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The economic and environmental aspects of energy production have become important due to the increasing complexity energy sector and envoirnmental pollution, warranting to test the connection between financial imbalances, energy prices and carbon emission. The study aims to test the impact of vertical fiscal imbalances (VFI) on energy prices and carbon emission trends by considering the dual-perspectives of environmental regulation and industrial structure. The empirical outcomes indicated that vertical fiscal imbalances limited the environmental quality of Pakistan. Furthermore, VFI also caused environmental degradation by affecting industrial structure. VFI inhibits the intensity of environmental regulation, promotes the upgrade of industrial structures, both of which cause additional carbon emissions. The study suggest to energy ministries and energy regulation offices to revisit the machinism of energy prices determination and revised machanisim should provide a user-friendly assessment to understand the actual costs associated with the rising concern of environmental pollution. By this, envoirnmental protection maximization and optimal energy conservation is expacted to increase. Based on empirical findings, the study extends the suggestion that vertical fiscal imbalances should be considered an active indicator by the key policy makers and other stakeholders for energy prices determination and environmental quality upgradation. • Vertical fiscal imbalances can lead to environmental degradation by affecting both environmental regulation and industrial structure. • Vertical fiscal imbalances have a significant impact on carbon emission patterns. • A positively significant coefficient of foreign direct investment supports that it increases the level of carbon emissions. • Energy prices do not reflect the level of environmental damages, significant changes in the environment and fuel-based transportation. [ABSTRACT FROM AUTHOR]