Green Budget Tagging

Introduction

There is increasing recognition of the physical and transition risks posed by climate change and environmental degradation. For example, evidence shows that changes in the climate system are contributing to a range of biophysical effects that are already impacting society and the economy. Future impacts are expected to be much greater. Given the cost of inaction, many governments have set national goals to help protect the environment (e.g. biodiversity) and mitigate climate change. Taking action also provides the opportunity to unlock investment and job opportunities associated with a more sustainable economic model.

Public expenditure amounts to a significant proportion of economic activity, thus government spending decisions have powerful social, environmental and economic implications for a country. Along with regulations, the choice and design of tax and expenditure also shape business decisions and influence people’s choices to work, invest and consume. Public expenditure also plays a key role in mobilising the private finance necessary to tackle climate change and other environmental challenges. Given that the budget is the government’s central policy document and the important role that it plays in determining how resources are allocated to deliver on national goals, it is appropriate that priorities relating to the environment and climate change be considered as part of the budget process. This is one of the reasons that we are seeing the emergence of practices such as “green budgeting” (Box 1) as part of broader efforts to ensure that the budget supports the achievement of environmental and climate objectives.

Box 1. Green budgeting

Green budgeting is a practice which uses the tools of budgetary policy making to help achieve “green” objectives, i.e. those relating to the climate and environmental dimensions such as biodiversity, air quality and water (see Section 1 for further information). There is no one-size fits all approach to green budgeting. Any approach should build on a country’s existing public financial management framework and thus be attuned to the strengths and limitations of the existing budgeting process. While by itself green budgeting does not change existing policies, it provides decision makers with a clearer understanding of the overall environmental and climate impacts of budgeting choices. It brings evidence together in a systematic and co-ordinated manner to allow more informed decision making on how to optimise revenue raising and resource allocation in order to fulfil national and international commitments.

Source: OECD (2020[1]).

Green budget tagging can be a useful tool within an overall approach to green budgeting. In the context of budget management systems where it can be difficult to track how budget policy impacts cross-cutting goals, green budget tagging allows countries to identify areas of expenditure and revenue that are helpful or harmful to green objectives. Green budget tagging encompasses any budget tagging practice that seeks to identify budget measures relating to climate and other environmental objectives, such as biodiversity, air and water challenges (quantity and quality), among others. While some countries identify individual budget measures that specifically target green objectives, green budget tagging involves a comprehensive survey of all budgetary measures to identify those that impact green objectives (whether in a positive, neutral or negative way). The information gained from tagging builds a useful evidence base that can help governments improve coherence between budget measures, green goals and commitments to sustainable development. It also serves to improve transparency in relation to the government’s budget policy, thus helping stakeholders such as parliamentarians and civil society hold the government to account for its decisions. Budget tagging is not new; it has been applied in relation to other cross-cutting priorities, such as poverty reduction, the Sustainable Development Goals (SDGs) and gender. Green budget tagging can, however, sit alongside these other tagging exercises as part of overall efforts to ensure that the budget serves to deliver outcomes in relation to cross-cutting high-level priorities. This report aims to provide guidance for countries looking to develop an effective approach to green budget tagging, recognising that practices are also likely to vary depending on country-specific objectives in relation to the exercise. It draws together the lessons from the international budgeting community through both the Paris Collaborative on Green Budgeting and the Coalition of Finance Ministers for Climate Action. In-depth information on country experiences was drawn from interviews with members of the Paris Collaborative on Green Budgeting, a series of regional roundtables organised by the United Nations Development Programme and the Inter‑American Development Bank, a review and analysis of climate expenditure tagging methodologies (World Bank, forthcoming[2]), and an assessment of the connections across financial and environmental classifications systems (IADB, forthcoming[3]).

Section 1 outlines the key decisions that need to be taken in designing an approach to green budget tagging. Section 2 sets out considerations in implementing green budget tagging. Section 3 identifies how to utilise and integrate information from tagging in the wider budget process. Section 4 highlights key challenges and Section 5 presents elements that can support an effective approach. Finally, information provided in this guidance is brought together and synthesised into Principles for Green Budget Tagging at the end of this document.