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The purpose of this paper is to provide a long‐term assessment of Pakistan's electricity policy in the context of both environmental and resource constraints. To increase the sustainability of energy supply, the Government of Pakistan introduced a series of reforms in the electricity supply sector during 1990‐1995. In response to these policy incentives, most of the independent power producer offers included coal, oil, and/or gas‐based power plants. Considering that Pakistan produces only up to 40 percent of its oil demand domestically and thermal power generation causes CO₂ emissions, there is a great need for an assessment of the existing electricity policy.

Drawing on system dynamics methodology, this study presents and utilizes a dynamic simulation model that captures the dynamics of the sectors underlying the electricity supply system including investments, capital, production, resources, financial resources, and the environment.

The key findings of this study are: policy incentives encouraged thermal‐based generation at the potential expense of hydro power generation; and the evolution of electricity supply related CO₂ emissions exhibits an exponential growth.

While there are other emissions related to the electricity supply system with potentially severe environmental concerns, for example SO₂, this study focuses only on CO₂ emissions.

The paper offers a system dynamics model and provides some useful policy insights for the electricity supply sector of Pakistan.