We present a CASPT2 method which exploits local approximations to achieve linear scaling of the computational effort with the molecular size, provided the active space is small and local. The inactive orbitals are localized, and the virtual space for each electron pair is spanned by a domain of pair-natural orbitals (PNOs). The configuration space is internally contracted, and the PNOs are defined for uniquely defined orthogonal pairs. Distant pair energies are obtained by multipole approximations, so that the number of configurations that are explicitly treated in the CASPT2 scales linearly with molecular size (assuming a constant active space). The PNOs are generated using approximate amplitudes obtained in a pair-specific semi-canonical basis of projected atomic orbitals (PAOs). The evaluation and transformation of the two-electron integrals use the same parallel local density fitting techniques as recently described for linear-scaling PNO-LMP2 (local second-order Møller-Plesset perturbation theory). The implementation of the amplitude equations, which are solved iteratively, employs the local integrated tensor framework. The efficiency and accuracy of the method are tested for excitation energies and correlation energies. It is demonstrated that the errors introduced by the local approximations are very small. They can be well controlled by few parameters for the distant pair approximation, initial PAO domains, and the PNO domains.