Second Resilient Institutions for Sustainable Economy (P172648): Climate Change Technical Note Climate vulnerability context Pakistan is highly vulnerable to the impacts of climate change, with extreme events frequently resulting in fiscal shocks for the economy. An estimated population of 49 million is residing in areas at risk of 4–5 percent decline in quality of life by 2030. Climatic shocks have caused significant loss of life, economic damage, and reversal of development gains over the last 15 years. The increased intensity and frequency of floods alone has caused substantial physical damage, affecting more than 30 million people since 2010, with damages and losses exceeding US$14 billion. The country is also increasingly exposed and vulnerable to various other climatic hazards, particularly droughts, heatwaves, and cyclones. These climatic shocks impact household welfare, undermine human capital formation, and are particularly challenging for the fiscal sustainability of the country. Prior actions and climate co-benefits Two prior actions in this operation are expected to yield climate co-benefits. Prior Actions Climate Co-Benefits Prior Action 5: To better target Pakistan’s Country Climate and Development Report (2022) identifies that and reduce the fiscal cost of power significant inefficiencies across the energy sector are the result of large distortive subsidies, (a) the Cabinet has energy subsidies. These inefficiencies are detriment to the reliability of electricity approved a second phase of and gas supplies and also generate large fiscal deficits that accumulate into high subsidy reforms for domestic levels of power sector debt, commonly referred to as the “circular debt�?. To consumers that: (i) reduces improve the efficiency of the power sector, the CCDR recommends that Pakistan subsidies for users above implements politically difficult reforms, including tariff reforms in the electricity 200kWh/month for six consecutive sector. months; and (ii) eliminates the incremental block tariff benefit; This prior action will have positive environmental impacts by reducing subsidies for and (b) the Ministry of Energy has most residential consumers and thereby mitigating incentives for excessive energy notified DISCOs to increase use and the associated adverse effects on the environment. Further, the salient electricity tariffs for users above feature of this reform is the improvement of the equity of electricity subsidies 200 kWh/month for six through protecting disadvantaged consumers, those consuming less than 200KW consecutive months in FY23. per months for six consecutive months, who are likely to be the poorest. Prior Action 8: (a) To support the Pakistan’s INDC identifies, as a climate change adaptation priority, the wider usage of digital payments, strengthening of the emergency response mechanism for managing extreme the State Bank of Pakistan has: (i) climate events. This PA helps to strengthen the capacity of such a response system. launched the Pakistan instant Pakistan had already successfully deployed digital payments during the 2010 floods payment system; (ii) increased the to provide swift and transparent compensation to the affected population. acceptance infrastructure for However, the payments were conducted then through ad-hoc arrangements and digital payments; and (iii) issued a mainly through state-owned banks. With this new system, the entire banking revised Foreign Exchange Manual sector can be utilized to rapidly deploy digital disaster aid payments and reach to facilitate investments; and (b) areas that may become physically inaccessible in the event of climatic shocks or to allow the use of digital natural disasters. Therefore, digital payments supported through this PA can be payments to vendors, the Finance used as part of the disaster response infrastructure. The use of digital technology Division has amended the Treasury also ensures that the benefit transfer system itself is resilient and operational in Rules. the wake of potential disruption from climate-related natural disasters.