereal crop, so its production inevitably absorbs large subsidies. Given its dietary importance, steady growth in wheat output will remain necessary to maintain food security. However, this needs to be done through substantial improvements in productivity and less intensive use of chemical inputs, land, and water, rather than the further expansion of conventional production methods. At the same time, for sustained improvements in human capital, a shift is needed in diets and agricultural production toward a more diverse and nutritious basket of foods, including vegetables and fruits, which could contribute to both higher productivity and greater health. Support to sugar production is equally fraught with inefficient and inequitable distortions. The benefits of public intervention in the sugar sector accrue almost entirely to sugar mills and large farmers, yet the costs are borne broadly by smallholder farmers, urban consumers, and the environment. High import duties help keep domestic sugar prices higher than international market prices; export subsidies to sugar farmers have the effect of transferring virtual water out of Pakistan; and licensing restrictions prevent the free entry of new millers which, coupled with mobility limitations, binds farmers to sell to the regional mill under quasi-monopoly conditions. These de facto regional monopolies lead to high farmer-to-factory ratios (on average 6000–8000 farmers per mill), causing long wait times. Excessively long intervals between when sugarcane is harvested and crushed—up to 6 days— lead to post-harvest loss. The embedded environmental cost of these losses is high because sugarcane has the highest per hectare water requirement and fertilizer use. The social cost of it is compounded by the public health footprint. Pakistan has the highest rate of diabetes globally. The consumption of sugar, and processed foods containing sugar, has risen significantly across the country, at the cost of more diverse, more nutritious foods. Fertilizer subsidies are another problematic practice. Excessive fertilizer use in agriculture is driven by distortionary and outdated policies that were initially introduced to lower production costs and food prices. Today, they deliver negligible monetary benefit to households, degrade resources, generate high GHG emissions, and impose a heavy fiscal burden on the government. This is expensive—about US$1.1 billion per year through subsidized natural gas, tax relief, and import subsidies—yet households receive a fraction of the benefit (US$4.70 per household per year). This has crowded out the space to promote the balanced and efficient use of chemical fertilizers as needed, and to promote natural alternatives that are less environmentally harmful, such as biofertilization based on recycled animal, human and household organic waste, and crop residues. A shift away from these inefficient, costly, and inequitable subsidy regimes is critical for sectoral transformation and strengthened resilience of systems and households. There are deep political and policy challenges for such a reform to succeed. A range of vested interests benefit from the status quo. Land ownership remains doggedly unequal, and tenancy and labor laws are weak and poorly enforced. Typically, Provincial Food Departments and Pakistan Agriculture Storage and Services Corporation Limited (a state-owned company) purchase a pre-determined quantity of wheat at a support price. A fraction of it is stored as a strategic reserve and the remaining is released to flour mills at a subsidized rate. This unprofitable arrangement is supported mostly through borrowing from commercial banks. This is around PKR 800 billion. The average exchange rate was US$1 = PKR 177.81 in FY21/22, according to the IMF. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 This leaves the bulk of rural households with uncertain land access and extreme economic dependency. Large landowners use land to buy political leverage, with little investment in their land or in the development of rural areas, entrenching poverty and human capital deficits and deepening societal divides. Industries linked to this system benefit from the lack of options for smallholder farmers and poor rural households. In the meantime, much can be done to improve both development outcomes and climate resilience by starting with a reorientation of the policy and investment focus. For instance, small-scale pilots have been initiated to test specific regenerative-farming methods and some have begun to show very encouraging results, though more research is needed (see more details in Annex 4: Regenerative Agriculture Practices in Pakistan). There is now a need to systematically test methods and scalability through carefully performed on-farm experiments. Regenerative agriculture can greatly strengthen the long-term resilience of agriculture to climate change. 4.1.1 Key Policy and Investment Recommendations This policy package for transforming agriculture-food system consists of four higher-level policy recommendations and several suggested priority actions. Policy Recommendation #1: Repurpose existing subsidies to introduce e ciency and use freed up resources to provide support to vulnerable subsistence farmers and remove barriers to transformative, climate-smart, on-farm investment and value-chain improvements. The subsidy structure across federal and provincial governments should be revised to prioritize direct and targeted subsidies to poorer farmers to promote resilient farming practices. The wheat support system needs to be gradually phased down. This will reduce direct financial costs to the government and indirect economic losses to the economy, free up fiscal space, arable land, and irrigation water, and create the enabling economic environment needed to induce large-scale crop diversification and CSA. Freed-up fiscal resources could be invested to improve wheat production systems and value chains. Modelling work indicates that removing support to wheat production could free up 1.4 BCM of irrigation water per year. This could be used to grow higher-value crops to substitute for agricultural imports for which demand is rising. Furthermore, with improved agronomic practices and seed quality, total wheat production could increase through gains in productivity, with much lower land and water use. Public support for sugar cane needs to be restructured. The key entry point is the removal of licensing restrictions that prevent the entry of new mills. Proposed by the Sugar Sector Reform Committee and the Ministry of Planning Development and Special Initiatives, this would reduce the wasteful post- harvest losses induced by monopsony, which allows a handful of buyers to control the market and prices. A second entry point is the removal of import duties and export subsidies. While some of these changes would benefit smallholder farmers, the removal of import duties and export subsidies could also induce some exit out of sugarcane toward higher value, more environmentally beneficial crops. Switching to less environmentally harmful alternatives such as sugar beets to supply the food, confectionary, sweets, and soft-drinks industries would ease the transition and may reduce demand- side resistance to reform. The natural gas subsidy for chemical fertilizer production urgently needs to be phased down and reconfigured to subsidize chemical fertilizer purchases by smallholder farmers and to promote a shift to natural fertilizer alternatives. Channels for this are already at an advanced stage of development—for example, Kisan/Hari credit cards.64F This would also provide an entry point to Kisan/Hari Cards are issued to smallholder farmers. They use the cards to access various agricultural subsidy programs and receive relief payouts. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT small farmers would also enable governments to swiftly make emergency relief cash payments in the aftermath of disasters, such as the 2022 floods. Other options include subsidies for credit and risk sharing to encourage commercial banks to lend directly to small farmers for CSA, including new regenerative practices, and to support private sector investment to fill value-chain investment gaps. Subsidy and risk-sharing interventions would need to be carefully targeted at identified market failures and subjected to adequate oversight and monitoring arrangements to prevent leakage, capture, waste, or broader market distortions. The political economy of this reform would need to be managed through compelling, and consistent communication that lays out the rationale and imperative of potential benefits to incomes, productivity, climate resilience and adaptation in agriculture, water availability and safety, and soil restoration and conservation. Key to this will be engagement with local communities. This would require an enabling environment for the adoption of new agronomic practices, the subject of the next recommendation. Policy Recommendation #2: Support the sustained adoption of CSA and regenerative agriculture practices. Improving research, extension services, and access to credit, machinery, and technology can mitigate the risks and uncertainties of adopting new CSA and RA technologies and practices. It is expected that smallholder farmers would benefit from adopting CSA and RA practices, which focus on soil restoration, but they will need support and incentives to increase uptake. Policy coherence is needed to ensure that research, extension services, and access to finance and to appropriate technology and machinery converge toward the objective of creating a high-productivity, climate- resilient agriculture and water sector that can reduce GHG emissions and ensure natural capital conservation. This would offer the opportunity to strengthen access to resources for women and smallholder farmers. Strengthening the enabling environment for CSA and RA practices adoption among smallholder farmers as key partners in adaptation and resilience requires a two-pronged approach. First, a knowledge-building agenda needs to be prioritized. The initial focus should be on (i) action-research conducted jointly with farmers; (ii) modernization of extension services, including farmer-to-farmer and e-extension services, advice by private sector providers, and ICT-based access to information. Second, there needs to be improved coordination across research projects and adequate dissemination in the public and private sectors to support the uptake of CSA and RA practices. Third, an existing organization should be tasked or, alternatively, an independent research coordination board with a single-point agenda should be established to promote and scale up CSA and RA practices. This organization can set the agenda for research on localized and context-specific issues such as alternatives for field preparation to support the regeneration of soil health and reduce crop residue burning; alternate wetting and drying rice management to achieve emission reductions; and forage seed multiplication or customized livestock-feeding rations, among others. Participatory multi-stakeholder forums should be strengthened to improve the uptake and promotion of CSA and RA practices. This can include boosting the membership of smallholder and landless farmers in unions and cooperatives and building relations across value chains through producer groups that bring together farmers, service providers, research institutes, and commercial and corporate businesses for information exchange, capacity building, entrepreneurial support, market access, and technology uptake. These platforms can promote contracts and licenses that make CSA and RA practices binding. This approach has already shown impressive results in Pakistan—for example, the Better Cotton Initiative (BCI) has helped 400,000 BCI-licensed farmers (30 percent of cotton farmers) to save 15 percent of irrigation water, reduce pesticide use by 10–15 percent, and cut GHG emissions in half. For example, early-warning systems; remote sensing and drones; digital agricultural extension services; and tech-enabled operating system for the agriculture and food value chain. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 The scaling up of climate-smart practices in dairy and pastoral systems, including improving access to markets, can be supported by participatory approaches and institutional collaboration interventions that aim to improve productivity and reduce the sector's GHG emissions intensity. Productivity in smallholder and semi-commercial livestock systems can be increased by (i) strengthening disease control to reduce morbidity and disease outbreaks; (ii) supporting the breeding of more productive and disease-resistant animals; (iii) improving access to adequate nutrition and feed to reduce emissions by enteric fermentation, and (iv) strengthening the enabling environment to facilitate the adoption of CSA and RA practices, for example, through participatory approaches. In pastoralist systems, community strengthening, and the development of grazing management plans could support the uptake of CSA and RA practices, and the restoration on communal lands. This needs to be supported by capacity strengthening, planning, and coordination amongst relevant provincial departments. Finally, improving market access, particularly for small- and medium-sized producers, and reducing post-harvest losses, will also be important to reduce emissions from the livestock sector. Policy Recommendation #3: Improve and modernize irrigation and drainage to provide climate-resilient, predictable, and exible services in response to changing demand. IBIS infrastructure and operations need to be modernized to make groundwater use sustainable, reduce distributional losses and inequity, facilitate rapid surface water reallocations, respond to largescale shifts in cropping patterns without increasing water withdrawal, and enhance drainage capacity to prevent waterlogging and flood water retention in cultivated areas. The immediate objective should be to make the surface-water system more demand-responsive to allow for better conjunctive management of surface water and ground water. There is a need to ensure alignment with and support the implementation of the Fourth National Flood Protection Plan for 2015-2025 (NFPP- IV), while considering the operationalization of the recently adopted NCCP 2021, National Water Policy (2018), and National Food Security Policy (2018). This requires investment in three key areas. First, investments in infrastructure to improve hydraulic control and flow measurement across all tiers of the distribution network, together with the automation of the outlets that supply watercourses and farms, and the construction of water storage both within the distribution system and on-farm. This must be complemented with adequate development and maintenance of drainage infrastructure, especially in low-lying and flood-prone areas of the lower Indus Basin. Second, improvements in water allocation practices, with a flexible system of surface water withdrawals at barrages to ensure a balance between demand and environmental flow requirements. Other factors to improve allocation practices must include the monitoring of groundwater and the modeling of surface-groundwater interactions to rationalize water allocations between head and tail reaches of canals, and remote-sensing to measure in-field crop coverage and crop water requirements. Third, improvements in water measurement, billing, and collection, starting with the digitization and automation of abiana collection and, as monitoring and control over distribution increases through modernization, moving toward volumetric charging. Abiana reform should also include ring-fencing collection responsibility and delegating the control of revenue to the irrigation departments. For groundwater, the ongoing development of a tariff system for domestic and industrial users (notably in Punjab) needs to extend to agriculture users as well. A transparent and efficient tariff system, coupled with improved service quality, could create space for higher tariffs using a structure that is progressive and equitable and has room for differentiated rates in order to incentivize climate-smart irrigation practices. The first three sets of policy recommendations primarily address issues in irrigated crop agriculture, even though the natural capital conservation, improved productivity, and increased fiscal space will have impacts beyond just crop production. The final recommendation goes beyond irrigated crops and looks at other important but neglected aspects of the agri-food system. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT Policy Recommendation #4: Strengthen ecosystems and landscape restoration. Ecosystem and landscape restoration needs to be a policy and investment priority. Without it, the natural capital required to sustain an agri-food transformation will not exist. Priority actions include the following: In partnership with local communities, assess ecosystems and develop a roadmap to restore high- priority ecosystem services, supported by a system of natural capital accounts. To make this actionable, an accessible, open, and user-friendly land use and land degradation monitoring system is needed. Build institutions and capacity, including strengthening community governance of natural resources and reinforcing the planning and technical capacity of public institutions and pastoral and forest communities to design and implement programs to restore ecosystems. Strengthen economic incentives for community action to conserve and restore ecosystems: restoration grants, payment for ecosystem services, and a livelihoods program based on agro- forestry and fisheries-related activities. The outputs of these actions will be a critical input to improving (i) land-use planning, especially at the interface of natural and urban landscapes where there is increasing competition for land and water resources; and (ii) integrated watershed management, which is crucial for reducing stormwater runoff and, consequently, reducing flooding in downstream areas. 4.2 Building Resilient and Livable Cities Pakistan's cities face challenges because of high urbanization rates. Roughly 37 percent of Pakistan's population resided in urban areas in 2020.65F Cities are growing fast, at 2.7 percent annually, with 59 percent of the population expected to live in urban areas by 2050. The concentration of people and production in urban areas increases productivity and facilitates service provision through economies of scale. However, urbanization in Pakistan has been characterized by urban sprawl, air pollution, poor waste management, low mobility, inadequate housing, and uneven and low access to safe water and sanitation. Karachi ranks as one of the least livable cities globally, with about 50 percent of inhabitants living in slums. Lahore, the second-largest city in the country, is among cities with the worst air quality in the world. Urban areas are increasingly exposed to climate and disaster threats and are major contributors of GHG emissions. Climate change creates threats for urban areas because of the concentration of assets, jobs, and human capital. These threats include pluvial and fluvial floods, rising temperatures, and heatwaves. Cities also account for a large share of CO2e from energy use, transport, industry, and waste. They contribute significantly to air pollution, posing significant health and productivity threat to urban dwellers. Cities will need to undergo a transformation to become livable and climate-resilient spaces and fulfil their role as catalysts of inclusive growth. Urban sprawl, the absence of green spaces, and the poor state of basic services accentuate people's vulnerability to shocks when they occur. Rapid urbanization puts stress on municipal services, which are critical to strengthening the resilience of vulnerable urban communities. Most cities in Pakistan lack the fiscal resources, governance, and institutional capacity to invest in much-needed infrastructure and services. Measures to strengthen climate resilience need to be an integral part of city investment and management. Improving planning, service delivery, and municipal finance is essential to set cities on a resilient, low-carbon, sustainable World Bank, “Urban Population (% of total population) – Pakistan” (World Bank website, 2021), https://data.worldbank.org/indicator/SP.URB.TOTL.IN.ZS?locations=PK. Pakistan's ten largest cities contribute more than half of national GDP and generate 95 percent of federal tax revenues. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 growth trajectory. The 2022 flood reconstruction and rehabilitation process needs to wholly embrace the approach of “Build Back Better” to reduce the cost and impact of future extreme events expected from climate change. Key to this will be action to resolve the most fundamental structural problems. 4.2.1. Challenges and Opportunities Implications for Policy and Investments In both primary and secondary cities, climate action needs to be folded into broader improvements in urban planning and management. Weaknesses in urban planning and management, and in the provision of basic urban services, create vulnerabilities that intensify climate risks and the health and productivity effects of those risks. Strengthening urban development and services through a climate lens would be an optimal way to address climate change in the country. In the medium to long term, a national strategy for improving urban resilience and provincial- and city-level adaptation plans needs to be developed. Primary cities especially stand out in terms of risk exposure. Lahore has the largest settlement area exposed to fluvial flooding (163 sq. km) and to pluvial flooding (129 sq. km) in Pakistan. Karachi has the second-largest settlement area exposed to pluvial flooding. These vulnerabilities are compounded by low-quality infrastructure.66F Secondary cites are growing fast, often into terrain exposed to climate risks, and have more pronounced levels of poverty. These cities host an increasing influx of migrants, who tend to settle where land is cheap but also disaster-prone, increasing their exposure to risks and shocks. Densification of secondary cities is a key to managing climate risks and improving livelihoods. Most Pakistani cities are experiencing lower-density expansion on their fringes. The average city has grown spatially at 6.8 percent annually but just 1.9 percent in population.70F Low-density expansion hinders the emergence of the “agglomeration economies” necessary to create more productive cities and reach the critical levels of productivity that, among other things, make international exports and integration into global supply chains commercially viable. Low-density expansion leads to the transformation of agricultural land into peri-urban land, increasing carbon generation. It also makes the provision of utilities and other services more costly per person. Furthermore, travel and commuting costs across large, sprawling cities are high in terms of energy costs, time requirements, and emission levels. Increasing the density of the low-density areas of secondary cities, without incurring the health and other costs of excessively dense, unplanned urban areas, is therefore especially important for addressing climate risks. Climate resilience will require improved land use planning and regulation, which will better guide urban expansion and create efficient, productive, livable cities. In primary cities, better land use planning and control measures should be introduced to ensure that settlement does not occur in flood-prone areas. Efforts should also be focused on upgrading informal settlements, given that primary cities have large built-up areas. However, land regulation efforts should prioritize the expanding secondary cities that provide opportunities to apply land use planning tools to enable densification. Low-density growth is in part a result of poorly functioning land markets and onerous regulations. Zoning regulations hinder mixed-use development, making urban property prices unaffordable to most. Land titles are difficult to register and transfer, making it hard to repurpose land. Densification can be supported by reforming zoning restrictions, encouraging mixed-use development, promoting high-rises, and formalizing slums. Reducing the costs of property transfers and construction permits will also support more efficient land use. Further, improved land use planning can help better manage peri-urban areas in the interest of climate mitigation and adaptation. The design of segregated areas, vegetative barriers, and nature Pakistan ranks 105 out of 140 countries in the quality of its infrastructure (see the WEG Global Competitiveness Index). The index takes into account utility infrastructure such as water and electricity supply, and transport infrastructure such as roads. See World Bank, Leveling the Playing Field: Pakistan Systematic Country Diagnostic (Washington DC: World Bank Group, 2020), https://doi.org/10.1596/34549. World Bank, Secondary Cities Analytics (Draft). (Washington DC: World Bank Group, 2021) 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT reserves can reduce cities' carbon footprints. Registering peri-urban properties makes them part of the formal land management system with land conversion controls, zonation and building codes. This increases resilience to disasters and enables more control over urban expansion and sprawl. Land use regulations need to be developed alongside urban transport planning to reduce congestion, which reduces urbanization-driven economic gains, and to improve impaired mobility. However, improved land use planning relies on unified and accurate land records and maps. Property records need to be digitized and be comprehensive. This will allow better land allocation, risk-informed spatial planning, and strengthened asset management strategies to support resilience. It will be important in these processes to ensure the protection of indigenous communities and those in informal housing settlements and to respect customary land use rights. NBSs should be prioritized in all urban areas. NBSs support mitigation through carbon sequestration, local climate regulation, and the reduction of air pollution. For example, vegetative barriers can reduce the urban carbon footprint. NBSs can also enable adaptation, cool UHIs, relieve water scarcity, and lessen flood risk by facilitating thermal regulation, rainwater harvesting, and stormwater management. For instance, bioretention areas and open spaces such as parks can help control stormwater by capturing and retaining runoff; and green roofs and permeable pavements promote rainfall infiltration. NBSs can also be integrated into river flood control systems. Floodplains and bypasses, inland wetlands, stream beds and banks, and upland forests can help regulate flood volumes and river flow.71F Urban transport presents significant opportunity for climate mitigation, which could help reduce air pollution. The transport sector represents about 23 percent of the country's total GHG emissions, 57 percent of which is urban. Passenger transport emissions in Pakistan are currently low compared to global averages, but this is rapidly starting to shift with the increased use of private cars and motorcycles in cities. Passenger transport is responsible for nearly 68 percent of transport emissions because less carbon-efficient passenger modes such as private vehicles are displacing more efficient modes like public transport.72F Total passenger demand, currently estimated at 1,206 motorized billion passenger kilometers, is expected to more than double by 2050, driven by population and economic growth. High passenger demand and more vehicles in the cities will aggravate congestion, air quality, and health risks. The associated CO2 emissions are expected to grow at around 6 percent per annum, reaching 69 million MtCO2e by 2030. It is estimated that inefficiencies in the urban transport sector cost Pakistan 4 to 6 percent of its GDP every year. The establishment of a comprehensive Clean Air Scenario (CAS) for Pakistan would have a substantive impact on ensuring improved health conditions and significantly reducing GHG emissions. A World Bank analysis shows that a reduction in PM2.5 concentrations through the CAS could contribute to reductions in CO2 and in short-lived climate pollutants (SLCPs), such as black carbon (BC) and methane (CH4). These are warming agents and reductions in these would contribute to slowing down rising temperatures. If it followed such a scenario, Pakistan could reduce premature deaths from air pollution by 41–53 precent (95,000 to 122,500 cases a year) up to 2030 compared to the BAU scenario and embark on a path toward the complete elimination of mortality and morbidity from air pollution by 2040.75F With strong political will to set short-, medium-, and long-term air quality targets, substantive reductions of SLCPs could already be achieved by 2025, particularly in BC. The reduction in BC will be largely driven by reducing biomass burning in the residential household sector, reducing diesel use in the heavy-duty vehicle fleet, and reducing energy combustion in industry. World Bank, Nature-Based Solutions for Disaster Risk Management (Washington DC: World Bank Group, 2018), http://documents1.worldbank.org/curated/en/253401551126252092/pdf/Booklet.pdf. Buses, which in 2010 served about 70 percent of BPKM, in 2022 carry only about 55 percent of BPKM. By 2035, nearly 90 percent of households in Pakistan are expected to own a motorcycle, which would double the current number of motorcycles to more than 40 million. Additionally, it is expected that, by 2035, 15 percent of all Pakistani households will own a car, increasing the number of cars to 7 million. National Transport Policy of Pakistan, 2018, Planning Commission. https://www.pc.gov.pk/uploads/downloads/policy.pdf Projection based on Pakistan Bureau of Statistics (PBS) forecasts. The goal of the Clean Air Scenario is to achieve the WHO Interim Target I for fine particulate matter PM2.5 and ground-level ozone O3 by 2030, and then work toward achieving WHO's guideline values for PM2.5 and O3 by 2040. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 Climate-Smart Municipal Services Improving Improving solid waste management (SWM) could make a significant contribution to both mitigation and adaptation targets. Pakistan generated an estimated 36 million tons of solid waste in 2020, which is projected to increase to 85 million tons by 2050.76F In 2020, emissions linked to the solid waste sector were more than 32 million MtCO2e. Modelling for three core urban areas in Pakistan has demonstrated that with even modest improvements in SWM, GHG emissions can be reduced significantly. While SWM emissions are projected to increase to 50 million MtCO2e by 2035 under a BAU scenario, reducing waste dumping by 25 percent would reduce emissions to just 26 million MtCO2e by 2035. If waste dumping were reduced by 50 percent, overall total emissions from SWM would fall to 21 million MtCO2e by 2035. In addition, improving SWM would contribute to adaptation by reducing the clogging of drains and thereby flood risk. Modeling shows that clearing stormwater drains in Karachi would reduce annual average damage resulting from flooding by more than 30 percent.77F Better SWM would also reduce health risks. However, reorienting Pakistan's SWM sector will require several specific actions in the short, medium, and long term. Actions are needed to strengthen institutions and raise capacities, tighten regulatory frameworks, build critical infrastructure and systems, introduce sustainable technologies, and encourage changes in behavior and attitudes to reduce waste generation. Investing in landfills that have methane gas capture is a first entry point, starting with the largest cities. But a low-carbon scenario that deploys a wide range of technologies to minimize CO2 and methane (CH4) emissions across the value chain may become feasible only when cost recovery and revenues have improved. Municipal governments in the country have insufficient capacity to address waste management issues. It is therefore essential that the domestic and foreign private sectors be incentivized to become involved. There are several small, local, private companies78F that are developing and scaling up sustainable models to curtail the waste that goes into landfills and contributes to GHG emissions. In addition, creating concessions for integrated waste management and recycling in larger cities could attract the interest of regional and international players, with the facilitation of the DFI community. However, the scalability of private sector solutions is limited by the absence of the requisite regulatory environment, the failure to segregate waste at source, and the lack of information and network. Sustainable Revenue Streams for Green and Resilient Urbanization Facilitating mitigation and adaptation measures in Pakistan's urban areas will require sustainable revenue streams. The costs of mitigation and adaptation will be substantial for all levels of government yet funding mechanisms to systematically allocate financing to cities to combat climate change are very limited. Developing new financing instruments is thus a priority. Local governments in the country have constrained fiscal space and will continue to depend on intergovernmental fiscal transfers in the medium term. Enhancing own source revenues (OSRs) is important in ensuring sustainability. However, OSRs amount to only one-third of revenues in Pakistan's provinces, and city governments have limited regulatory space for revenue development. This is insufficient to plan and finance climate-smart infrastructure at a scalable level.79F Intergovernmental fiscal transfers are a useful instrument to improve the funding available for cities. They are the most important revenue source for local governments. In all four provinces, federal transfers account for two-thirds of all provincial financial resources. They can be used to target the A CAS that substantively reduces emissions of both BC and CH4 may also improve the yield of stable crops, even in the heavily air-polluted Indo-Gangetic Plain. Lisa Yao Silpa, Perinaz Bhada-Tata, and Frank Van Woerden, What a Waste 2.0 – A Global Snapshot of Solid Waste Management to 2050 (Washington, DC: World Bank Group, 2018), and World Bank. “What a waste 2.0: A Global Snapshot of Solid Waste Management to 2050” World Bank website, last accessed September 5, 2022, https://datatopics.worldbank.org/what-a-waste. To identify the impact of solid waste and debris blocking the channels, this assessment was done using a HEC-RAS hydraulic model to calculate a first-order estimate of damage and potential reductions from the clearing of stormwater drains for various return periods. Two scenarios were modeled: a) a baseline scenario estimating inundation and damage, with reduced conveyance capacity of drains; b) an improved scenario reflecting reasonably free-flowing drains without blockages. They include TrashIt, Davaam, Saaf Suthra Sheher, Waste Busters, Green Earth Recycling, and Novatex. Given the country context, local government green bonds and green taxes also have limited potential in the short to medium term. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT most vulnerable areas in terms of climate impacts, channeled to a broad range of recipients, and combined with larger funding for individual projects. They can be used as incentive systems for local governments. The overall objective of a performance-based, climate-resilience, grant-financing mechanism targeting adaptation and mitigation interventions would be to increase the climate change response capabilities of cities. Leveraging property taxes effectively presents an opportunity to expand financing at the local level. Analyses from Sindh and Punjab indicate that, with targeted interventions, the collection of Urban Immoveable Property Taxes (UIPTs) could double and over time increase by sixfold.80F Currently, UIPTs, at 0.13 percent of GDP, are very low compared to other low- and middle-income countries.81F Increasing UIPTs will require administrative improvements in tax base growth, control of exemptions, improved collection and enforcement, and the willingness to review policies for tax rate setting. However, it will lead to enhanced urban climate action if combined with measures on budget planning and expenditure that ensure that the increased revenue yields are used for climate-oriented investments and actions.82F Strengthening cost recovery for urban services would further improve service provision and attract investment. At present, only a fraction of service costs is being recovered. This has impaired the financial viability and investment potential of service providers and made them unattractive to private investors. Low tariffs also foster waste and pollution. Improving cost recovery is a priority because it would free up resources to improve public services, unlock opportunities to attract private funding, and disincentivize excess resource consumption. Higher charges could provide the funding for expenditures on the services for which they are charged, creating some scope for financing climate- relevant investments and services. Public-Private Partnerships (PPPs) and IFC's subnational financing program could promote investment in climate-smart, service delivery infrastructure. The framework at the federal level grants the PPP Authority approving powers at various stages of the project implementation cycle. However, gaps exist at the framework level and in existing standardized contracts to address climate issues. Measures include integrating climate costs in the form of compensation payments in contracts, integrating climate costs and the probability of occurrence in the scope of technical studies, making resilience part of the evaluation criteria for tenders, including climate experts on project approval committees, and forming partnerships with the insurance industry and engineering firms on the use of climate screening and risk forecasting tools. This will require concentrated policy action by the authorities. PPPs would also necessitate basic funding mechanisms. Further, IFC lends to subnational governments without the requirement of a sovereign guarantee. 4.2.2 Key Policy and Investment Recommendations This policy package for building resilient and livable cities consists of four higher-level policy recommendations and several suggested priority actions. Policy Recommendation #5: Strengthen urban planning and management capabilities. Basic urban development and management actions are the most critical for addressing climate change impacts. The immediate priority is to address weaknesses in urban planning and management and in basic urban service provision that create vulnerabilities and intensify climate risks. A national urban resilience strategy and provincial- and city-level adaptation plans are needed. In primary cities, mitigation and adaptation efforts in the medium term will need to involve better landuse planning and control measures. This will, for example, help to discourage human settlement World Bank, Overview of the Urban Immovable Property Tax in Pakistan and Revenue Simulations (Draft). (Washington DC: World Bank Group, 2021). Where UIPT generates 0.3–0.6 percent of GDP on average. Note that UIPT performance can and certainly should be improved in Pakistan. However, given the low base—on aggregate, UIPT constitutes less than 1.5 percent of provincial revenues—and the magnitude of the country's overall fiscal difficulties, it is implausible that improvements in UIPT could have much impact on the country's broader fiscal position even under optimistic assumptions. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 in flood-prone areas. Another area of focus should be the upgrading of informal settlements. In many secondary cities, these efforts will need to include finding ways to enable greater population density, which would help address climate impacts and lower GHG emissions. Better land regulation, land use planning, and tools such as sites and services instruments will be important to guide this expansion and to facilitate a more compact urban form. Policy Recommendation #6: Pursue green urban mobility. Interventions to decarbonize passenger transport can support the sustainable development agenda—with improved access to jobs and services—and set cities on a low-carbon development trajectory. Transport and land use integration (that is, transit-oriented development) can make cities compact and livable and reduce the need for long-distance trips and motorized travel. It can reduce GHG emissions per unit of activity and infrastructure costs and enhance climate resilience by freeing up resources that could be invested more strategically. Studies in large cities such as Chongqing have estimated that an urban land use form that is private vehicle-centric would increase emissions by 60 percent compared to one that is focused on transit-oriented development principles and would have a lock-in effect that lasts for decades. Interventions in urban mobility should also foster a shift toward carbon-efficient modes such as public, shared, and active transport (for example, walking and bicycling). Although cars carry only 10 percent of passenger trips today, they are responsible for 15 percent of emissions and account for a lion's share of the growth. Substantial investments in public transport, parking management, complete streets (streets designed and operated to enable safe use and support mobility for all users), bike paths, and mobility-as-a-service (technology platforms that facilitate access to shared transport options) are some key levers. The evidence from an impact evaluation of a Bus Rapid Transit (BRT) intervention in Lahore, Karachi, and Peshawar shows that the introduction of the BRT corridor reduced the travel time and costs of commuters and caused a substantial modal shift from private to public transport (40 percent in Lahore). The priority is to keep cities from becoming locked into planning decisions that reinforce the need for private mobility because this has costly, long-term, lock-in effects that are not easy to reverse. This can be achieved by substantially scaling up mass-transit systems and enabling compact city development. Over the 2022–2027 period, the most important steps would be to invest in urban public transport systems and improve rail infrastructure and operations. Investing in the project currently under consideration to construct 570 km of BRT lines across the country by 2030 could deliver emission reductions of about 8 million MtCO2e in the next 10 years if it is complemented with appropriate urban mobility policies. This would also put Pakistan on a path to reduce emissions by about 62 million MtCO2e by 2050. Favorable policies, incentives and instruments that link national targets with provincial, local, and private sector investments could accelerate the transition to low-carbon transport modes like EVs. Pakistan's 2019 National EV Policy has set ambitious sales targets. Yet EVs are still a nascent transport mode in Pakistan, with around 2,000 fully electric cars and a few e-buses in Karachi and Punjab. The limited penetration means small impact on emissions—less than a 1 percent reduction by 2030. It will be at least 15–20 years before e-mobility can make a significant impact. In the longer run, EVs could yield about 57 percent of emission reduction (relative to a BAU) from the passenger sector by 2050. Given the influence of government in public transport, however, e-buses represent a low- hanging fruit for the e-mobility transition. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT Policy Recommendation #7: Promote climate-smart municipal services and circularity. Better waste management will reduce GHG emissions and flood risk. In primary cities, the recommended starting point is investing in landfills with gas capture to replace the current open dumps. Given the primary cities' large carbon footprint, greener modes of transport and climate-smart service delivery could contribute to mitigation and improve health and well-being. Further, the expansion of climate-smart service delivery will require more private financing. For that, developing legal frameworks is necessary for enabling private investment in resilient urban infrastructure, as well as better regulation for outsourcing. Policy Recommendation #8: Create sustainable revenue streams for green and resilient urbanization. Climate actions in urban areas will require improved revenue streams. There is some scope to improve tax yield and cost recovery at the local level. It could create space for public investments in climate-smart services, improve the financial sustainability of services, and create opportunities for crowding in private investments. However, in the medium term, local governments will continue to depend on intergovernmental fiscal transfers. One innovation could be to develop an urban, performance-based, climate-resilience grant-financing mechanism. Another avenue would be for local governments to borrow directly, for which secondary legislation would need to be developed to enable direct subnational borrowing from commercial lenders. There is considerable opportunity for the domestic and foreign private sectors to invest in urban infrastructure and services, green buildings, transportation, water and sanitation, waste management, and RE. Structured and transparent procurement models under bankable concessions will help catalyze private investment. Finally, concentrated policy action is also required to close the numerous gaps at the PPP framework level and in existing standardized contracts in order to address climate issues. 4.3 Accelerating a Just Transition to Sustainable Energy and Transport Energy is a critical enabler of economic development and poverty reduction in Pakistan. However, the energy sector is not adequately fulfilling this role as a result of persistent fiscal, reliability, and security challenges. It is estimated that power shortages have resulted in lost economic output of more than US$8 billion a year.83F Additionally, the country imports around 43% of its total energy supply, requiring around US$13 billion of scarce foreign currency per year, which is likely to increase over time based on current trends. There is significant use of imported coal, especially in industry, and the country suffers from relatively high energy intensity of GDP. Furthermore, Pakistan's transport sector is on an unsustainable expansion path and there are major gaps in the provision of universal access to modern energy. Energy sector emissions are the largest contributor to GHG emissions and air pollution in Pakistan. However, there is enormous potential for transitioning to more secure, environmentally sustainable, lower-cost sources of energy that take advantage of Pakistan's hydropower, solar and wind resources, especially if combined with an improvement in supply- and demand-side efficiency, efforts to decarbonize industry and transport, and sustained structural and fiscal reforms. Fan Zhang, In the Dark: How Much Do Power Sector Distortions Cost South Asia? South Asia Development Forum (Washington, DC: World Bank Group, 2019), https://openknowledge.worldbank.org/handle/10986/30923. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 4.3.1 Challenges and Opportunities Pakistan's energy sector suffers from multiple challenges in achieving the Sustainable Development Goal of affordable, reliable, sustainable, and modern energy for all (SDG7). Five key challenges are: (i) heavy dependence on fossil fuels, which comprise 86 percent of the primary commercial energy supply84F and expose Pakistan to high prices, energy insecurity (including price shocks and supply disruptions), and air pollution and GHG emissions; (ii) growing financial deficits due to energy prices that do not reflect costs, misaligned subsidies, and the poor performance and inefficiencies of the electricity and gas distribution companies,87F which generate a heavy fiscal burden on the government and disincentivize private investment in the sector; (iii) electricity and gas supply interruptions that stem from electricity transmission bottlenecks, aging equipment, and managed load-shedding of electricity and gas for commercial reasons, leading to additional costs to households and firms in lost productivity and heat stress, and increasing the potential for widespread “grid defection”;88F (iv) relatively high energy intensity of GDP, with low rates of improvement, which places additional cost burdens on households and businesses and further exacerbates energy insecurity; and (v) persistent gaps in the provision of universal energy access, with significant rural-urban and regional disparities. Heavy reliance on fossil fuels, combined with the expected growth in demand, threatens to Figure 4.1: Final Energy Consumption 2019–20 exacerbate many of the current challenges of 2% the energy sector. Although considerable 17% LPG focus is given to the electricity sector, only 17 Electricity percent of Pakistan's energy consumption is in the form of electricity, with the balance coming primarily from the direct consumption of coal, gas, and oil in the domestic, industrial and transport sectors (see Figure 4.1). Total energy Energy 19% Consumption 31% supply is likely to increase from 84 million tons Coal Oil of oil equivalent (MTOE)89F in 2019 to 115 MTOE in 2025, at an annual growth rate of 5.8 percent under a BAU scenario, much of which will come from fossil fuels under the current 31% policies Gas Structural issues, poor planning, and substantial subsidies have resulted in huge inefficiencies across the energy sector that affect the reliability of electricity, gas, and petroleum supply, generate huge fiscal deficits, referred to as “circular debt,” and create barriers to future investment. Pakistan has the highest subsidies on energy products in South Asia. Energy subsidies in 2020 accounted for 2.6 percent of the country's GDP, two-thirds of which were for electricity consumption, with the remainder for natural gas.95F The notified tariff continues to be below cost-recovery level: 62 percent of residential and all of agriculture consumers are subsidized. While the progressivity of the subsidy to residential consumers has improved with the recent tariff notification in July 2022, the subsidy to electric tubewells continues to be regressive. Meanwhile financial deficits have been building up with state-owned distribution companies (DISCOs) in the energy sector because of their operational and technical inefficiencies and the gap between tariffs and the full cost of power to consumers. This excludes highly uncertain estimates of the use of traditional biomass and waste. The issues include theft, losses (including methane leakage from the gas network), inaccurate consumer billing, and incomplete collections and arrears. Some consumers find it cheaper and more efficient to generate their own electricity. The loss of such profitable, paying consumers can create a spiraling problem for the DISCOs because the less revenue they are able to collect, the less electricity they are able to supply, and the more erratic the electricity service becomes, which compels more customers to leave the grid, which further diminishes the revenue of the DISCOs. Million tons of oil equivalent. IMF, Fossil Fuel Subsidies Database (Washington, DC: International Monetary Fund, 2022), https://www.imf.org/en/Topics/climate-change/energy- subsidies. Note that this figure includes only “explicit subsidies.” The IMF also provides an estimate for “implicit subsidies” that takes account of the underpricing of externalities. Total energy subsidies, including both explicit and implicit, are estimated at 11.9 percent for 2020. For further details about the IMF's research, see Ian Parry, Simon Black, and Nate Vernon, Still Not Getting Energy Prices Right: A Global and Country Update of Fossil Fuel Subsidies (Washington, DC: International Monetary Fund, 2021), 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT The deficit, often referred to as “circular debt,” has accumulated especially in the last few years, and as of the end of June 2022, stood at roughly US$11.3 billion in the electricity sector and US$7.5 billion in the gas sector.7F The situation has been exacerbated by the recent addition of large coal and imported gas power plants with “take-or-pay” contracts that have increased capacity payments by 50 percent and increased the country's exposure to international fossil fuel price volatility—as witnessed over 2022. Finally, there are significant inefficiencies within the state-owned enterprises (SOEs) in the power and gas sectors, including outdated metering practices, low collection rates, high technical losses, rampant theft, and gas leakages as a result of old and poorly maintained pipelines and sabotage.98F One impact of persistent circular debt is a lack of investment in the gas and power distribution networks, the inability of both sectors to operate at full capacity due to fuel shortages, and the likely difficulty of attracting investors to support future power sector requirements. Resolving the energy sector's debt requires the government to maintain its commitment to a comprehensive reform and accelerate a transition away from fossil fuels. For the power sector, this requires reducing the cost of generation while at the same time reducing overdependence on imported fossil fuels, bringing end-consumer tariffs closer to the cost recovery level, and improving supply-side efficiency and collections. The government has recognized this and initiated a comprehensive power sector reform package, supported through the World Bank's Program for Affordable and Clean Energy (PACE). For the first time, the reform program covers all aspects of the sector, focusing strongly on reducing current and future power costs, reducing reliance on imported fossil fuel, scaling up RE, addressing inefficiencies within the DISCOs, and lowering subsidies in the sector by better targeting them to those most in need. Similar reforms—including increases in residential tariffs—are required in the gas sector. Pakistan has huge solar and power potential but so far this has been largely neglected due to vested interests and misplaced concerns about “surplus capacity”. These concerns, frequently voiced over the last few years, do not take account of system operation and commercial realities. Of the 43 GW of installed capacity, 40.5 GW is classed as “dependable”, but “peak capability” of the NTDC system is just under 28 GW, against a peak summertime demand of over 30 GW. This, along with the inability and unwillingness of the government to run all available capacity due to high fuel prices, combined with the commercial losses involved in supplying non-paying consumer segments, is the reason for widespread scheduled power cuts during 2022. As a result, the power system has a supply deficit, exacerbated by currently high prices for imported fuels, requiring the urgent development of additional RE capacity. According to a World Bank study, utilizing just 0.071 percent of the country's available area for solar photovoltaics (PVs) would meet Pakistan's current total electricity demand.92F The wind resource is also considerable, especially in Balochistan and Sindh. The 2019 ARE Policy90F outlined a target to achieve 20 percent of power capacity from non-hydro RE sources by 2025, and 30 percent by 2030. The Indicative Generation Capacity Expansion Plan 2021–203091F (IGCEP), approved in September 2021, includes hydropower in a broader definition of RE, with a target to reach 60 percent of electricity generation by 2030. This would require a significant build-out of 13.6 GW of additional solar and wind capacity based on current projections, but this has yet to begin. Critical to achieving the objectives of the 2019 ARE Policy and the 2021 National Electricity Policy (NEP)93F is the introduction At the end of FY2022, Pakistan's total circular debt was PKR 2,253 billion in the electricity sector and PKR 1,500 billion in the gas sector. The exchange rate: 1 US$ = 200 PKR. In the gas sector these issues are often collectively referred to as “unaccounted-for gas.” Although the portion due to leakages is hard to estimate, this is a further source of avoidable GHG emissions in the country. The total “dependable capacity” consists of all the available capacity on the NTDC network assuming that all plants are generating at full output, with no fuel or hydrological constraints, but taking account of plant deratings due to age and inefficiencies. In practice this is virtually impossible to achieve, even if the current fuel cost and CD issues were addressed, due to the seasonal and daily availability schedules for large hydropower, scheduled and unscheduled maintenance, fuel shortages at individual plants, and the variability of solar and wind. “Peak capability” takes account of these constraints, and will vary throughout the year. NEPRA. 2022. State of Industry Report 2022. Available at: https://nepra.org.pk/publications/State%20of%20Industry%20Reports/State%20of%20Industry%20Report%202022.pdf World Bank, “Solar Photovoltaic Power Potential by Country,” World Bank Understanding Poverty website, July 23, 2020, https://www.worldbank.org/en/topic/energy/publication/solar-photovoltaic-power-potential-by-country. Mohammed Bilal Khan, “Alternative Energy Policy 2019 at a Glance,” The Nation (March 18, 2020), https://nation.com.pk/2020/03/18/alternative-energy-policy-2019-at-a-glance. Syed Safeer Hussain, “Submission of Revised Indicative Generation Capacity Expansion Plan (IGCEP) 2021–30),” National Electric Power Regulatory Authority (NEPRA), Managing Director's Letter to National Transmission & Despatch Co. Ltd (NTDC), September 24, 2021, Republic of Pakistan, https://nepra.org.pk/licensing/Licences/LAT-01%20IGCEP%2024-09-2021%2037702-29.pdf. Government of Pakistan, Ministry of Energy, National Electricity Policy 2021 (Government of Pakistan, 2021), http://www.mowp.gov.pk/userfiles1/file/National%20Electricity%20Policy%202021.pdf. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 of competitive bidding for new power generation projects and ending the old practice of direct contracting and cost-plus tariffs that have led to high power costs and an over-reliance on fossil fuels. However, despite assurances that the first rounds of competitive bidding are imminent, there has been no action since the procedure was formalized by the National Electric Power Regulatory Authority (NEPRA) in 2017. Instead, a number of new fossil-fuel plants have been commissioned under a cost- plus tariff regime during this period.94F As a result, Pakistan has become more exposed to rising fossil-fuel prices and has not been able to capitalize on the low prices for solar and wind energy seen in other countries such as India, South Africa and Uzbekistan. The energy intensity of GDP is relatively high in Pakistan compared to other countries in the region, and there is substantial potential for improvement in demand-side efficiency. Pakistan's energy intensity—the amount of energy needed to produce US$1 of GDP and a measure of energy efficiency—was 4.6 megajoules (million joules, MJ) per dollar in 2018, compared to 4.4 MJ/$ in India, 2.6 MJ/$ in Türkiye, 2.5 MJ/$ in Bangladesh, and just 1.8 MJ/$ in Sri Lanka. Moreover, the rate of energy efficiency improvement was only 1.2 percent over 2000–2018 (declining in more recent years), which is well short of the SDG7 global target of 2.6 percent. High energy intensity, combined with rapidly growing energy consumption, adversely affects energy security by further adding to the country's dependence on imported fuel for meeting its energy needs, and by increasing peak demand requirements in the electricity and gas sectors. For example, a large and growing source of electricity demand, especially during summer peak periods, is cooling. Increased usage of air conditioning, combined with poor levels of building energy efficiency and higher temperatures, will place huge pressures on the electricity network and could increase annual cooling related GHG emissions from 23 million MtCO2e in 2020 to over 50 million MtCO2e by 2030.99F Furthermore, there are over 175 million electric fans in Pakistan, most of which are inefficient models that consume over twice as much electricity as highly efficient fans with direct current (DC) motors that can be manufactured domestically. XF Reducing industry's use of coal would have significant benefits for Pakistan's balance of payments and GHG emissions. The industrial sector has the highest share of energy use. Combined with its heavy reliance on coal, the sector makes a disproportionate contribution to air pollution and GHG emissions. In 2020, industry represented 37 percent of total energy consumption and 73 percent of coal consumption (mostly imported). Electricity generation represents a smaller share of total coal consumption, albeit one that has grown rapidly in recent years due to a number of new coal-fired power plants. Industrial coal consumption is dominated by the brick kiln and cement industries, leading to both energy use and process emissions, with air pollution impacts. These industries are economically significant contributors to GDP and employment and have important linkages to other sectors. But since much of the coal consumption in the industrial sector uses imported coal, there would be wider economic benefits to implementing efficiency and decarbonization measures, in addition to the significant environmental benefits. NEPRA, “Notification (S.R.O 306(1)/2017 dated 02-05-2017) Regarding NEPRA Competitive Bidding Tariff (Approval Procedure) Regulations, 2017,” memorandum from the director of NEPRA (Government of Pakistan, 2017), https://nepra.org.pk/Legislation/3- Reg/3.7%20NEPRA%20Competitive%20Bidding%20Tariff%20(Approval%20Procedure)%20Regulations,%202008/NCBT-01%2003-05- 2017%206072.pdf. Green Cooling Initiative Country Data, last accessed September 5, 2022, https://www.green-cooling-initiative.org. World Bank. 2022. Supporting the Manufacture in Pakistan of High-Quality DC Fans. https://openknowledge.worldbank.org/handle/10986/38109 Energy Yearbook 2020. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT Figure 4.2: Energy Consumption by Sector (above) and by Fuel Type in the Industrial Sector (below) (2019–2020) 4% Other gov’t 3% Commercial Transport Industry Domestic 2% Agriculture 30% 37% 24% 31% 31% 19% 17% Oil Gas Coal Electricity 2% LPG Transport sector emissions are rapidly increasing because of the increased use of private transport modes in cities and the expansion of freight traffic. Freight represents around 32 percent of transport emissions but is expected to grow fast. In 2020 the sector handled an estimated 188 billion-ton kilometers (BTKM) of inland freight. By 2050, demand for logistics services could grow to 5–6 times its 2022 level. Roads, the backbone of Pakistan's transport sector, currently carry 94 percent of freight traffic. Rail has only a 5 percent share, down from over 86 percent in the 1950s, and 23 percent in 1997.101F With long transport distances and the country's significant demand for bulk commodities and containers well suited to the mode, rail service could offer a viable alternative to road traffic. Not only would this decrease transport emissions but it would also increase the nation's competitiveness by lowering transport costs, cutting road maintenance costs, and reducing the incidence of road accidents. While the majority of Pakistanis have some access to electricity, universal access to modern and reliable energy is a long way from being achieved due to persistent issues with supply and disparities between population groups. Based on household survey data recently commissioned by the World Bank, over 97 percent of households have access to electricity, out of which 89 percent have access to the grid, 8 percent are using off-grid solutions and only 2.4 percent have no access to electricity. However, electricity access in Sindh is just under 93 percent, and 68 percent of the population nationwide receive electricity for 16 hours or less per day, with this figure rising to 76 percent in rural areas. Almost 17 percent of households experience poor quality power availability, including unstable voltage issues. Access to modern energy for cooking is considerably lower, as nationwide only 39 percent have access to a piped gas network,11 percent of households use liquid petroleum gas (LPG) while the rest are using wood, charcoal or crop residue. In rural areas 24 percent of households cook using an open fire, which is associated with indoor air pollution and resulting health issues. Analysis by the World Bank shows that a combination of grid extension, mini-grids, and off-grid solar would be required to achieve Pakistan's target of universal electricity access by 2030.103F However, deployment of mini-grids and off-grid solar would need to be led by the private sector to ensure long- term sustainability. For households with grid access, power availability and quality need to be improved, which links back to the underlying issue of inefficiencies and poor performance within the DISCOs. 4.3.2 Key Policy and Investment Recommendations This policy package for accelerating a just transition to sustainable energy and transport consists of five higher-level policy recommendations and several suggested priority actions. Energy Yearbook 2020. World Bank. 2022. Supporting the Manufacture in Pakistan of High-Quality DC Fans. https://openknowledge.worldbank.org/handle/10986/38109 Energy Yearbook 2020. R.E. Looney, “The Growth and Decline of Pakistan's Rail System,” International Journal of Transport Economics 25, no. 3 (October 1998): 353–378, https://www.jstor.org/stable/42747994. The data and analysis are being finalized for publication. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 Policy Recommendation #9: Transition away from fossil fuels. Pakistan urgently needs to accelerate the commissioning of RE capacity in the power sector to reduce the overall cost of generation and improve energy security. In the near term, considering the country's generous endowment of hydropower, solar and wind resources, the power sector is a natural candidate for displacing fossil fuels. The latest approved version of the IGCEP (2021-2030), which is supported by the World Bank's own analysis, shows that RE is now the least-cost generation option, even before consideration of energy security and environmental externalities.104F It calls for the addition of 17 GW of solar and wind capacity, plus 22 GW of hydropower capacity, by 2030. The transition to RE is technically and financially viable in all respects, especially with recent advances in batteries and other forms of storage, and demand response, and needs to begin immediately.105F Aside from already committed plants, IGCEP does not plan for any additional fossil fuel capacity. The government should explicitly rule out such projects in the future, building on their existing moratorium on imported coal projects and reflecting the underlying analysis and conclusions of IGCEP. There may also be justification for early retirement of existing fossil fuel capacity, especially older plants operating at low efficiency, and this may be a good candidate for climate finance support. There are three intermediate steps that are critical to accelerating this transition: (i) the immediate initiation of competitive bidding, starting with 2 GW by the middle of 2023 followed by annual rounds of procurement to meet the IGCEP targets;106F (ii) the acceleration of plans for additional solar and wind capacity at identified sites near to existing thermal plants and substations, and through parallel development of strategically located RE parks,107F and (iii) yearly updating of the IGCEP to quickly respond to demand growth as a result of increased electrification and delays in other projects (see Policy Recommendation #11). Investment in new RE capacity should be led by the private sector, especially through FDI, under a competitive bidding regime, with public financing targeted toward larger, “strategic”, hydropower projects and shared infrastructure for RE parks. XF Pakistan should also explore opportunities outside the power sector for production of alternative fuels such as biomethane and green hydrogen. Policy Recommendation #10: Improve supply-side e ciency. Pakistan must see through politically difficult supply-side efficiency improvements, including tariff and subsidy reforms, the introduction of private sector participation in the DISCO sector, and the start of a competitive wholesale power market. These actions are critical to reducing the country's circular debt, improving service levels, and introducing market discipline in planning and sector operations. Key to this will be ensuring that tariffs accurately reflect the true costs of supply, directing electricity and gas subsidies to the poorest consumers, and improving the operational efficiency of the DISCOs and gas supply companies. Improving operational efficiency should include efforts to introduce private sector participation in the management of the DISCOs and a renewed push to modernize metering, billing and the energy sector's transmission and distribution infrastructure. The introduction of a competitive wholesale power market would help to reduce the possibilities for suboptimal planning and dispatch decisions by making the relative economics of different generators This finding is based on a separate study that is being finalized for publication. World Bank, Variable Renewable Energy Integration and Planning Study (Washington, DC: World Bank Group, 2020), https://openknowledge.worldbank.org/handle/10986/34586. According to the hourly modeling carried out under the above study (using the same model now used to develop the IGCEP), reaching 30 percent of installed power sector capacity from solar and wind does not require any dedicated storage, so long as hydropower and other sources of generation can be operated more flexibly, and with much-needed investments in forecasting and communications. Going beyond 30 percent, however, would likely require additional storage, at which point Pakistan could take advantage of global innovations and cost reductions. World Bank, Variable Renewable Energy Competitive Bidding Study (Washington, DC: World Bank Group, 2022), https://openknowledge.worldbank.org/handle/10986/37405. World Bank, Variable Renewable Energy Locational Study (Washington, DC: World Bank Group, 2021), https://openknowledge.worldbank.org/handle/10986/35113. Given the land intensive nature of solar and wind and the inevitable displacement caused by hydroelectric projects it will be essential to pursue a systematic, reliable, locally informed policy to ensure adequate protection of local land rights, appropriate compensation, resettlement, and rehabilitation, and strict rationalization and checks on the quantum and type of land acquired for public projects. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT more explicit. This would favor lower-cost power generation which, as already noted, equates to non- fossil fuel generation. Large investments to improve the responsiveness and stability of the electricity transmission network will also be needed to cope with the expansion of RE and with potential climate change impacts. The domestic and foreign private sectors can play an important role in this, alongside agencies such as the National Transmission & Despatch Company (NTDC), by investing in new transmission lines and capitalizing on third-party access and wheeling arrangements (such as the use of a DISCO's distribution system to transport electrical power) under competitive wholesale market conditions. Policy Recommendation #11: Place greater emphasis on enhancing demand-side e ciency. Considering the high energy intensity of Pakistan's economy and the low rate of improvement over the past couple of decades, the government should embark on an urgent, wide-ranging demand-side efficiency program, aiming at immediate cost savings for consumers. Energy efficiency and conservation (EE&C) has been neglected in Pakistan for many decades, with serious consequences. Yet this could be reversed if an ambitious, comprehensive EE&C policy108F were to be implemented through a well-resourced, professionally staffed National Energy Efficiency & Conservation Authority (NEECA), supported by provincial agencies where they exist. To achieve this, it is important to target a few quick wins, such as setting minimum performance standards for mass-market appliances and improving the energy efficiency of existing and new buildings in the commercial and residential sectors.109F Considering the country's dwindling natural gas reserves, increasing reliance on imported liquefied natural gas (LNG), and the heavy use of gas in the commercial and residential sectors, Pakistan needs to consider opportunities for shifting to electricity where economically and technically feasible, such as for space and water heating. Finally, there is huge potential for launching replacement or exchange programs for inefficient end-use appliances, such as incandescent lightbulbs and fans. Building on models developed in other countries, Pakistan should explore opportunities for developing the energy service companies (ESCOs) market to mobilize private sector investment. There may also be a need to establish publicly owned but commercially operated super- ESCOs to design targeted programs that are self-financing through a shared savings model, or by tapping carbon finance. Policy Recommendation #12: Decarbonize the industrial and transport sectors. Given that the industrial sector is the largest consumer of fossil fuels, with only partial scope for electrification or fuel switching, the government needs to give specific attention to the sector and incentivize decarbonization and efficiency improvements through regulations, fiscal incentives, and improved access to financing. This will require a number of decisive actions: (i) incentivizing the uptake of carbon-efficient, energy-efficient, and water-efficient technologies and production processes, with replacement of old, inefficient motors and boilers a near-term priority; (ii) promoting electrification and fuel efficiency improvements, including through waste heat recovery and fuel switching to sustainable sources such as bioenergy and green hydrogen; (iii) piloting and adopting innovative technologies for undertaking hard-to-abate industrial processes such as cement production that are unlikely to be replaced any time soon; and (iv) improving water usage and wastewater treatment. Pakistan should aim for the early adoption of decarbonization solutions that are already cost-effective and should seek concessional climate financing to pilot technologies and processes where there is a cost premium, relying on private sector investment for mass adoption of technologies once costs fall. ESCOs could play an important role by implementing energy efficiency Given the land intensive nature of solar and wind and the inevitable displacement caused by hydroelectric projects it will be essential to pursue a systematic, reliable, locally informed policy to ensure adequate protection of local land rights, appropriate compensation, resettlement, and rehabilitation, and strict rationalization and checks on the quantum and type of land acquired for public projects. A draft Energy Efficiency & Conservation Policy has been prepared by NEECA but has not yet been approved. The payback period of replacing an incandescent light bulb with an LED is only one month while that of a compact fluorescent light (CFL) bulb is seven months. Replacing the existing stock of inefficient lighting with LEDs alone could save Pakistan 5,500 gigawatt-hours (GWh) annually. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 and decarbonization measures and receiving regular payments in return, based on the achieved energy savings. Wider adoption of programs such as the Partnership for Cleaner Textiles, which is being implemented in partnership with IFC, is needed to support global brands and their local suppliers to achieve long-term competitiveness and their corporate sustainability targets by identifying and employing cleaner production techniques. Close continuous collaboration between government and industry is essential for this: experience from other countries suggests that buy-in is critical and that the likelihood of energy efficiency policy adoption is enhanced if industries and their associations are involved from the beginning in articulating efficiency plans and in investment financing negotiations and arrangements. The adoption of circular-economy practices—for example, under the Collect and Recycle program (CORE), especially on the waste-sorting/waste-recycling side111F—will also heavily depend on such collaboration and needs to be sustained through continuous stakeholder engagement. Decarbonizing transport in Pakistan and ensuring that it supports broader development objectives will require massive investment in mass-transit systems and rail, in addition to green urban mobility. An important opportunity in the freight segment, both in terms of development and decarbonization, would be the revival and transformation of Pakistan Railway (PR). PR currently carries only 5 percent of freight, and the 11 BTKM it carries is lower than the 1960s peak of 14.2 BTKM. The recent PR Revival Plan sets an extremely ambitious target of increasing rail's freight share to 15 percent by 2025 and 20 percent by 2030, which would mean carrying 39 BTKM by 2025 and 69 BTKM by 2030. A more attainable scenario would be for rail to aim at a 20 percent share by 2050 (that is, a carrying capacity of 195 BTKM), which could reduce freight emissions by 10 percent (amounting to about 6.2 Mt CO2e a year). Doing so would require not just investment but the transformation of an institutionally run system into a competitive, customer-focused service fully integrated with, and embedded in, a larger multimodal network. Most investment needs could be met by a planned US$8 billion initiative to upgrade the main North- South Rail Line (ML-1) through China–Pakistan Economic Corridor (CPEC) financing. Complementary targeted investments will be needed to improve rail connectivity with and within the ports. The most important of these is the 50-km-long Karachi Port to Pipri Corridor, which is already under planning. These investments will need to be accompanied by reforms that create the appropriate enabling environment. The first step would be to operationalize concessions awarded in 2013 to operate freight trains on PR tracks. The next step would be to separate the policy and commercial roles between the Ministry of Railways and PR, and to complete the setting up of a commercially oriented ecosystem by implementing existing plans for (i) creating an independent and autonomous Railway Safety and Regulatory Authority, (ii) strengthening the newly formed Railways Freight Business Company, and (iii) enhancing PR's capacity to prepare, procure, evaluate and manage PPP transactions, including updating the underlying framework, such as the Track Access Policy. Trucking will continue to be the primary mode of freight transportation. For the trucking industry to absorb and benefit from new technologies—including e-logistics platforms that have the potential to optimize vehicle utilization—a bankable formal industry is a necessity. E-logistic platforms operating in Pakistan have shown promise. For freight, they could mitigate GHG emissions through the efficient utilization of vehicles and reduce food losses (caused by inadequate logistics) and their related landfill emissions. Second, for passengers and small businesses, the e-logistic platforms could improve mobility by complementing the public transport system, and also reduce fuel consumption through vehicle pooling services. Governance and regulatory shifts that reward formal tax-paying, rule- compliant actors will help such a transition. In Pakistan, an alliance between the country's leading industry players and global brands has been formed, called CORE (Collect and Recycle) to help increase waste collection rates. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT Policy Recommendation #13: Ensure “just” transitions. To achieve an equitable and sustainable transition of Pakistan's energy sector, the government will need to do three things: (i) have a clear understanding of those who might stand to lose politically and financially, and avoid disproportionately favoring some interest groups over others, (ii) protect the poor and vulnerable through targeted retraining and financial support; and (iii) achieve universal access to modern energy by 2030. Although there are strong reasons for the federal and provincial governments to embrace the energy transition, the pace of change could be slowed by resistance from vested interests among fossil-fuel importers and producers, and from those who may lose their livelihoods as a result of new investment patterns, sectoral changes, demand shifts, facility closures, or supply-side efficiency measures. This means that the efforts to promote accelerated decarbonization in Pakistan will need to carefully consider the potential winners and losers and devise strategies to overcome political resistance and ensure that livelihoods are protected through retraining, fiscal transfers, and other measures. For example, introducing private participation in the DISCOs will require a parallel strategy to address the concerns of employees whose jobs may be threatened as a result of a shift to automated or pre-paid metering and other efficiency measures introduced by new management. Separately, it will be essential for Pakistan to address the identified gaps in access to energy, with a particular focus on rural households and on the promotion of clean cooking solutions. Delivering universal electrification and access to clean cooking and heating by 2030 (SDG7 goal) is critical, with delivery likely to fall to the provincial governments. The total investment required to achieve universal access to electricity by 2030 is estimated at US$13.75 billion, out of which US$5.92 billion will be required just for Sindh and Balochistan. In Balochistan, the least-cost electrification options for at least 50 percent of the unelectrified population are solar-based mini-grids and stand-alone solar home systems. In addition to closing the remaining gaps in achieving universal electrification and improving the availability and quality of supply, Pakistan needs to give greater focus to clean cooking and heating solutions in rural areas, especially where there is unsustainable use of traditional biomass resources. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 5. THE MACRO FISCAL AND DISTRIBUTIONAL IMPACTS OF CLIMATE AND DEVELOPMENT POLICY ACTIONS 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 5. THE MACRO FISCAL AND DISTRIBUTIONAL IMPACTS OF CLIMATE AND DEVELOPMENT POLICY ACTIONS This chapter evaluates the macro-fiscal, financial, and distributional implications of key policy actions to build climate resilience, accelerate inclusive and sustainable development, and pivot the economy to a low-carbon pathway. Three policy packages are analyzed with the support of macro- economic models: (i) needed shifts in the country's energy mix to alleviate chronic fiscal stress from overreliance on imported fossil fuels, ensure equitable development, and reduce levels of air pollution; (ii) carbon taxes with revenue recycling and feebates to hard-to-decarbonize sectors to improve the tax base and incentivize a shift away from fossil-fuel-based development; and (iii) actions to improve human capital for greater resilience in the face of climate-change-related risks and higher labor productivity and incomes. Also discussed are needed investments in adaptive social protection systems and the adoption of additional green instruments. The economy-wide, macro-fiscal and distributional implications of some of the recommended policy actions discussed in Chapter 4 are not directly addressed in the modeling performed in this chapter because of the limitations of the models and the unavailability of inputs data for some sectors, including agriculture, livestock, and land use. Both limitations can be addressed and are envisioned as key follow-up actions to the report. These include, in particular, the transformation of the agri-food system, the management of the irrigation system, and the restoration of degraded ecosystems. The successful implementation of policies such as carbon taxation could help free up significant resources for urgent investments in these sectors. The results shown focus on the E3ME model because this model better captures the medium-run, cross-sectoral interactions, and transmission mechanisms at play. All policy simulations assume a baseline that models a BAU macro scenario in which the economy grows at approximately 4 percent per year out to 2050. 5.1 Policy Packages 5.1.1 Policy Package 1: The Government's IGCEP 2021–2030 Policy Package 1 outlines two policy scenarios. The first is based on the implementation of IGCEP (2021–2030), which will substantially increase the share of RE in the electricity generation mix by 2030. The second scenario proposes a substantial increase in electrification so that electricity as a percentage of final energy consumption reaches 28 percent by 2030 from 20 percent in 2020, while retaining the same percentage contribution of RE as assumed under the first scenario. The implementation of IGCEP will lead to a moderate boost in GDP and substantially reduce GHG emissions and PM2.5, with a small negative impact on poverty. Figure 5.1 shows the impact of IGCEP alone (orange bars) on selected indicators. The expansion in RE generation capacity will boost GDP by 0.8 percent by 2025 before it falls slightly relative to the BAU level by 2050. Emissions fall by 20 percent relative to BAU by 2050 while PM2.5 declines by 16 percent. The initial boost to the economy is driven by higher investment but there is mild inflationary pressure in the latter decades from upward Note that the figure of 20 percent is higher than that quoted in Section 4.3.1, where a figure of 17 percent is quoted based on the Pakistan Energy Yearbook 2000. The difference is because the modeling in this section made use of energy demand data from the International Energy Agency (IEA), with traditional biomass excluded. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 pressure on electricity tariffs to pay off the investment costs. In line with this, changes in poverty stay relatively low, due to the stimulus effect, and eventually rises to about 1 percent compared to the BAU, but only close to 2050, as household electricity bills rise. If the more ambitious plan of fuel switching to electricity is also implemented in the same timeframe as IGCEP—captured by the blue bars in Figure 5.1—the initial boost to GDP will be higher and emissions and PM2.5 levels will fall more sharply, but poverty could rise. Under this policy run, GDP growth rises slightly above 2 percent until 2030, and 1.3 percent thereafter until 2040, driven mostly by additional investment. By 2050, GDP growth falls slightly below the BAU. There is a further decline of 11 percent in CO2 emissions, with a total decline of 32 percent relative to baseline by 2050 if both policies are implemented. There is a corresponding decline in PM2.5 levels, which total almost 30 percent relative to BAU. The NPV of the needed investment in this case is an additional US$49.8 billion. Figure 5.1: Impact of IGCEP and IGCEP + Electri cation Global lower middle Real GDP income poverty line 3 3 2 2 % change from baseline % change from baseline 1 1 0 0 IGCEP IGCEP + electrification -1 -1 2025 2030 2040 2050 2025 2030 2040 2050 GHG emissions (MTco2e) PM 2.5 (µg/m ) Working days lost 0 0 0 -10 -10 -10 % change from baseline % change from baseline % change from baseline -20 -20 -20 -30 -30 -30 -40 -40 -40 -50 -50 -50 2025 2030 2040 2050 2025 2030 2040 2050 2025 2030 2040 2050 This investment would further reduce reliance on imported fossil fuels, enhancing energy security and macro-fiscal stability. However, the upward pressure on prices starting in 2040 is also larger, rising to 8 percent relative to BAU, and reflects the increase in energy tariffs needed to finance a share of the policy-induced expansion of capacity, as well as the additional costs of electrification to end users that get passed on in consumer prices for a period of time. Higher electricity tariffs and product prices will reduce real income and drive the poverty response, with a slight increase in the poverty rate after 2040 until the investment is paid off. As noted in Chapter 4, the current subsidy to the sector is significant and the electricity subsidy is poorly targeted. The repurposing of this subsidy to protect households at the bottom of the distribution would eliminate any negative impact on poverty. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 5.1.2 Policy Package 2: Carbon Taxes, Revenue Recycling, and Feebates A carbon tax could be beneficial to Pakistan's development from several perspectives. As discussed in Chapter 4, Pakistan imports nearly one-third of its energy in the form of oil, coal, and re-gasified liquefied natural gas (RLNG), at enormous cost, which contributes significantly to the country's chronic fiscal stress. The presence of a carbon tax would provide a clear signal to both firms and households to start adopting efficiency measures and shift consumption and investment away from fossil fuels to RE sources. The resulting reduction in emissions would yield several co-benefits, of which a reduction in pollution is the most important. As discussed in chapter 2, Pakistan is among the countries with the highest levels of air pollution, with large attendant health impacts. Lower levels of pollution would improve health outcomes, with associated gains in labor productivity and household income from fewer lost days of work and lower costs of production. A carbon tax would also broaden the tax base by bringing currently untaxed producers who operate in the informal economy–estimated to be between 35 and 50 percent–into the tax net at a low administrative cost. The use of traditional tax instruments is more challenging in such contexts. A broad-based carbon tax would circumvent this and could be relatively easy to implement, administratively and politically, if it is introduced gradually, with adequate revenue recycling to protect the poor and to sustain an expansion of shared prosperity. The introduction of a carbon tax is under consideration within the government. A key guiding principle of the NDC (2021) is to explore market- and nonmarket-based approaches to diversifying funding sources for commissioning capital-intensive projects. To this end, the National Committee on the Establishment of Carbon Markets (NCEC) was established in 2018, with equal representation from the federal ministries, the provincial governments, and the private sector. The modeling considers the gradual introduction of a carbon tax starting in 2025, with full revenue recycling. Two tax levels are considered, as described in Table 5.1. This use of tax revenues is indicative. Some of the revenues generated could, in principle, be freed from feebates and utilized instead for debt repayment, resilience-building investments (RBIs), or the financing of core development needs. A gradual ramp-up of the tax not only avoids a large impact on prices but allows the economy time to adjust to new incentives and to take advantage of new technologies as they become available. Table 5.1: Carbon Tax Policy Abbreviation Model implementation Rate of US$1–5/tCO2 in 2025, gradually increasing to US$20/tCO2 by 1. Low Carbon Tax + 2050. Revenues from taxes are recycled as a) rebates to hard-to- Revenue Recycling Low CT + RR decarbonize industries, and b) transfers to the poorest 50 percent of households Rate of US$2–10/tCO2 in 2025 gradually increasing to US$40/tCO2 by 2. High Carbon Tax + 2050. Revenues from taxes are recycled as a) rebates to hard-to- Revenue Recycling High CT + RR decarbonize industries, and b) transfers to the poorest 50 percent of households Figure 5.2 shows the impact of a carbon tax with revenue recycling, with and without IGCEP being concurrently implemented. Since the government has committed to IGCEP, it is important to see the impact of these policies not just in isolation but also as additive to IGCEP. The effects will differ because the marginal effectiveness of additional policies on emissions could decrease if they are implemented simultaneously with IGCEP. In other words, it will, understandably, become increasingly difficult to reduce emissions as the decarbonization agenda gets under way. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 It was found that the implementation of a carbon tax alone has only a small positive impact on GDP. This is mainly caused by an increase in aggregate demand, driven by the recycling of revenues to the bottom 50 percent of households and feebates. Aggregate demand rises because of two factors: Households substitute away from fossil fuel-intensive products and use the transfer to purchase a broader set of goods and services; and secondly, firms make additional investments in renewables. The carbon tax, regardless of the level, is predicted to have a more beneficial marginal effect on GDP if IGCEP is already in place. This is because the costly substitution and adjustment effects of the carbon tax are already captured by the IGCEP. Hence, what dominates are the positive recycling effects. In the absence of IGCEP, carbon taxes have the largest impact on emissions. By 2050, a low carbon tax could reduce emissions by 20 percent. With a high carbon tax, the impacts are stronger, with emissions declining by as much as 40 percent relative to BAU. Since carbon taxes are applied to all fossil-fuel uses (petroleum, coal, oil, and gas), they increase the price of fossil fuels relative to renewables, which results in higher demand for renewables and reduced emissions. If carbon taxes are implemented concurrently with IGCEP or IGCEP plus electrification, there is a significant boost to GDP through the decade of the 2040s. However, in 2050, this effect is projected to wear off as some of the investment costs are paid off through higher final consumers bills. There is a dampening in the fall in poverty relative to the projected baseline, indicating that larger transfers at the bottom of the distribution will be needed. As indicated above, the current subsidy to the agriculture sector is significant but poorly targeted. This could be used to augment transfers and fully protect households at the bottom of the distribution, eliminating any negative impact on poverty. The analysis makes it clear, however, that it will be important to pay careful attention to ensuring that these policies have substantial economy-wide benefits, address climate mitigation objectives, and are implemented in a manner that fully protects the poor from transition-related costs. Figure 5.2: Macroeconomic Impacts of Carbon Taxes without IGCEP, with IGCEP, and with IGCEP and Electri cation Real GDP — low CT Real GDP — high CT 4 4 3 3 % change from baseline % change from baseline 2 2 1 1 0 0 -1 -1 -2 -2 2025 2030 2040 2050 2025 2030 2040 2050 Global lower middle income poverty line — low CT Global lower middle income poverty line — high CT 4 4 % change from baseline % change from baseline 3 3 2 2 1 1 0 0 -1 -1 -2 -2 2025 2030 2040 2050 2025 2030 2040 2050 Without IGCEP IGCEP IGCEP + electrification 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 5.1.3 Policy Package 3: Investments in Human Capital Development Achieving equitable development and climate resilience in Pakistan is hard to envision without very substantial efforts to improve human capital. In the policy package simulated here, the focus is twofold: (a) accelerating the decline in the total fertility rate (TFR) toward replacement fertility; and (b) addressing child stunting by expanding access to safe water and sanitation (WASH), as per SDG 6, to all households that currently lack access. Under the modeled scenario, TFR drops to 2.0 by 2035 and is then constant at 2.0 until 2050. Under BAU, total fertility drops to 3.0 between 2030 and 2040, and to 2.0 by 2050. Figure 5.4: Macro impacts of human capital (HC) development and HC plus other policy packages Real GDP GDP per capita 30 30 % change from baseline % change from baseline 25 25 20 20 15 15 10 10 5 5 0 0 2025 2030 2040 2050 2025 2030 2040 2050 GHG emissions (MTCO2e) Global lower middle income poverty line 20 0 % change from baseline % change from baseline 15 -1 10 -2 5 0 -3 -5 -4 -10 -5 -15 -20 -6 2025 2030 2040 2050 2030 2040 2050 HC HC + IGCEP HC + IGCEP + electrification + low CT HC + IGCEP + electrification HC + IGCEP + electrification + high CT The combined policy package triggers a strong boost to GDP with a 15-year lag as healthier and better educated children enter the labor market and female labor market participation also rises due to the fertility decline. As shown in Figure 5.4, GDP rises 7 percentage points by 2040, and more than 12 percentage points by 2050. Due to the accelerated decline in fertility, GDP per capita also shows a large increase starting in 2040, with a 15 percent increase by 2040 and a 25 percent increase by 2050. The policy is also equity-enhancing. By 2050, the commensurate decline in poverty is sustained between 2.6 percent and 4.7 percent. 5.1.4 Investments in Adaptive Social Protection Policies Social protection (SP) can help build the resilience of poor and vulnerable households to prepare for, cope with, and adapt to climate shocks. It does so by (i) reducing poverty and vulnerability and increasing coping capacity ahead of shocks, (ii) providing a steppingstone toward climate-resilient livelihoods, and (iii) supporting inclusive disaster preparedness, and disaster response and recovery. Pakistan's existing SP system can be strengthened and mobilized for more efficient delivery of relief and recovery building on lessons learned from the response to the 2022 floods. Ex-ante SP instruments could also be used to incentivize proactive protective behaviors and activities. Based on PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 the recent flood relief process, it is evident that the current National Socio-Economic Registry (NSER) is not able to support most Pakistani households in the informal sector who fall outside existing risk- sharing and risk-mitigation mechanisms and are not eligible for existing safety net programs that are targeted to the very poor, nor covered by social insurance, including formal pensions. Many are likely to incur significant losses due to climate-related disasters and could be driven into poverty. By integrating the principles of an adaptive SP system, swift support could be provided to such vulnerable groups. A comprehensive strategy to combine social assistance and insurance schemes, including microinsurance, health care coverage, and savings products for the poor and those in the informal sector, is essential. In addition, Pakistan needs to leverage the SP system to promote medium- to long- term incentives for households to prioritize human capital accumulation, in particular education, including skills for work in green sectors. This will require high-level government commitment and inter-governmental coordination between the federal and provincial levels. 5.2 Financing a Resilient and Inclusive Development Pathway The total investment needs for a comprehensive response to Pakistan's climate and development challenges between 2023 and 2030 amount to around US$348 billion (or 10.7 percent of cumulative GDP for the same period) (see Figure 5.5). This consists of US$ 152 billion for adaptation and resilience and US$196 billion for deep decarbonization (see more details in Annex 6: Methodology for Estimating Total Climate and Development Financing Needs). This figure is enormous in comparison with the historic average annual development budget at the federal and provincial levels and currently available finance, which was roughly US$11 billion per annum between 2011/2012 and 2014/2015. However, the needs for adaptation and resilience is likely an underestimation due to unavailability of data on investment needs for key transformations, such as the sustainable agri-food system, flood risk management plan, shock-responsive social protection system, and climate-resilient rural connectivity. These estimates suggest a significant climate and development gap, for which a number of tangible solutions can be proposed to start bridging it. An illustrative assessment based on a retrospective review of the level of funding in recent years suggests that the current financing composition available over the next decade can be estimated to be around US$39 billion from public finance (including MDB financing) and US$9 billion from public-private partnerships for infrastructure projects. This will clearly not be enough to address the priority transitions identified above. As Pakistan is calling for additional international financing, the government is encouraged to explore the repurposing of subsidies in the energy, agriculture and water sectors and improving tax and tariff collection. This can be done while protecting the poorest and most vulnerable through well targeted programs and transfers. Specifically, Pakistan could maintain its commitment to energy decarbonization and accelerate a comprehensive reform in the energy sector, including piloting the implementation of carbon pricing instruments. If fully implemented the combined revenue of these measures could result in around US$ 10 billion per year. Using the best available data and a review of the literature, Figure 5.6 presents total indicative climate financing needs (not incremental costs) and potential resources for up to 2030. These estimates are tentative, but they illustrate the order of magnitude of the financial need. This is based on the latest CPEIR in 2017; more recent data are not available. This will require a careful evaluation of international best practices. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT Figure 5.5: Indicative Estimation of Total Investment Needs for Climate-Resilient and Low-Carbon Development for up to 2030 Disaster Preparedness and Response 85.7 & Resilience Adaptation Universal Water & Sanitation 55.2 Modernization of Irrigation Systems 4.0 Low Carbon Power Supply (Generation and Distribution) 84.7 Total Investment Needs Transport Decarbonization 57.0 Deep Decarbonizatiom Phase Out Coal & Replace with Solar 31.0 EE Industry 9.8 EE Buildings 5.5 Clean Cooking 1.3 EE Irrigation 0.3 Cross-Cutting Improve Wastewater Management Total CF Needs: 7.5 Strengthen Municipal SWM US$ 348 billion 6.4 0 50 100 150 200 250 300 350 Financing Amount (in US$ billion) A comprehensive climate financing strategy is therefore needed to support the achievement of this transformative climate transition. The key elements should include these four: (i) optimizing the utilization of domestic resources by removing the inefficiencies and inequities in their use; (ii) mobilizing additional domestic financing by widening the tax base and developing innovative financing mechanisms at the federal and provincial levels; (iii) creating an enabling policy and regulatory environment to bring in private investments; and strengthening its own capacity to access international climate finance. That said, it is also clear that it will be hard to fully close that gap in the short term, and hence further discipline will be needed to refine, prioritize, and sequence investment decisions. (1) Optimizing the utilization of domestic resources Better utilization of domestic resources could continue to play an important role in providing climate finance. This includes bolstering climate-related spending by mainstreaming climate risk considerations into development planning, sectoral policies, and programs. Hypothetically, if the percentage of total climate-related public expenditure over total public expenditure doubles from its current level of 6.9 percent to 13.8 percent, projected climate public expenditure for the next decade could reach US$98 billion, which would translate into about US$9.8 billion of climate finance per year (or 3.7 percent of 2020 GDP). To do so, it is crucial that the design of each capital project consider the potential impacts of climate change on project implementation and sustainability, as well as opportunities to integrate low-carbon and energy-efficient standards where technically and financially feasible. Further, there is huge potential to revise the current spending of explicit subsidies on fossil fuels and agriculture-water to better target the poorest and the most vulnerable and strengthen their adaptive capacity over time. This could potentially repurpose a portion of the US$9.1 billion (or 3.5 percent of 2020 GDP) of climate-damaging subsidies to scale up investments to decarbonize growth and build resilience. The detailed methodology and assumptions for the climate finance stocktaking is provided in Annex 6. Please note that the sectoral needs are based on the best available data and analytics. Certain investment needs of critical sectors, such as climate-smart agriculture, integrated land management, which are identified as key priorities of the CCDR, are nevertheless unavailable. To avoid double counting, the total recovery and reconstruction needs for 2022 floods (US$16.3 billion for up to 5 years) were not added because this figure falls within the range of the average disaster preparedness and response cost of US$10.7 billion a year based on MOCC analysis. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 (2) Mobilizing additional financial resources through revenue enhancement measures and innovative financing mechanisms The introduction of innovative financing mechanisms will be crucial for narrowing or even closing the climate financing gap. This may include the introduction of carbon taxation, implementation of green/blue bonds, and promotion of PPPs. As the figure suggests, tripling or quadrupling overall investments from the private sector, including FDI, could potentially close up to 40 percent of the total financing gap until 2030, with some instruments bringing in long-term fiscal, climate, and environmental benefits. Practical experience has shown that green bonds are effective in generating revenue for high-cost, large-scale development programs. They seem well-adapted to the needs of key sectors, although further institutional and regulatory adjustments may be needed and are contingent upon the global financial environment as well as the country's macro-fiscal stability. The introduction of a high carbon tax with full revenue recycling (see Section 5.2) could potentially generate revenue of US$28.6 billion over the next decade, with much of the fiscal revenue to be accumulated at a later stage of the implementation. Roughly 40–50 percent of total revenue could be leveraged to support decarbonization efforts, while the rest would be transfers to the poorest 50 percent of households. The role of the private sector in addressing climate challenges is crucial, but it is constrained by a lack of resources and skills and the need to transition to sustainable practices. This is due mainly to a lack of green financing, especially investments in green infrastructure projects and human capital, as well as the absence of an enabling environment for investment, as discussed in Chapter 3. This is even more true within the large SME sub-sector, which accounts for an estimated 90 percent of all businesses in Pakistan and employs roughly 80 percent of the non-agricultural labor force. Besides SMEs, a significant proportion of businesses in Pakistan operate in the informal sector, which accounts for 35–50 percent of undocumented economic activity. This not only keeps them outside the tax net but also makes it difficult to provide them with financial services. (3) Strengthening the capacity to access international climate finance and bolster private sector investments Enhancing institutional capacity for climate action implementation and transparency on monitoring and reporting are two urgently needed prerequisites for Pakistan to unlock access to international climate finance. While Pakistan can do much to raise domestic resources, as discussed above, the investments needed to build climate resilience and accelerate a transition away from fossil fuels will be expensive and substantially out of reach for domestic capital, despite its significant development and climate benefits. Such investments typically require concessional international finance. Specifically, developing and implementing a nationwide GHG MRV and adaptation M&E system would allow the government to keep track in real time of the implementation progress being made toward its climate targets. Mainstreaming climate adaptation and mitigation considerations into the planning process and the public financial management system and process through climate risk screening and climate budgeting would further improve the transparency, efficiency, and impact of public spending on climate actions. To achieve these objectives, it is imperative that the government strengthen its institutional and technical capacities for climate-informed planning, climate action implementation, and stakeholder engagement. Importantly, this needs to be accomplished through a whole-of- economy approach across central and line ministries as well as provincial departments. From a private sector perspective, institutional capacity at the regulatory, sectoral, and corporate levels needs to be strengthened to scale up green investment. Capital markets in Pakistan are shallow, the adoption of globally accepted environmental and social risk management (ESRM) systems is very low, and there is a lack of institutional capacity at the regulatory, sectoral, and corporate levels. To raise its competitiveness and attractiveness to potential PPP sponsors, the government should pay particular attention to strengthening its capacity on PPP management and 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT Iimproving its country risk rating, especially the rule-of-law indicators. Additionally, the regulatory framework for FDI needs to be strengthened, including at the subnational level, and political risks addressed to attract green investments. Policy measures need to be adopted to scale up green investments in the financial sector, especially through (i) enhancing the existing Green Banking Guidelines and mandating their adoption to allow the banking sector to develop much-needed ESRM frameworks; (ii) issuing green financing targets to FIs from the State Bank of Pakistan (SBP); (iii) introducing commercially viable incentives for green financing for FIs to build capacity and pursue green finance and lend to investments that reduce GHG emissions; and (iv) requiring FIs to report on the GHG emissions impact of their financing. Green financing targets should be designed to minimize potential misallocation of credit, accompanied by capacity building of relevant stakeholders, should be flexible enough to allow mid-course correction, and should be employed in a way that encourages sustainable operations for FIs. 5.3 The Aggregate Effects of Policy Packages on Emissions Figures 5.6 depicts the aggregated emissions-reduction effects of different policy pathways. The trend lines use the modeled BAU, which predicts an increase in total GHG emissions from 524 million MtCO2e in 2020, to 890 million MtCO2e in 2030, and to 1633 million MtCO2e in 2050. This represents an increase of 312 percent from 2020 levels, a lower projection than the emissions target for 2030 included in Pakistan's NDC (2021). The difference is mainly due to a lower modeled GDP growth rate. The modeled growth rate uses Pakistan's historical GDP growth trends and projections out to 2029, which are then extrapolated to 2050. This gives an average growth rate of about 4 percent per year. In contrast, the NDC assumes 9 percent GDP growth per year. A climate-resilient, low-carbon and equitable development path would enable Pakistan to reach its unconditional NDC target for 2030 (15 percent below BAU) and beyond. The low-carbon transition of the energy sector through implementing the IGCEP, promoting electrification, and establishing a carbon tax (Scenario 3) could help Pakistan reduce its total emissions by 12 percent from BAU by 2030. Additionally, investing in SWM, completing the NBSs identified in the NDC, and achieving the MP (Scenario 4) could lead to a total emission reduction of 33 percent from BAU by 2030. Achieving deeper decarbonization (Scenario 5) would require implementing more radical mitigation policies and technologies beyond 2030, especially those that bring in negative emissions. Analysis commissioned by the World Bank shows that, with additional policies and investments, energy sector emissions could be constrained to peak by 2035, thereby falling from 256 MtCO2 in 2020 to 206 MtCO2 by 2050. This is against a backdrop of a 380 percent increase in economic output, resulting in a 160 percent increase in energy demand, and a 400 percent increase in industrial output over the same period. Achieving such an emissions trajectory in the energy sector would require i) a tripling of electricity's share of energy demand (to 48 percent by 2050), rapid scale-up of RE, combined with an accelerated phase down of fossil fuels; ii) 80 percent penetration of energy-efficient appliances; iii) 80 percent of buildings classified as “green” through EE&C retrofits and enforcement of high standards for new buildings; iv) massive adoption of efficient technologies and process changes in industry; and v) aggressive deployment of mass transit and EVs in the transport sector. By 2050, industrial emissions would represent 52 percent of total energy sector emissions, despite very significant decoupling of emissions from industrial growth. Bringing down industrial emissions further would William Mako, Ijaz Nabi, and Amna Mahmood, “Developments in Climate Finance and Implications for Pakistan,” Insights for Change (Consortium for Development Policy Research (CDPR) August 2022), https://mcusercontent.com/bfb54020f918218452cd35b67/files/1c1035c0-0112-4a1b-1249- 477f36cacd0a/Development_in_Climate_Finance.pdf. To promote green finance and global E&S practices in Pakistan through market-creation activities, IFC has been working with the SBP on capacity building through policy-level advisory work, and with FIs to demonstrate the business case for global finance (GF). In addition, in the past, IFC has worked with two of its client banks to showcase the potential for GF across multiple sectors in their existing portfolio. The World Bank has commissioned “energy transition” studies for a number of countries in South Asia, and the Pakistan study is under implementation. Draft results were presented during a webinar organized on July 5, 2022 and can be accessed at https://my.atainsights.com/webinar/wb-the-energy-transition-in-pakistan-meeting-growing-energy-demand-sustainably In addition to achieving 155GW of installed solar and wind capacity and 52GW of hydropower capacity by 2050, the government would have to institute a moratorium on all new coal plants (except those committed up to 2025), carry out early decommissioning of coal plants after 25 years of operation, and ensure no new thermal plants (coal, gas and oil) after 2030. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 require the deployment of carbon capture, utilization, and storage (CCUS) targeting cement process emissions, which if deployed at a 50 percent penetration rate, could further reduce energy-sector GHGemissions by 29 MtCO2 to reach 177 MtCO2 by 2050. Implementation of such policies could put Pakistan on a path to “net zero” by 2070. Furthermore, expanding the forest cover to 15 percent of total land cover (or 16 billion trees) through the TBTTP (6 percent forest cover) could achieve a total sequestration of 800 million MtCO2e between 2020–2040, or 40 million MtCO2e annually. Figure 5.6 Aggregated GHG Emissions Impacts from Different Policy Scenarios for 2020–2050 (right panel) in Comparison to the NDC (2021) Target for 2030 (left panel) (a) NDC Target (b) Projected Total National GHG Emission 2000 1603 1600 Total GHG Emission (MtCO2eq) 1363 1200 802 800 400 0 2030 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 0% Total Redcution of GHG Emission from Baseline (%) -15% -15% -30% -45% -50% -60% -75% -15% from Modeled BAU (E3Me) IGCEP + Electrification 1. IGCEP NDC BAU 2. -50% from Modeled BAU (E3Me) Unconditional Target 3. Scenario 2 + High Carbon Tax Conditional Target BAU (E3ME) 4. Scenario 3 + SWM + NBS + MP 5. Deep Decarbonization Scenario This is a rough estimation based on the carbon sequestration value provided in the NDC. IGCEP: Rapid expansion of RE including wind, solar and hydropower, reaching a total of 63 percent production by 2030, per revised IGCEP 2021. Electrification: Electricity as a percentage of final energy consumption increases from 20 percent in 2020 to 28 percent by 2030. High Carbon Tax: Rate of US$2–$10/tCO2 in 2025 gradually increasing to US$40/tCO2 by 2050. Revenues from taxes are recycled as a) rebates to hard-to-decarbonize industries, and b) transfers to the poorest 50 percent of households. SWM: The high emissions abatement scenario assumes reducing dumping by 5 percent in 2025, 25 percent in 2030, and 50 percent in 2035. NBS: Implementation of the Billion Trees Afforestation Project and the Ten Billion Tree Tsunami Programme, which together will sequester CO2 around 500 million MtCO2e by 2040 per the NDC. MP: In 2021, Pakistan signed the Global Methane Pledge to curb its methane emissions by 30 percent, to about 99 MtCO2e, by 2030. It is assumed that the government will maintain this same amount of methane emissions between 2030 and 2050. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 6. SUMMARY OF RECOMMENDATIONS PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 6. SUMMARY OF RECOMMENDATIONS 6.1 Prioritization Framework This CCDR aims to provide recommendations for how Pakistan could embark on a sustainable development path while rationally managing climate change-related physical, transitional, and financial risks. Each of the policy recommendations is underpinned by a handful of short-, medium- and long-term policy actions that, if taken, would support the country in shifting into a climate-resilient development path. Many of these policies will also move the country toward low-carbon growth. The policy recommendations and specific policy actions differ in their potential impacts on development and climate as well as in their implementation readiness. Additionally, Pakistan faces several other challenges, including internal resource constraints, capacity shortfalls, and governance and political economy issues. The CCDR attempts to provide preliminary prioritization for each policy recommendation on these aspects, which needs to be further discussed and evaluated with key stakeholders. Table 6.1 presents the criteria that formed the foundation for evaluating the recommended policy actions. Moreover, the CCDR recognizes that in-depth analysis of institutional and regulatory framework issues and governance and political economy challenges will be required for these policy recommendations before their preparation and implementation. Table 6.1: Criteria for Prioritizing and Sequencing the Recommended Policy Actions Note: The framework presented below is intended to provide a relative prioritization and to inform the sequence of implementation. Criteria Description Impact on poverty reduction Human Capital Potential for employment generation Development Impact Economic Growth Relevance to growth as measured by contribution to GDP Natural Capital Conservation and restoration Impact on emission reduction Mitigation Potential for lock-in Climate Impact Reduced vulnerability to climate risks Resilience Enhanced adaptive capacity Adequacy of policy framework Enabling Architecture Adequacy of institutional framework Implementation Technology availability Readiness Impact on fiscal burden Financing Attractiveness to private sector Table 6.2 below provides the full list of policy recommendations and their underpinning policy actions. It also presents a snapshot of their overall performance in supporting development and climate outcomes. In each case, the number of shaded circles depicts the priority level of the policy package against the sub-criteria detailed in Table 6.1, while the red, yellow, and green circles offer a quick visual depiction of their impact on development and climate and on their implementation readiness. Further, the CCDR attempts to categorize the urgency of each policy action by considering its capacity to provide in providing an enabling environment and technical foundation for other policy actions, as well as the current political economy. In general, it is recommended that short-term (ST) policy actions 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT be initiated and/or implemented within the next two years leading up to 2024/2025; medium-term (MT) policy actions be initiated and/or implemented within the following five years, or up to 2029/2030; and (iii) longer-term (LT) policy actions be initiated and/or implemented post-2030. Please refer to the subscript after each policy action for the proposed level of urgency. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 Table 6.2: Summary of Policy Recommendations in the CCDR Urgency: *** Short-Term (2022/23-2024/25) ** Medium-Term (2024/25-2029/30) * Long-Term (2030 Onwards) Policy Priority Prioritization recommendation policy actions result Policy Package A: Transforming the Agriculture-Food System Human Capital 1. Repurpose Ÿ Gradually phase down the wheat support system*** Development Growth existing subsidies Ÿ Gradually remove the subsidy to electric tubewells*** Natural Capital in agriculture and Ÿ Gradually phase down the natural gas subsidy for fertilizer irrigation production** Resilience Ÿ Implement reforms in the sugar sector: such as removing Climate Mitigation licensing restrictions on new sugar mills and removing import Enabling Architecture duties and export subsidies for sugar *** or ** Readiness Financing Ÿ Repurpose released resources to support smallholder farmers to transition to CSA and RA practices ** 2. Support a Ÿ Implement reforms in the sugar sector: such as removing Human Capital Development Growth sustained adoption licensing restrictions on new sugar mills and removing import Natural Capital of CSA and RA duties and export subsidies for sugar *** or ** practices Ÿ Repurpose released resources to support smallholder farmers Resilience to transition to CSA and RA Climate Mitigation Ÿ practices ** Enabling Architecture Readiness Financing Human Capital 3. Improve and Ÿ Invest in infrastructure to improve hydraulic control and flow Development Growth modernize measurement*** or ** Natural Capital irrigation and Ÿ Improve water allocation practices and water measurement, drainage to provide billing, and collection, starting with the tariff on surface Resilience climate-resilient, irrigation water (abiana) *** Climate Mitigation predictable, and Ÿ Finalize and implement the updated national flood protection Enabling Architecture flexible services in plan ** Readiness Financing response to Ÿ Develop an irrigation water management system** changing demand Human Capital 4. Strengthen Ÿ Support smallholder farmers to improve their livestock Development Growth climatesmart productivity*** Natural Capital livestock systems Ÿ Develop a roadmap to restore priority ecosystem services*** and prioritize Ÿ Strengthen economic incentives for community action to Resilience ecosystems conserve and restore ecosystems** Climate Mitigation and landscape Ÿ Build institutions and capacity on climate-smart livestock Enabling Architecture restoration systems and landscape restoration* Readiness Financing Policy Package B: Building Resilient and Livable Cities 5. Strengthen Ÿ Modernize urban land management systems to incentivize Human Capital Development Growth urban planning and urban densification*** or ** Natural Capital management Ÿ Improve land regulation and land use planning*** or ** capabilities Ÿ Support the implementation of NBSs** Resilience Ÿ Formulate national urban resilience strategy and provincial-level Climate Mitigation as well as city-level adaptation plans** Enabling Architecture Ÿ Invest in measures to achieve national clean air standards and Readiness Financing reduce GHG emissions** 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT Policy Priority Prioritization recommendation policy actions result Human Capital 6. Enhance green Ÿ Accelerate large-scale investment in mass-transit solutions *** Growth Development urban mobility or ** Natural Capital Ÿ Improve first- and last-mile connectivity *** Ÿ Introduce incentives to reduce traffic congestion *** Resilience Ÿ Invest in pedestrian mobility and encourage non-motorized Climate Mitigation transport *** Enabling Architecture Ÿ Set policy targets and a regulatory framework for sustainable Readiness Financing fuel adoption *** Ÿ Establish measures to discourage private-vehicle mobility ** Ÿ Develop compact cities and limit sprawl ** Ÿ Support new greenfield infrastructure that reduces in travel distance ** Ÿ Encourage e-commerce and work-from-home arrangements to reduce urban travel ** Ÿ Replace all motorized shared modes with zero emissions versions ** Ÿ Transform 60 percent of the bus and transport fleet to zero emissions by 2030, and aim for 100 percent zero emissions vehicles by 2050 * Human Capital 7. Promote Ÿ Strengthen regulations for SWM and transition to low-carbon Development Growth climate-smart solutions ** Natural Capital municipal services Ÿ Expand water treatment capacity ** Ÿ Rehabilitate existing water supply infrastructure ** Resilience Climate Mitigation Enabling Architecture Readiness Financing 8. Create Ÿ Strengthen cost recovery for urban municipal services** Human Capital sustainable Ÿ Strengthen the legal and regulatory framework for PPPs ** Development Growth Natural Capital revenue streams Ÿ Develop a performance-based, climate-resilience, grant- for green and financing mechanism ** or * Resilience resilient Climate Mitigation urbanization Enabling Architecture Readiness Financing Policy Package C: Accelerating a Just Transition in Energy and Transport Human Capital 9. Transition from Ÿ Immediate initiation of competitive bidding, starting with 2 GW Development Growth fossil fuels by the middle of 2023 followed by annual rounds of Natural Capital procurement to meet the IGCEP targets *** Ÿ Accelerate plans for additional solar and wind capacity at Resilience identified sites near to existing thermal plants and substations, Climate Mitigation and through parallel development of strategically located RE Enabling Architecture parks ** Readiness Financing Ÿ Undertake annual updating of IGCEP to quickly respond to changes in supply projections ** 10. Improve supply- Ÿ Implement reforms to ensure that tariffs better reflect costs, Human Capital Development Growth side efficiency and target electricity and gas subsidies to the poorest Natural Capital consumers*** or ** Ÿ Introduce private sector participation in the management of the Resilience DISCOs, combined with a modernization drive*** or ** Climate Mitigation Ÿ Introduce a competitive wholesale power market*** Enabling Architecture Ÿ Invest in the electricity transmission network to improve its Readiness Financing reliability and prepare for increased variability** or * 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 Policy Priority Prioritization recommendation policy actions result Human Capital 11. Address Ÿ Finalize and implement an ambitious EE&C policy through a Growth Development demand-side strong and well-resourced NEECA and the related provincial Natural Capital efficiency EE&C agencies *** Ÿ Set minimum performance standards for mass-market Resilience appliances *** Climate Mitigation Ÿ Improve the energy efficiency of existing and new buildings in Enabling Architecture the commercial and industrial sectors ** Readiness Financing Ÿ Shift to electricity where economically and technically feasible, such as space and water heating ** Ÿ Institute commercially driven replacement or exchange programs for inefficient lightbulbs, streetlights, and fans ** Ÿ Develop the market for ESCOs to mobilize private-sector investment ** Human Capital 12. Decarbonize Industrial Decarbonization Development Growth the industrial and Natural Capital transport sectors Ÿ Incentivize the uptake of carbon-, energy- and water-efficient technologies and production processes, with replacement of Resilience old, inefficient motors and boilers a near-term priority ** Climate Mitigation Ÿ Promote electrification and fuel efficiency improvements, Enabling Architecture including through waste heat recovery and fuel switching to Readiness Financing sustainable sources such as bioenergy and green hydrogen ** Ÿ Pilot and adopt innovative technologies for hard-to-abate industrial processes such as cement production ** Ÿ Improve water usage and wastewater treatment ** Transport Decarbonization Ÿ Facilitate the revival of PR and swift implementation of the PR Strategic Plan *** Ÿ Consider private sector involvement in PR ** Ÿ Provide concessions to operate freight trains on PR tracks *** Ÿ Facilitate the modernization of the trucking sector *** Ÿ Establish and implement a new commercial strategy for PR ** Ÿ Implement railway economic corridors ** Ÿ Develop new rail links; upgrade and restore existing rail links; and extend new lines * Ÿ Support consolidation of trucking flows using technology * Human Capital 13. Ensure “just” Ÿ Develop a clear understanding of those who might stand to lose Development Growth transitions politically and financially and avoid disproportionately favoring Natural Capital some interest groups over others *** Ÿ Devise strategies for “just” transitions to overcome political Resilience resistance *** Climate Mitigation Ÿ Ensure protection of livelihoods through retraining and other Enabling Architecture measures *** and ** Readiness Financing Ÿ Achieve universal access to modern energy by 2030, with a particular focus on rural households and on the uptake of off- grid electrification and clean-cooking solutions *** Policy Package D: Strengthening Human Capital for Sustained and Equitable Development and Climate Resilience Human Capital 14. Improving Ÿ Provide equitable and sustainable access to safely managed Development Growth WASH and family water and sanitation facilities to all households, as per SDG 6 Natural Capital planning services target *** Ÿ Invest in family planning services to reduce fertility rate by Resilience 2035 *** Climate Mitigation Enabling Architecture Readiness Financing 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT Policy Priority Prioritization recommendation policy actions result Human Capital 15. Building a Ÿ Establish a policy framework for shock-responsive SP, including Growth Development shock-responsive ex-ante actions to reduce risk *** Natural Capital SP system Ÿ Ensure the dynamism of NSER as an integral element of strengthening the SP-delivery system *** Resilience Ÿ Expand coverage of the poor and vulnerable by SP programs Climate Mitigation and increase the benefit adequacy *** or ** Enabling Architecture Readiness Financing Policy Package E: Aligning Institutions, Policies, Incentives, and Financing to Scale Up Climate Actions Human Capital 16. Aligning Ÿ Set up systematic metrics and measurement and reporting Development Growth institutions, systems to monitor and report on the costs and benefits of Natural Capital policies, incentives, climate actions *** and Ÿ Introduce climate-risk screening and climate-informed public Resilience financing financial management at the federal and provincial levels *** Climate Mitigation Ÿ Develop and implement a climate and disaster resilience Enabling Architecture framework and financing strategy *** Readiness Financing Ÿ Green the financial sector by (i) enhancing the existing Green Banking Guidelines and mandate its adoption; (ii) issuing green financing targets to FIs from the SBP; (iii) introducing commercially viable incentives for green financing; and (iv) requiring FIs to report on climate impacts *** Ÿ Finalize and implement the NAP and Provincial Action Plans to mainstream climate and broader environmental actions into development planning ** Ÿ Strengthen the institutional and regulatory framework on PPP management and for FDI ** 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 7. BIBLIOGRAPHY Air Quality Life Index. Country Spotlight: Pakistan, 2022. https://aqli.epic.uchicago.edu/country- spotlight/pakistan/#:~:text=Pollution%20Ranking&text=Pakistan%20is%20today%20the%20world's,(WHO)% 20guideline%20was%20met. Algur, Kisan Dilip, Surendra Kumar Patel, and Shekhar Chauhan. “The impact of drought on the health and livelihoods of women and children in India: A systematic review.” Children and Youth Services Review 122 (March 2021): 105909. Doi: https://doi.org/10.1016/j.childyouth.2020.105909. Armstrong, Richard L., Karl Rittger, Mary J. Brodzik, Adina Racoviteanu, Andrew P. Barrett, Siri-Jodha Singh Khalsa, Bruce Raup, et al. “Runoff from glacier ice and seasonal snow in High Asia: separating melt water sources in river flow.” Regional Environmental Change 19 (2019) :1249–1261. Doi: https://doi.org/10.1007/s10113-018-1429-0. Babar, Maryam Salma, Saema Tazyeen, Hiba Khan, Christos Tsagkaris, Mohammad Yasir Essar, and Shoaib Ahmad. “Impact of climate change on health in Karachi, Pakistan.” The Journal of Climate Change and Health 2 (May 2021): 100013. Doi: https://doi.org/10.1016/j.joclim.2021.100013. Brollo, Fernanda, Emine Hanedar, and Sébastien Walker. Pakistan: Spending Needs for Reaching Sustainable Development Goals (SDGs). IMF Working Paper WP/21/108. Washington, DC: International Monetary Fund, 2021. https://www.imf.org/en/Publications/WP/Issues/2021/04/29/Pakistan-Spending-Needs-for- Reaching-Sustainable-Development-Goals-SDGs-50285. Buchner, Barbara, Baysa Naran, Pedro de Aragão Fernandes, Rajashree Padmanabhi, Paul Rosane, Matthew Solomon, Sean Stout, et al. Global Landscape of Climate Finance 2021. Climate Policy Initiative, 2021. Last accessed September 5, 2022. https://www.climatepolicyinitiative.org/publication/global-landscape-of- climate-finance-2021. Cruz, Jose Luis and Esteban Rossi-Hansberg. The Economic Geography of Global Warming. Becker Friedman Institute Working Paper no. 2021-130, 2021. https://bfi.uchicago.edu/insight/research-summary/the- economic-geography-of-global-warning. Davies, Stephen and William Young. “Unlocking Economic Growth Under a Changing Climate: Agricultural Water Reforms in Pakistan.” In Water Resources of Pakistan: World Water Resources, vol. 9. Edited by M.A. Watto, M. Mitchell, and S. Bashir. Cham, Switzerland: Springer, 2021. https://doi.org/10.1007/978-3-030- 65679-9_7. Fernandez Milan, Blanca and Felix Creutzig. “Reducing urban heat wave risk in the 21st century.” Current Opinion in Environmental Sustainability ISSN: 1877-3435 – 14 (June 2015): 221–231. Doi: http://dx.doi.org/10.14279/depositonce-5766. Global Burden of Disease (GBD) 2019 Risk Factors Collaborators. “Global burden of 87 risk factors in 204 countries and territories, 1990–2019: a systematic analysis for the Global Burden of Disease Study 2019.” Global Health Metrics 396, no. 10258 (October 2020): P1223–1249, last accessed September 5, 2022. Doi: https://doi.org/10.1016/S0140-6736(20)30752-2. German Watch. Global Climate Risk Index 2021. https://www.germanwatch.org/en/19777. Global Change Impact Studies Centre. National Greenhouse Gas Inventory Information for Pakistan. 2018. Government of Pakistan. Pakistan: Updated Nationally Determined Contributions 2021. Government of Pakistan, 2021. https://unfccc.int/sites/default/files/NDC/2022- 06/Pakistan%20Updated%20NDC%202021.pdf. Government of Pakistan, Finance Division. Pakistan Economic Survey 2020–21. Government of Pakistan, 2021. https://www.finance.gov.pk/survey_2021.html. Government of Pakistan, Finance Division. Medium Term Budget Strategy Paper (2022/23–2024/25). Government of Pakistan, 2022. https://www.finance.gov.pk/budget/Budget_2022_23/MTBSP_2022_23___2024_25.pdf. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT Government of Pakistan, Ministry of Climate Change. National Economic and Environmental Development Study. Government of Pakistan, 2011, https://unfccc.int/files/adaptation/application/pdf/pakistanneeds.pdf. Government of Pakistan, Ministry of Climate Change. Technical Report on Karachi Heat wave June 2015. Government of Pakistan, 2015. https://ghhin.org/wp-content/uploads/heatwave.pdf. Government of Pakistan, Ministry of Climate Change. Pakistan's Second National Communication on Climate Change to United Nations Framework Convention on Climate Change (UNFCCC). Government of Pakistan, 2019. https://unfccc.int/documents/199292. Government of Pakistan, Ministry of Climate Change. Policies: National Electric Vehicle Policy. 2019. http://www.mocc.gov.pk/Policies. Government of Pakistan, Ministry of Climate Change. Policies: Final Updated National Climate Change Policy. 2021. http://www.mocc.gov.pk/Policies. Government of Pakistan, Ministry of Energy. National Electricity Policy 2021. Government of Pakistan, 2021. http://www.mowp.gov.pk/userfiles1/file/National%20Electricity%20Policy%202021.pdf. Hannah Ritchie and Max Roser. “CO2 and Greenhouse Gas Emissions.” Our World in Data. 2020. https://ourworldindata.org/greenhouse-gas-emissions. Ian Parry, Simon Black, and Nate Vernon. Still Not Getting Energy Prices Right: A Global and Country Update of Fossil Fuel Subsidies. Washington, DC: International Monetary Fund, 2021. https://www.imf.org/en/Publications/WP/Issues/2021/09/23/Still-Not-Getting-Energy-Prices-Right-A-Global- and-Country-Update-of-Fossil-Fuel-Subsidies-466004. IMF. Fossil Fuel Subsidies Database. Washington, DC: International Monetary Fund, 2022. https://www.imf.org/en/Topics/climate-change/energy-subsidies. India State-Level Disease Burden Initiative Air Pollution Collaborators. “Health and economic impact of air pollution in the states of India: the Global Burden of Disease Study 2019.” Lancet Planet Health 5, no. 1 (January 2021): e25-e38. Doi: https://doi.org/10.1016/S2542-5196(20)30298-9. Looney, R.E. “The Growth and Decline of Pakistan's Rail System.” International Journal of Transport Economics 25, no. 3 (October 1998): 353–378. https://www.jstor.org/stable/42747994. Khan, Mohammed Bilal. “Alternative Energy Policy 2019 at a Glance.” The Nation, March 18, 2020. https://nation.com.pk/2020/03/18/alternative-energy-policy-2019-at-a-glance/. Lutz, A.F., W.W. Immerzeel, A.B. Shrestha, and M.F.P. Bierkens. “Consistent increase in High Asia's runoff due to increasing glacier melt and precipitation.” Nature Climate Change 4 (2014): 587–592. Doi: https://doi.org/10.1038/nclimate2237. Mako, William P., Ijaz Nabi, and Amna Mahmood. “Developments in Climate Finance and Implications for Pakistan.” Insights for Change. Consortium for Development Policy Research (CDPR), August 2022. https://mcusercontent.com/bfb54020f918218452cd35b67/files/1c1035c0-0112-4a1b-1249- 477f36cacd0a/Development_in_Climate_Finance.pdf. Mako, William P., Ijaz Nabi, Amna Mahmood, and Shehryar Khan. Recent developments in climate finance: Implications for Pakistan—Main Report. Working Paper PAK-22034. International Growth Center (IGC) and the Consortium for Development Policy Research (CDPR), 2022. https://www.theigc.org/wp- content/uploads/2022/09/Mako-et-al-2022-Working-paper.pdf. Malik, Aslam Amin, Pervaiz Amir, Shakeel Ahmad Ramay, Zuhair Munawar and Vaqar Ahmad. National Economic and Environmental Development Study (NEEDS). Ministry of Climate Change, Government of Pakistan, 2011. https://unfccc.int/files/adaptation/application/pdf/pakistanneeds.pdf. Malik, Sadia Mariam, Haroon Awan, and Niazullah Khan. “Mapping vulnerability to climate change and its repercussions on human health in Pakistan.” Globalization and Health 8, no. 31 (2012). Doi: https://doi.org/10.1186/1744-8603-8-31. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 Mansuri, Ghazala, Mohammad Farhanullah Sami, Mohammad Ali, Bilal Javed, Priyanka Pandey, and Dung Thi Thu Doan. When Water Becomes a Hazard: A Diagnostic Report on The State of Water Supply, Sanitation, and Poverty in Pakistan and Its Impact on Child Stunting. Working paper. Washington DC: World Bank, 2018. https://openknowledge.worldbank.org/handle/10986/30799?show=full. Mueller, V., C. Gray, and K. Kosec. “Heat stress increases long-term human migration in rural Pakistan.” Nature Clim Change 4(2014): 182–185. Doi: https://doi.org/10.1038/nclimate2103. Narain, Urvashi and Chris Sall. Methodology for Valuing the Health Impacts of Air Pollution: Discussion of Challenges and Proposed Solutions. Washington, DC: World Bank Group, 2016. https://openknowledge.worldbank.org/handle/10986/24440. Organisation for Economic Co-operation and Development. Mortality Risk Valuation in Environment, Health and Transport Policies. Paris: OECD Publishing, 2012. Doi: https://doi.org/10.1787/9789264130807-en. NEPRA. “Notification (S.R.O 306(1)/2017 dated 02-05-2017) Regarding NEPRA Competitive Bidding Tariff (Approval Procedure) Regulations, 2017.” Memorandum from the director of NEPRA. Government of Pakistan, 2017. https://nepra.org.pk/Legislation/3Reg/3.7%20NEPRA%20Competitive%20Bidding%20Tariff%20(Approval%2 0Procedure)%20Regulations,%202008/NCBT-01%2003-05-2017%206072.pdf. Pörtner, H.-O., D.C. Roberts, E.S. Poloczanska, K. Mintenbeck, M. Tignor, A. Alegría, M. Craig, et al. eds. “Summary for Policymakers.” In Climate Change 2022: Impacts, Adaptation, and Vulnerability, IPCC Sixth Assessment Report, edited by H.-O. Pörtner, D.C. Roberts, M. Tignor, E.S. Poloczanska, K. Mintenbeck, A. Alegría, M. Craig, et al. Cambridge University Press (in press). https://www.ipcc.ch/report/ar6/wg2. Qureshi, Asad Sarwar and Chris Perry. “Managing Water and Salt for Sustainable Agriculture in the Indus Basin of Pakistan.” Sustainability 13, no. 9 (May 2021): 5303. Doi: https://doi.org/10.3390/su13095303. Schelske, Oliver, Bernd Wilke, Anna Retsa, Gillian Rutherford-Liske, and Rogier de Jong. Biodiversity and Ecosystems Services Index: measuring the value of nature. Swiss Re Institute, September 24, 2020. Last accessed September 5, 2022. https://www.swissre.com/institute/research/topics-and-risk- dialogues/climate-and-natural-catastrophe-risk/expertise-publication-biodiversity-and-ecosystems- services.html#. Silpa, Lisa Yao, Perinaz Bhada-Tata and Frank Van Woerden. What a Waste 2.0 —A Global Snapshot of Solid Waste Management to 2050. Washington, DC: World Bank Group, 2018. https://openknowledge.worldbank.org/handle/10986/30317. Syed Safeer Hussain. “Submission of Revised Indicative Generation Capacity Expansion Plan (IGCEP) 2021–30).” National Electric Power Regulatory Authority (NEPRA), Managing Director's Letter to National Transmission & Despatch Co. Ltd (NTDC). September 24, 2021, Republic of Pakistan. https://nepra.org.pk/licensing/Licences/LAT-01%20IGCEP%2024-09-2021%2037702-29.pdf. United Nations Climate Change. Nationally Determined Contributions Registry. 2021. https://unfccc.int/NDCREG. United Nations Development Programme. Pakistan – Climate Public Expenditure and Institutional Review (CPEIR). New York: UNDP, 2017. WHO. “Health consequences of air pollution on populations.” WHO News (website). November 15, 2019. Last accessed September 5, 2022. https://www.who.int/news/item/15-11-2019-what-are-health-consequences- of-air-pollution-on- populations#:~:text=Exposure%20to%20high%20levels%20of,people%20who%20are%20already%20ill. World Bank. Revitalizing Pakistan's Fisheries: Options for Sustainable Development. Washington, DC: World Bank Group, 2018. https://openknowledge.worldbank.org/handle/10986/30156. World Bank. Opportunities for a Clean and Green Pakistan: A Country Environmental Analysis. Washington DC: World Bank Group, 2019. https://openknowledge.worldbank.org/handle/10986/32328. World Bank. Pakistan at 100: Shaping the Future. Washington DC: World Bank Group, 2019. https://openknowledge.worldbank.org/handle/10986/31335. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT World Bank. “Fertility rate, total (births per woman) – Pakistan.” Washington DC: World Bank Group, 2020. Last accessed September 5, 2022. https://data.worldbank.org/indicator/SP.DYN.TFRT.IN?locations=PK. World Bank. “Foreign Direct Investment, Net Inflows (% of GDP) – Pakistan.” World Bank website, 2020. https://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS?locations=PK. World Bank. Forest area (% of land area) – Pakistan. Washington DC: World Bank Group, 2020. Last accessed September 4, 2022. https://data.worldbank.org/indicator/AG.LND.FRST.ZS?end=2020&locations=PK&start=2000 World Bank. Leveling the Playing Field: Pakistan Systematic Country Diagnostic. Washington DC: World Bank Group, 2020. https://doi.org/10.1596/34549. World Bank. “Rural Population (% of total population) – Pakistan.” World Bank website, 2020. https://data.worldbank.org/indicator/SP.RUR.TOTL.ZS?locations=PK. World Bank. “Solar Photovoltaic Power Potential by Country.” World Bank Understanding Poverty website, July 23, 2020. https://www.worldbank.org/en/topic/energy/publication/solar-photovoltaic-power-potential-by- country. World Bank. Variable Renewable Energy Integration and Planning Study. Washington, DC: World Bank Group, 2020. https://openknowledge.worldbank.org/handle/10986/34586. World Bank. Overview of the Urban Immovable Property Tax in Pakistan and Revenue Simulations. Draft. Washington DC: World Bank Group, 2021. World Bank. Pakistan Blue Carbon Rapid Assessment: Policy Recommendations for the Revision of Nationally Determined Contribution. Washington, DC: World Bank Group, 2021. https://openknowledge.worldbank.org/handle/10986/35663. World Bank, “Urban Population (% of total population) – Pakistan.” World Bank website, 2021. https://data.worldbank.org/indicator/SP.URB.TOTL.IN.ZS?locations=PK. World Bank. Variable Renewable Energy Locational Study. Washington, DC: World Bank Group, 2021. https://openknowledge.worldbank.org/handle/10986/35113. World Bank. “Pakistan: Climate Projections.” Climate Change Knowledge Portal. Last accessed June 10, 2022. https://climateknowledgeportal.worldbank.org/country/pakistan/climate-data-projections. World Bank. Pakistan Climate and Health Vulnerability Assessment. Draft. Washington, DC: World Bank Group, 2022. World Bank. Pakistan Human Capital Review. Draft. Washington, DC: World Bank Group, 2022. World Bank. “Poverty headcount ratio at $3.20 a day (2011 PPP) (percentage of population).” World Bank Poverty and Inequality Platform. Washington, DC: World Bank Group, 2022. https://data.worldbank.org/indicator/SI.POV.LMIC. World Bank. Variable Renewable Energy Competitive Bidding Study. Washington, DC: World Bank Group, 2022. https://openknowledge.worldbank.org/handle/10986/37405. World Bank. “What a waste 2.0: A Global Snapshot of Solid Waste Management to 2050.” World Bank website. Last accessed September 5, 2022. https://datatopics.worldbank.org/what-a-waste. World Bank and Asian Development Bank. Climate Risk Country Profile: Pakistan. Washington, DC and Manila: The World Bank Group and the Asian Development Bank, 2021. https://openknowledge.worldbank.org/handle/10986/36372. World Economic Forum. “Record-breaking heat wave strains 'limits of human survivability' in India and Pakistan.” WEF, May 9, 2022. Last accessed September 4, 2022. https://www.weforum.org/agenda/2022/05/record-breaking-heatwaves-limit-human-survivability-india- pakistan. World Resources Institute. “Global Historical GHG Emissions.” CLIMATEWATCH. 2022. https://www.climatewatchdata.org/ghg-emissions?end_year=2018®ions=PAK&start_year=1990. PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT 1 Young, William J., Arif Anwar, Tousif Bhatti, Edoardo Borgomeo, Stephen Davies, William R. Garthwaite III, E. Michael Gilmont, et al. Pakistan: Getting More from Water. Washington, DC: World Bank Group, 2021. https://openknowledge.worldbank.org/handle/10986/31160. Zhang, Fan. In the Dark: How Much Do Power Sector Distortions Cost South Asia? South Asia Development Forum. Washington, DC: World Bank Group, 2019. https://openknowledge.worldbank.org/handle/10986/30923. 1 PAKISTAN COUNTRY CLIMATE AND DEVELOPMENT REPORT