Client Name

Pakistan Stock Exchange

Faculty Advisor

Ms. Madeeha Omer Lakhani

SBS Thought Leadership Areas

Investment Decision Making

SBS Thought Leadership Area Justification

Carbon markets only work if the people making financial decisions inside them can trust the prices, the instruments, and the counterparties. Every major design decision in this report is oriented toward creating exactly those conditions.

The readiness assessment is structured around the preconditions for investable markets. Regulatory clarity, institutional coordination, supply pipeline credibility, financial infrastructure, demand drivers, and structural risk are not just policy checkboxes. They are the factors any institutional investor or corporate treasury would evaluate before committing capital to a new asset class. The analysis maps Pakistan against all six dimensions and identifies the gaps that would prevent capital from flowing even if the exchange existed tomorrow.

The international benchmarking draws the same lesson from five exchanges across different institutional contexts: markets that skipped legal classification, governance, or proper sequencing destroyed investor confidence and took years to recover it. CTX operated for nine years without formalised trading rules. The implication for financial decision-making is direct. Without written rules, institutional buyers cannot get investment committee sign-off, and without that, there is no liquidity.

At the instrument design level, the Pakistan Carbon Pricing Session produces a daily benchmark price specifically so that exporters, ESG funds, and institutional buyers have a reliable reference point for budgeting, hedging, and reporting. The six-month forward contracts convert uncertain future CBAM liabilities into fixed costs that corporate finance teams can model and manage. The tiered credit eligibility framework reduces information asymmetry between buyers and sellers, which the market design literature identifies as a core determinant of carbon market efficiency.

The DVP settlement mechanism, the central counterparty structure with novation, margining, netting, and a default fund, and the proposed joint accounting guidance for carbon credits all serve the same purpose: to give financial decision-makers the certainty required to treat carbon credits as a legitimate asset class rather than a reputational gesture.

Aligned SDGs

GOAL 13: Climate Action

Aligned SDGs Justification

Pakistan's NDC commits to a 50% emissions reduction by 2030, with 35% of that target explicitly dependent on international climate finance. Without a functioning carbon market, that 35% has no bankable delivery mechanism. This project addresses that gap directly.

The proposed exchange model creates the infrastructure through which verified Pakistani carbon credits can be issued, traded, and retired under internationally recognised standards. Nature-based projects like the Delta Blue Carbon mangrove restoration covering 350,000 hectares and renewable energy projects like the Sachal Wind Farm are already generating internationally verified credits but are currently sold through brokers with no domestic financial system involvement. The PIEM brings these transactions onto a regulated exchange, ensuring revenues are traceable, retirements are auditable, and proceeds can be directed toward further climate projects.

The legal and institutional groundwork proposed in Layer 1, including SECP classification of carbon credits and the inter-institutional MOU, creates the regulatory certainty that international climate finance requires before it flows into any market. The central counterparty clearing, DVP settlement, and tiered credit eligibility framework provide the operational credibility that institutional climate investors and compliance buyers need to treat Pakistani credits as a legitimate asset class.

The project also addresses the Article 6 double counting risk directly. Every credit listed on PSX must disclose its Article 6 authorization status, ensuring that emissions reductions sold internationally are properly adjusted on Pakistan's NDC ledger and not counted twice. Without this safeguard, carbon market activity could undermine rather than support Pakistan's climate commitments.

In short, this project does not sit alongside Pakistan's climate goals. It proposes the financial market infrastructure through which those goals become fundable.

NDA

No

Abstract

Pakistan has the natural assets, financial infrastructure, and policy intent to support a functioning voluntary carbon market. What it currently lacks is the legal, institutional, and technical framework to make that market operational. This ELP, conducted in partnership with the Pakistan Stock Exchange, examines Pakistan’s readiness for a voluntary carbon exchange and proposes a structured model for launching one.

The study pursued three objectives: assessing Pakistan’s readiness across six dimensions (regulatory, institutional, supply potential, financial infrastructure, demand drivers, and structural challenges), benchmarking five international voluntary carbon exchanges (CTX, CIX, ACX, EGCX, and TSE/NSE), and proposing a phased exchange model suited to Pakistan’s institutional context. The research relied entirely on secondary sources including government policy documents, international registry data from Verra and Gold Standard, exchange rulebooks, and reports from UNFCCC, ICAO, ISDA, and ICVCM.

The readiness assessment found that Pakistan scores well on supply potential and financial infrastructure but has critical gaps in registry operationalization, MRV capacity, legal classification of carbon credits, and inter-institutional coordination. The benchmarking analysis consistently showed that successful exchanges built governance infrastructure before permitting any trading.

Based on these findings, the study proposes the Phased Integrated Exchange Model (PIEM), a four-layer framework covering legal foundation, spot marketplace, full exchange with central counterparty clearing, and regional integration. The model includes a Shariah-compliant Carbon Ijarah Sukuk with no direct precedent in any major voluntary carbon exchange globally, representing a genuine first-mover opportunity for Pakistan.

Document Type

Restricted Access

Document Name for Citation

Experiential Learning Project

Download

Share

COinS