Green Budget Tagging

5. Elements that can support an effective approach to green budget tagging

Lessons from efforts to undertake public financial management (PFM) reforms in the past, and in particular from countries introducing green budget tagging, have provided insights into elements that can support an effective approach. This section highlights some of those key elements, including: strong political and administrative leadership, a scaled approach to implementation, ensuring coherence with wider PFM reforms and complementing tagging with a wider set of government reforms to achieve national goals.

5.1. Strong political and administrative leadership

Political buy-in can support the viability and credibility of any new reform and green budget tagging is no exception. Stand-alone tagging exercises that are not part of the broader political economy of the country risk being efforts that are not fully utilised and implemented – instead being considered “tick the box” exercises.

Ensuring political leadership in relation to green objectives, and processes such as green budget tagging which support their achievement, provides weight to their importance and helps administrative implementation of the tagging across the government (UNDP, 2019[8]). An example is provided by France, where the president has helped initiate the introduction of green budget tagging following his strong political commitment at the One Planet Summit in 2017.

While political leadership is important, particularly at the beginning, administrative leadership by the central budget authority and the Ministry of the Environment or Climate Change helps embed the initiative over time. This is illustrated from experiences of implementing gender budgeting (Box 23).

Lessons from gender budgeting show that legal foundations can also ensure sustainability in the longer term. For example, legislation that is fully tested and debated in parliament has helped embed gender budgeting as a valued and enduring feature of public policy making and insulate it, as far as possible, from fluctuations arising from the economic or political environment (Downes and Nicol, 2019[63]). This can be observed in the case of the Philippines, where the Climate Change Act of 2012 required the Department of Budget and Management to “undertake the formulation of the national budget in a way that ensures the appropriate prioritisation and allocation of funds to support climate change-related programs and projects in the annual program of government”. This has helped the Philippines to set the basis for a broader climate budgeting approach.

Box 23. Strong leadership and its role in supporting gender budgeting in Canada

Canada introduced gender budgeting in 2016. A central tool of Canada’s approach to gender budgeting are ex ante gender impact assessments of policies (GBA+).

The Department of Finance has showed strong leadership from the start in relation to these reforms. At the beginning, to ensure that the line ministries were clear on new requirements, the Minister of Finance stipulated in the budget circular that all new budget proposals must be accompanied by a GBA+.

The Department of Finance then set about trying to improve the quality of the information that it was receiving as part of the gender budgeting reforms. For example, in Budget 2018, the Department of Finance highlighted that there was inconsistency in the quality and application of GBA+ analysis accompanying budget proposals. Furthermore, the department highlighted examples of GBA+ analysis where there was room for improvement and made a commitment to publish GBA+ accompanying all budget proposals starting in Budget 2019. This public “naming and shaming” and commitment to transparency on the information accompanying budget proposals helped ensure that spending departments took the new requirements seriously and gender budgeting is now becoming an exercise which brings high-quality information to inform budget decisions supporting Canada’s gender goals.

Sources: Government of Canada (2019[64]); OECD (2018[65]).

5.2. A scaled approach to implementation

Another element which can support effective implementation of green budgeting is a scaled approach to implementation, whereby countries start small and iterate and expand their efforts over time (as outlined in Section 2.4). Mindful that bureaucratic resistance and limited capacity are some of the main challenges when initiating reforms, this allows countries to develop capacity over time, and tailor the approach. In general, it is observed that this is how countries are implementing green budget tagging. For instance, in Ireland, the government started by tagging expenditures with a positive impact on climate change, but is moving to tag negative expenditures over time as it develops sufficient capacity and expertise. In the Philippines, the government recognised from the start that reforms are likely to be accomplished over the medium to long term. As such, the Department for Budget and Management and Climate Change Commission focused on generating concrete products quickly to engage stakeholders across the budget process. Like Ireland, due to the novel nature of the tagging process, the initial approach was limited to only positive expenditures, with plans to add in tax expenditures and negative expenditures in subsequent years. A further example is given by Nepal’s implementation of climate budget tagging (Box 24).

Box 24. Nepal’s scaled approach to implementing climate budget tagging

Nepal started implementing climate budget tagging along a simplified approach using 11 criteria to define and share climate-relevant activities, serving as the basis to define the weight of each programme. Building on this, the Ministry of Agriculture is piloting an expansion of the existing criteria based on seven agriculture-specific typologies, with relevance being determined along three non‑financial factors:

1. the degree to which an activity targets the correct beneficiaries

2. whether it links to a climate change policy

3. whether it is based on a climate risk assessment.

As the pilot with the Ministry of Agriculture develops, Nepal plans to evolve its original methodology to other ministries so that tagging processes are attuned to different sectors.

Source: UNDP (2019[8]).

5.3. Ensuring coherence with wider public financial mangement reforms

Many PFM systems have undergone significant reforms in recent decades, particularly since the 2008 global financial crisis. Reforms have focused on introducing elements such as programme budgeting, performance budgeting, medium-term planning, increased transparency, and greater parliamentary and public participation in the budget process (OECD, 2019[66]).

Some PFM systems support green budget tagging more easily than others. For example, countries with existing programme budgeting are better able to incorporate green budget tagging processes than traditional input-based systems. This is echoed in experiences with gender and SDG budgeting, where existing programme-based structures have helped to adopt implementation of additional high-level areas of focus (Stotsky, 2016[67]). It can also be easier in countries where there are stronger links between planning and budgeting. In sequencing PFM reforms, it is thus helpful to introduce tagging after developments to implement programme budgeting and to link planning with budgeting. Lessons from the implementation of gender budgeting in low-capacity settings also show that there are often greater challenges where a country has weak public expenditure management systems and political economy factors in budget management (vested interests) (World Bank, forthcoming[2]).

Initiatives to implement green budgeting and green budget tagging are also part of a wider momentum that has gathered for a set of budgeting approaches focused on specific priorities, sometimes termed “budgeting for high-level priorities”. Examples include gender budgeting, SDG budgeting and well‑being budgeting. These approaches look to embed more systematic linkages between budget decision making and high-level cross-cutting priorities – including through developing greater awareness and capacity to consider these priorities across government, building greater evidence and using this to take more informed decision making during the budget process.

In general, tagging exercises can support the implementation of other PFM reforms, such as performance budgeting, or developing a medium-term expenditure framework, since it provides information on financial resources allocated to high-level policy priorities. This facilitates linking spending and policy objectives as well as measuring results from budget policy (UNDP, 2015[37]). Where information is presented to the public, for example through a statement accompanying the budget or as part of a citizens’ budget, it can also support PFM reforms to improve budget transparency and increase accountability and public engagement on how the government is using budget policy to ensure that national climate and environmental goals are prioritised and achieved.

When green budgeting is being implemented and there are already other budget tagging approaches in place, it can be helpful to develop a coherent approach. An example of a coherent approach for tagging multiple dimensions is provided by Iceland, where expenditure is tagged for links to both the SDGs and gender equality. To facilitate a coherent approach, Iceland has developed an IT system which line ministries can use to tag expenditure as relevant to these higher level priorities.

In other instances, countries may be able to use green budget tagging as a model for expanding tagging to other priorities. In Ecuador, for example, there is consideration to scale climate budget tagging to other areas of the SDGs. This is a natural evolution given that the cross-cutting goals of climate and the environment are linked to a number of SDGs. There is also often intersectionality between climate and environmental goals and other high-level priorities, with women, those in poverty, people with disabilities and ethnic minorities often disproportionately affected by climate change and environmental degradation. This builds the case for approaches to green budget tagging that allow measures to be tagged for other dimensions such as gender, poverty or the SDGs (UNDP, 2019[8]). In this way, green budget tagging can provide for a better understanding and discussion around how different policy interventions on climate and the environment impact different socio-economic groups, as recommended in Section 4.5.

5.4. Complementing green budget tagging with a wider set of government reforms to achieve national goals

Government spending, together with fiscal instruments including taxes, charges, pricing externalities and subsidies, all have the potential to influence progress towards green objectives. To the extent that there is information related to these fiscal policy choices in the budget, green budget tagging can shine an important spotlight on how fiscal policy as a whole is impacting green objectives. However, where transparency on these items falls short, the effectiveness of green budget tagging is affected.

A key area where information is often limited is tax expenditures. Although these can have wide-ranging implications for green objectives, for example tax benefits for fossil fuels, the quality and scope of reporting varies considerably among countries. To ensure that tools such as green budgeting help highlight the alignment between fiscal policy and green objectives, governments must significantly improve their reporting on tax expenditures.

However, the budget is not the only public policy intervention to support progress towards climate and environmental goals. In addition to ensuring that green budget tagging captures the full range of fiscal instruments impacting green objectives, tools such as green budgeting and green budget tagging can be complimented with wider efforts outside the budget process to be most effective. Other interventions might include the use of infrastructure and public procurement policies, as well as assessing, amending or introducing regulations, market-based policy instruments or legislation so that they better support the achievement of national climate and environmental goals.

Infrastructure and public procurement policies can help leverage existing efforts toward green objectives. Infrastructure investments, for example, can mobilise private resources in areas such of sustainable transport and energy. In other contexts, setting specific green conditionality measures to infrastructure programmes can ensure that various dimensions of environmental and climate change objectives are incorporated throughout project cycles. For example, the Netherlands and the United States have incorporated biodiversity points and estimates for cost-benefit analysis to infrastructure projects (Frits and Ruijs, 2019[68]; OECD, 2019[69]). Public procurements, accounting for a sizeable portion of public expenditures, can also be aligned to address green objectives. Sustainability criteria within procurement processes, for instance, can ensure that supply chains meet and address standards for reducing waste and emissions and protect biodiversity (OECD, 2015[70]). Regulation can be put in place to control emissions, and constrain or ban polluting activities and chemicals that are toxic for people and the environment. Regulatory scans or reviews can help identify actions that are needed to ensure that regulations are coherent with, and support the achievement of, green goals. Direct regulation can also be supported by innovative market-based policy instruments to meet public policy objectives. Well-designed, market-based instruments such as tradable permits, and deposit-refund systems have proven to be at least as environmentally effective as direct regulation, and often much more economically efficient (i.e. meeting given environmental objectives at lower cost).

Reviewing, amending and developing new legislation also helps to ensure that the legal system reflects the changing environmental context and supports the achievement of green objectives. For example, Denmark recently passed new and ambitious climate legislation that enshrined a commitment to reduce carbon emissions by 70% by 2030 in law and will act as the new framework for Danish climate policy in the years to come (Danish Ministry of Climate, Energy and Utilities, 2020[71]).

Even where strong regulations and legislation are in place, governments are prone to taking policy and decisions that are not coherent with green objectives, e.g. through continuing to support investment in fossil fuels or road building. Some countries are taking efforts to avoid this. For example, New Zealand stated in 2019 that all its major Cabinet decisions will now be taken through a climate change lens. Decision making will be supported by climate impact assessments that are now mandatory for policy and legislative proposals designed to reduce carbon emissions, or which are likely to have an impact on emissions greater than 250 000 tonnes a year (New Zealand Government, 2019[72]).

Where a whole-of-government approach is built, encompassing legal, regulatory, policy and budget decisions, it has significantly more potential to be effective than the implementation of one stand-alone tool.