Pakistan is a developing country which is faced by the scourge of energy deficiency. The country is dependent upon the import of oil for energy as it does not have ample resources of oil. The energy crises along with the heavy costs of importing the oil, produce immense pressure on the country's economy. During the fiscal year 2012-2013, the transport sector of the country has 49.57% share in the total consumption of oil. Approximately 1794 million liters of gasoline was consumed by this sector in 2012. In this paper, the potential for ethanol production and its substitution in Pakistan is found. The results are focused on sugarcane production, demand for sugar, economic growth for the country and potential reduction in carbon emissions. Currently there is a potential of 274 million liters annual ethanol production, without affecting the production of food products from sugarcane. The transport sector can be benefited from ethanol after it is blended with gasoline under four different scenarios, which will lead to the minimization of gasoline consumption and subsequently the associated economic and environmental effects. Results indicate that the best possible blending ratio can be E8 in the present and the predicted situation. In addition to that, the usage of ethanol will add to a positive environmental impact by reducing 14.6 million tons of CO2 emissions by 2030. Finally, the substitution of ethanol over gasoline will lead to lower imports of oil products, thus reducing the cost and less draining of resources from the Pakistani economy. This method, if implemented, can provide an incentive for improved yields in sugarcane production and help develop the industrial sector. The outcomes of this paper may also be followed and similar techniques may be implemented by other developing countries having alike resources.