Before any country starts green budget tagging, it is important to have clarity on why it is being introduced, specifically what “problem” it is trying to solve, and to make an assessment of whether or not green tagging is indeed the best approach. Once these considerations, or first principles, are clear, the country is in a position to think about designing an appropriate approach. There are also important considerations in relation to deciding when to undertake the tagging exercise during the budget cycle. This section presents the different design choices and their respective merits in the context of differing local needs, capacities and policy environments.
Green Budget Tagging
Introductory Guidance & Principles
1. Developing green budget tagging
1.1. First principles: Why do green budget tagging and is it the best approach?
Increasing political focus on the costs of climate change and environmental degradation has led governments to consider what options they have to ensure that public policy supports the achievement of green objectives. Given that the budget is the central policy document of any government, public administrations are looking at how they might develop a budget that is more aligned with national green priorities (including country Nationally Determined Contributions [NDCs], explained in Box 2), better understand financing gaps for achieving green objectives and find ways to help prioritise investments with green benefits in decision making. There is also pressure for governments to improve accountability and transparency in relation to actions that they are taking to address green priorities. And some governments may also be subject to reporting requirements relating to how external financing is being spent vis-à-vis green objectives, e.g. for sovereign green bonds1 or donor financing.
Box 2. Nationally Determined Contributions
Following the 2015 Paris Agreement, parties made commitments to mitigate and adapt to the adverse impacts of climate change. Nationally Determined Contributions (NDCs) reflect the commitments made by each party to reduce national emissions and adapt to the impacts of climate change. As such, the NDCs provide long-term goal for countries (and globally) in order to meet commitments in the Paris Agreement to reduce emissions, taking into account domestic circumstances and capabilities.
Source: UNFCCC (2020[4]).
These growing needs lead governments to consider green budget tagging as a tool to help mobilise change. However, tagging is not the only tool which can help integrate green considerations into the budget processes and improve transparency and accountability on how money is being spent. It is important to consider the merits of tagging alongside policy measures such as regulations and providing linkages between expenditure and results to feed into the policy process and decision making – otherwise, tagging runs the risk of expenditure bias, where greater attention is placed on spending and investment than on the solution (World Bank, forthcoming[2]). There have been efforts to monitor programmes in relation to impacts on various dimensions including poverty, seen in the World Bank’s Public Expenditure Reviews, as well as the environment, seen in the United Kingdom’s Green Book (Pradhan, 1996[5]; HM Treasury, 2018[6]), further illustrated in Box 3. In other instances, tools such as the Climate Public Expenditure and Institutional Reviews (CPEIRs) have been a useful diagnostic tool for many countries in assessing opportunities and constraints for integrating climate change concerns within the budget allocation and expenditure process. These provide a qualitative and quantitative analysis of a country’s public expenditures and how they relate to climate change, its climate change plans and policies, institutional framework, and public finance architecture (World Bank, 2014[7]; UNDP, 2019[8]). Before embarking on tagging, undertaking an exercise such as this can help countries take stock of their existing climate change structures and resources, and serve as a baseline for designing further reforms. For many countries, particularly in Asia, CPEIRs have been instrumental for starting the design for country‑level tagging processes.
Box 3. The Green Book in the United Kingdom
In the United Kingdom, the Green Book is issued by HM Treasury and provides information on how to appraise policies, programmes and projects by providing guidance on the design and use of monitoring and evaluation before and after implementation. This ranges from policy and programme development, taxation and benefit proposals tochanges to existing public assets and resources. In particular, it provides an integrated approach to the assessment of climate mitigation, transition and other sustainability considerations across all government programmes.
Source: HM Treasury (2018[6]).
Additionally, it is important to identify tagging in relation to specific country contexts. In countries that already have practices in place to identify the environmental impacts of policy measures, the value added of tagging practices may be limited. For instance, in Switzerland, it is mandatory to analyse the environmental and economic effects of new policy propositions. As this allows an identification of the environmental effects of many budget measures, including subsidies and tax expenditures which may have big impacts, tagging efforts may provide limited benefits. However, in contexts where there is limited environmental assessment with little to no transparency on the budget, tagging efforts can provide significant added value in helping a country address its green objectives.
This sort of “first principle” work helps ensure that governments are clear on the purpose of green budgeting and its associated tools, such as green budget tagging, before implementing them. The best results from green budget tagging emerge when its design and implementation fulfil a need that emerges from government strategy or policy. Having a clear purpose helps communicate to internal government stakeholders why the practice is being introduced. It also helps inform the design of these tools.
The main benefits of implementing a tagging system include raising awareness, giving visibility to government action, mobilising resources, and improving the monitoring and reporting of climate change policies and international climate commitments (UNDP, 2019[8]). Compared to other methods for assessing how budgets align with green objectives, institutionalised domestic budget tagging has the advantage of being more sustainable and better integrated in budgeting processes. Where tags are integrated in financial management systems, real-time tracking of actual expenditures is enabled (World Bank, forthcoming[2]).
1.2. Designing an approach to green budget tagging
While there are significant differences in country contexts and public financial management systems, there are also common decisions that must be taken in designing any approach to green budget tagging. This includes: defining what is “green”, deciding what budget measures to tag and developing a classifications system that is fit for purpose. Countries must also decide what type of information is needed from the tagging process. This helps to inform the design of the weighting system in order to capture the proportion that is relevant, depending on institutional capacity and the need for an accurate measure of relevant budget items. This section provides guidance on how to approach each of these key decisions.
Figure 1. Key decisions in designing an approach to green budget tagging
1.2.1. Defining what is “green”
Defining “green” budget items is not a straightforward task given that there is no common international definition. At its essence, “green” budget items are those which have a positive contribution towards broad environmental objectives, whether it be objectives relating to mitigating or adapting to climate change, or those related to other environmental dimensions such as ecosystems, biodiversity, water management, air quality, protection of marine resources, pollution prevention, etc. This also includes consideration for the various shades of green, such as the degree to which the budget contributes positively or negatively to environmental impacts. As such, existing definitions of “green investment” vary – making the purpose of an investment critical to defining the green criteria (Inderst, Kaminker and Stewart, 2012[9]).
“Green” budget tagging is invariably conflated with climate budget tagging. While climate budget tagging, similar to other tagging practices such as biodiversity tagging, is a subset of green budget tagging, these practices focus specifically on tagging budget items relevant to a narrower range of environmental goals. Green budget tagging may also have a wider purview relating to a number of environmental goals. It may indeed be that green budget tagging starts off tagging budget items related to a narrower range of environmental goals, then these practices provide useful foundations for building on tagging relating to other environmental objectives.
Invariably, the definition of “green” that is used by any country for budget tagging depends on the national country context. The decision is likely to be influenced by the scope of national green objectives. The choice will also depend on the purpose and ambition for green budget tagging in each country, as well as capacity. In developing the definition of “green” to be used for tagging, countries may also wish to – and have in the past – draw on existing definitions used by different international bodies (such as those in Box 4). Using existing definitions of “green” has the added benefit of facilitating international comparability.
Box 4. Definitions of “green” used by international organisations
European Union (EU) Taxonomy for Sustainable Finance: The EU Taxonomy defines investments in economic activities which make a substantial contribution to one of six environmental objectives: 1) climate change mitigation; 2) climate change adaptation; 3) sustainable use and protection of fresh water and marine resources; 4) transition to a circular economy; 5) pollution prevention and control; and 6) protection and restoration of biodiversity and ecosystems, without harming any of the other activities.
Joint MDB definition of climate finance: Refers to the financial resources (own-account and managed by multilateral development banks, MDBs) committed by MDBs to development operations and components which enable activities that mitigate climate and support adaptation to climate change in developing and emerging economies.
International Capital Markets Association (ICMA) green bonds: The Green Bond Principles explicitly recognise several broad categories of eligibility for investments in green projects, which contribute to the following environmental objectives: climate change mitigation, climate change adaptation, natural resource conservation, biodiversity conservation, and pollution prevention and control. Several states have issued sovereign green bonds and green bond frameworks to define the scope of their green investment with the bonds’ proceeds (Belgium, Fiji, France, the Netherlands, etc.).
OECD-DAC Rio markers: Four Rio markers – biodiversity, climate change mitigation, climate change adaptation and desertification – are used to monitor aid targeting environmental sustainability in general and the objectives of the Rio Conventions in particular.
Sources: European Commission (2018[10]); AfDB et al. (2015[11]); ICMA (2018[12]); OECD (2016[13]).
As countries set out a definition of “green”, it is important to consider linkages to existing principles, standards and metrics at the international level. As later noted in Section 2.7, this includes finding ways to align efforts to existing international statistical standards (such as the Classification of Environmental Activities, CEA). This can help give credibility to national approaches and facilitates cross-country comparisons and analysis.
Once “green” has been defined at the national level, the task of tagging can still be complex for several reasons:
A number of different operational definitions of “green” may be in place across government, thus the relevant definition needs to be clearly communicated so that it is widely understood and not confused with others.
There can be a sizeable common intersection of the various definitions in terms of some budget items (e.g. renewable energy), commodities (e.g. carbon or renewable energy credits), services (e.g. waste management) and technologies (e.g. to enhance energy efficiency).
Defining “greenness” is easier for some budget items than for others, e.g. those with multiple purposes, some of which are green and others not (such as adaptation spending which serves to address the consequences of environmental change induced by human action). There are also some areas where data are difficult to obtain as well as areas where there can be disagreement (e.g. nuclear and large-scale hydro energy), changing consensus (e.g. biofuels, biomass, shale gas), ambiguity (e.g. agriculture, green IT, financial services, waste) or uncertainty how to deal with (e.g. biodiversity, conservation) (Inderst, Kaminker and Stewart, 2012[9]).
Depending on a country’s green commitments and climate objectives (such as the NDCs), the “greenness” of a budget item can be characterised in absolute terms (a budget item is green or not green) or in relative terms (e.g. one budget item has lower greenhouse gas emissions than another or is more energy-efficient).
Definitions of “green” can be based on ex ante arguments (e.g. any activity in sustainable energy, energy efficiency or water management) or on specific indicators. There are qualitative and quantitative definitions, trying to measure different grades of “greenness”. Quantitative definitions require some sort of indicator or measure of greenness (e.g. greenhouse gas emissions, energy efficiency, recycling and waste management, more points in a scoring system, etc.). In other instances, as seen in the EU Taxonomy for Sustainable Finance, a “do no harm” principle is put in place to ensure that the pursuit of one of the six environmental objectives does not harm any of the other five objectives.
For these reasons, it is important to set out, alongside the definition of “green”, clear guidance that defines the boundaries of the tagging, and explains how to tag in these more complex circumstances. For instance, some objectives may positively contribute to some objectives (i.e. climate change adaptation), but may potentially negatively affect others (i.e. biodiversity). Understanding the purpose of the budget item is key in order to pin green criteria down, as it allows for the navigation of potential conflicts.
1.2.2. Deciding what budget measures to tag
Green budget tagging can cover different elements of the budget. There are a range of coverage issues, including the breadth of sectors and budget coverage, the type of budget items to include (positive or negative impact, revenue, expenditure, and different types of expenditure) and the administrative level of tagging (central government, subnational government, state-owned enterprises).
In terms of the breadth of budget coverage, green budget tagging should as a minimum aim to cover budget measures in priority sectors such as agriculture, transport, energy, industry and the environment, where budget measures tend to have significant impacts on climate and environmental objectives. Where budget classification is not by sector but by expenditure type, priority may be given to those expenditure areas most likely to have strong impacts on green objectives. However, as budget measures across all government areas can have a significant impact on climate change and environment objectives, countries should work towards covering budget measures across all sectors and expenditure types where capacity allows and where they are relevant according to their environmental objectives and pathways.
In terms of the type of budget items to include, countries should aim for green budget tagging to include both positive and negative measures. Country practices until now tend to only identify positive expenditure while other items such as negative expenditure, revenues, tax expenditures and subsidies – which are often more politically sensitive – are excluded (World Bank, forthcoming[2]). In some instances, this is likely to be related to the political sensitivity of negative measures, but it is also likely to be related to capacity considerations. For instance, there may be public support for fuel subsidies or pressure from interest groups (i.e. fossil fuel lobby) or limited capacity to fully identify and analyse an activity’s carbon footprint. In other instances, areas which have a negative impact towards the environment and climate can conflict with pro-social policies, such as winter-fuel subsidies for low-income households. As elaborated in Section 4.5, information on negative expenditures can help kick-start policy discussions on the environmental as well as associated social and economic trade-offs of different budget items. This can be important as tagging can help to identify these tensions, allowing policy makers to develop more coherent and well-designed measures across multiple policy dimensions.
The exclusion of negative measures is problematic, as analysis in Finland and Indonesia has shown that they may outweigh positive measures. Reducing harmful measures is a key feature of climate and environmental policy and should go hand in hand with increased positive measures (World Bank, forthcoming[2]). To overcome this, countries can phase their approach to tagging and start with capturing positive expenditures, then subsequently expand the practice to include negative (brown) expenditures as greater capacity is developed within the Ministry of Finance and line ministries, as in the case of Ireland. Some countries also make efforts to identify these items as part of a separate exercise (see Box 5 for some examples).
Box 5. Examples of efforts to identify environmentally harmful spending and tax expenditures
Germany: The German Federal Environment Agency has published a series of reports on environmentally harmful subsidies. The reports are structured around a sectoral approach identifying environmentally harmful subsidies in four main sectors: 1) energy supply and use; 2) transport; 3) construction and housing; and 4) agriculture, forestry and fisheries.
Italy: The Italian Catalogue of Environmentally Friendly and Harmful Subsidies was developed by the Ministry of Environment, Land and Sea in response to a request by the Italian parliament, as part of a general effort aiming to analyse and evaluate fiscal erosion due to tax breaks and tax expenditures. The catalogue analyses the subsidies by sector: agriculture, energy, transport, value-added tax and other subsidies, considering both direct subsidies and tax expenditures.
Sources: Umweltbundesamt (2016[14]), Italian Ministry of Environment, Land and Sea (2017[15]).
A further issue is whether tagging covers the full range of expenditures, including recurrent and investment/development budgets. As countries consider the scope of tagging, the exclusion of recurrent budgets such as civil servant salaries may potentially underestimate the amount of relevant green expenditures. As these overheads can be a vital part of investment and development budgets, arguments can be made to ensure they are included. Where tagging is applied to budget programmes rather than line items, both recurrent and investment budgets will be covered. Other expenditures such as in the area of the procurement of goods and services can be assessed in relation to use of green procurement practices through the use of relevant specifications and criteria (OECD, 2019[16]).
A final consideration on the scope of tagging is whether or not to include subnational budget measures. In this regard, it is worth bearing in mind that the case for tagging to cover local government budgets is particularly strong where there are high levels of fiscal decentralisation and where tax and spending in areas relevant to climate and environmental policy are devolved. Because subnational governments play a critical role in land-use management, urban services, transport, water and environmental management functions, many governments have applied tagging methodologies to transfers to sub-government expenditures (World Bank, forthcoming[2]). Furthermore, although not currently common practice, there is an argument for tagging to cover the budgets of state-owned enterprises where they account for an important share of government expenditures and play an important role role in environmentally relevant sectors (such as energy, water and transport).
With these considerations, it is important to identify the relative costs and benefits of a fully comprehensive tagging approach. A fully comprehensive approach may provide added value but may require significant costs in time, training and resources. On the other hand, a less comprehensive approach may incur fewer resource costs but may not provide sufficient added value to achieve its intended purpose.
1.2.3. Developing a classifications system
Once the definition of “green” in the country context and with the scope of tagging have been decided, a classifications system can be identified or developed that helps to ensure that the tagging system gathers the right information. Different types of classifications systems are highlighted in Table 1.
Table 1. Classifications systems for green budget tagging across select countries
Sources: OECD (forthcoming[17]); UNDP (2019[8]); World Bank (forthcoming[2]); Climate Change Commission (2019[18]); Climate Change Commission (n.d.[19]); Ministry of the Ecological Transition (2020[20]); Cremins and Kevany (2018[21]).
For definitions of “green” that focus on climate change, often referred to as “climate budget tagging” or “climate expenditure tagging”, countries may use one category for climate-relevant items (as in the case of Ireland) or break it down between adaptation and mitigation (as is the case in countries such as Bangladesh), depending on the extent to which detailed information is needed. Many countries follow the OECD-DAC Rio marker definitions for activities which contribute to climate adaptation and mitigation (Box 6) (OECD, 2016[13]).
Where definitions of “green” include environmental activities beyond climate mitigation or adaptation, such as air and water management quality, and biodiversity, classifications may be guided by or aligned with national strategies in the area of climate and the environment. For example, in Honduras, tagging includes climate-related disaster management, which covers activities related to reducing the impact of natural hazards and environmental disasters (World Bank, forthcoming[2]). In Bangladesh and Kyrgyzstan, tagging also includes identifying programmes contributing to biodiversity and conservation. Existing usages of these definitions can be found in Box 7.
Box 6. Definitions of climate mitigation and climate adaptation activities
Climate mitigation: An activity classifies as climate mitigation if it contributes to the objective of stabilising greenhouse gas (GHG) concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system by promoting efforts to reduce or limit GHG emissions or to enhance GHG sequestration.
Climate adaptation: An activity classifies as climate adaptation if it intends to reduce the vulnerability of human or natural systems to the impacts of climate change and climate-related risks, by maintaining or increasing adaptive capacity and resilience. This encompasses a range of activities, from information and knowledge generation to capacity development, planning and the implementation of climate change adaptation actions. It is important to understand the challenges of climate adaptation being faced across different contexts – with the global South facing a greater need to address adaptation.
Source: OECD (2016[13]).
Box 7. Existing definitions of key environmental protection activities
Air quality management: All activities a regulatory authority undertakes to help protect human health and the environment from the harmful effects of air pollution.
Water resources management: The process of planning, developing and managing water resources, in terms of both water quantity and quality, across all water uses.
Biodiversity: Protection and restoration of biodiversity and ecosystems. This includes efforts to mainstream biodiversity and ecosystem services into national and sectoral policies and using economic and policy instruments to incentivise environmentally sustainable activities.
Disaster risk management: The application of disaster risk reduction policies and strategies to prevent new disaster risks, reduce existing disaster risks and manage residual risks, contributing to the strengthening of resilience and reduction of losses, such as strengthening infrastructure resilience.
Sources: US EPA (2017[22]); World Bank (n.d.[23]); OECD (2018[24]); OECD (2020[25]); United Nations (2020[26]).
To help facilitate the classifications process, it is useful to provide clear definitions of the type of budget items that qualify under each category of objectives. The definitions should be sufficiently broad to reflect the cross-sectoral nature of climate and environmental policy, yet sufficiently narrow to be meaningful and credible (World Bank, forthcoming[2]). The cross-cutting nature of climate and environmental policy also means that budget measures may qualify to be tagged in more than one category. Tagging guidance should thus also be clear on what to do in this instance (e.g. only tagging budget measures which directly address each objective). Some countries develop a “positive” and “negative” list of indicative investments to help guide classification (consideration of “negative” expenditures is further detailed in Section 4.3). For example, Colombia’s methodological guide to climate budget tagging includes an annex that provides an indicative list of activities by sector and subsector that qualify as climate mitigation or climate adaptation (Government of Colombia, 2016[27]).
As countries work to develop their classification process, close co-ordination with the national statistical office can help harmonise approaches to existing international classification standards. This can mean working to co-develop an approach that helps address a country’s “green” objectives that allows statistical offices (or other agencies managing national accounts) to concurrently use the information to facilitate reporting against global statistical standards. Further considerations in relation to this “statistical tagging” approach are further detailed in Section 2.7.
As countries engage in this process, country experiences have highlighted key challenges for consideration (further highlighted in Section 4). This includes identifying the appropriate level of granularity for tagging, deciding how to address budget measures related to adaptation and disaster risk management, negative expenditures, ensuring consistency and quality as well as balancing environmental objectives with social and economic objectives.
1.2.4. Identify information needs: Developing a weighting system
Another important design choice for any green budget tagging practice is to identify information needed for the purpose of data tagging. This provides inputs into the development of an appropriate weighting system for budget items. For instance, if a country decides to only track those expenditures that mostly contribute towards green objectives, as in the case of Ireland, it can adopt a more binary approach (either budget programme is tagged or not). On the other hand, if a country decides to track the extent to which all of its expenditures contribute to its green objectives, it can adopt a more scaled approach in order to identify the proportion of expenditures attributed to the objectives.
The weighting system determines the share of the tagged budget item that is considered (and counted) as green. In most cases, relevant expenditures are costed out on an input basis (as used in methodologies by many multilateral development banks) or identified proportionately, where the amount allocated to a specific objective is proportional to the relevance of the expenditure. Examples of countries employing a costed methodology are Indonesia, where tags are placed on outputs and sub-programmes, as well as Nicaragua and Uganda, where tags are placed on the activity level and sub-programme level respectively.
Countries employing a weighting system often try to identify expenditures proportionately by either categorising those that have a primary purpose related to green objectives, often seen in binary approaches, or through a scaled approach where attempts are made to estimate the co-benefits or the degree of climate relevance of a budgetary programme. For instance, when it comes to expenditure on urban transport, only the share of expenditure that has co-benefits with climate change mitigation (by reducing GHG emissions per unit transported) is tagged. In other instances, countries have further assigned weights to expenditures that have been identified as having co-benefits to green objectives. There are two main approaches when it comes to weighting and green budget tagging: the binary approach and the scaled approach.
Under a binary approach, either the full cost of a budget item is tagged or none is. For example, research and development (R&D) expenditure would either be fully included or not included at all, even if it is the case that just a portion of the expenditure relates to the stated objectives. While this can be simpler than the scaled approach and may serve the needs of a particular tagging exercise or be useful as a first step in budget tagging, it provides a less accurate picture of the quantity of revenues and expenditure that are relevant. Countries pursuing a binary approach to weighting may find it helpful to employ a more conservative tagging approach. This means only counting those budget items which are significantly relevant to the national climate and environmental agendas. A notable example of this is in Ireland, where tagging only includes expenditure items which “significantly contribute” towards lowering GHG emissions. This conservative approach can ensure that a binary system does not give an overestimation of the figures, withstanding accusations of “greenwashing” by stakeholders. However, as it excludes expenditure items which may have medium and low relevance to national climate objectives, the tagging may not capture the full breadth of relevant budget items.
A scaled weighting system allows for a certain proportion of a budget item to be tagged. Often, budget items will include some revenue or expenditure that is relevant for the tagging exercise and some that is not (as was the case with the R&D expenditure illustration above). The calculation of the proportion of the budget item that is relevant may be based on either an inputs or outputs approach. An inputs approach is simpler and considers the proportion of the budget measure that is relevant to green objectives, while an outputs approach considers the proportion of the outputs associated with the budget measure that are relevant to green objectives. The outputs approach is inevitably open to a greater degree of subjectivity.
Most countries that currently undertake green budget tagging employ a scaled approach to weighting since it allows a more granular quantification of relevant revenues and expenditure. This means budget items are categorised in accordance to their degree of relevance to green objectives. For revenues and expenditure where the primary purpose is not specifically climate change adaptation, for example, only the share with co-benefits to adaptation is tagged. In many cases, approaches are based on the OECD-DAC Rio marker methodology, shown in Box 8.
Box 8. OECD-DAC Rio marker methodology for budget tagging
The OECD-DAC Rio markers have served as a reference for OECD Development Assistance Committee (DAC) donors to tag bilateral aid projects along four thematic areas: biodiversity, desertification control, climate mitigation and climate adaptation. The Rio markers employ a three-step classification system:
“not targeted”: an activity is not targeted to policy objective (e.g. roads)
“significant”: an activity which contributes to but does not primarily address policy objective (e.g. air quality measures)
“principal”: an activity which the policy objective is the explicit objective (e.g. wind farms).
Countries build on the Rio marker methodology by adapting them to their classification and weighting approach. In certain instances, when expenditures are weighted, countries have assigned percentages along the three categories to identify the degree to which an activity or expenditure contributes to its degree of relevance. For instance, in Ghana, whose approach is influenced by the Rio markers, expenditure items are tagged along high relevance (100%), medium relevance (50%) and low relevance (20%). In the European Union, items are tagged and weighted as “not targeted” (0%), “significant” (40%) and “principle” (100%).
Sources: OECD (2011[28]); Petri (2017[29]); World Bank (forthcoming[2]); UNDP (2019[8]).
A scaled approach may be simple, or complex. A simple scaled approach, such as the OECD-DAC Rio markers, sets out considerations for identifying different weights to budget items. This type of approach is relatively easy to implement and is more accurate than binary weighting. A complex scaled approach, as seen in Bangladesh, builds on this by factoring in counterfactuals to the weighting process (as further illustrated in Box 8). This approach entails using modules to further narrow down the degree of relevance with which budget items are classified beyond categorical degrees seen in more simplified approaches (e.g. highly relevant, relevant, neutral). The complex scaled approach gives the potential for the most granular information among the different weighting systems, but requires greater capacity for analysis and builds on assumptions which may result in errors in overestimating or underestimating its relationship to climate change or the environment. This represents a benefits-based approach where it works to assess the proportion of total programme benefits associated with a green objective, as seen in Bangladesh. Examples of countries that use each of these different weighting systems are provided in Box 9.
Box 9. Country examples of the different approaches
Ireland (binary): Ireland adopted a conservative classification approach where it only tagged programmes where it is evident that all, or at least the majority of, investment in question supports Ireland’s transition to a low-carbon, climate-resilient and environmentally sustainable economy.
Moldova (scaled – simplified): Programmes, activities and projects which mainly address climate change are fully counted with a 100% weight. Those that do not directly address climate change are classified and weighted in accordance to four categories:
high relevance with a 70% weight (more than 65% of activities dedicated to climate-related interventions
medium relevance with a 50% weight (40-65% of activities)
neutral relevance with a 25% weight (14-40% of activities)
marginal relevance (less than 15% of activities or with very indirect and theoretical links) are not counted.
France (scaled – simplified): Expenditures were tagged in accordance to their impact towards six objectives (climate change mitigation, climate change adaptation [and natural risk prevention], water resource management, the circular economy, pollution abatement, and biodiversity and sustainable land use):
favourable: directly targeted environmental expenses
favourable (indirect): no explicit environmental target, but indirect positive impact
favourable but controversial: e.g. short-term favourable effects but presence of a long-term technology lock-in risk
neutral: no significant or no information
unfavourable: environmentally harmful expenditure.
Nepal (scaled – simplified): Activities relevant to its list of 11 climate change-related activities are classified (not weighted) into three categories:
highly relevant (more than 60% of the programme budget allocated to climate activities)
relevant (20-60% of the budget)
neutral (less than 20% of the budget).
Bangladesh (scaled – complex): Applies a climate-relevant weight to all relevant expenditures. Weights are calculated by identifying the difference between the degrees of relevance (%) an expenditure area has towards climate change with the share of expenditure (%) which would still take place in the absence of climate change.
Example: The development of seed production, storage and supply systems is considered 100% relevant. In the absence of climate change, 40% of the expenditure would still take place.
Thus, the weighting is calculated as:
[Weight Score] = [100%] – [40%] = 60% weight
Sources: Cremins and Kevany (2018[21]); Ministry of Ecological Transition (2020[20]); World Bank (forthcoming[2]); UNDP (2019[8]).
1.3. Deciding which stage of the budget process to cover
Green budget tagging may be undertaken at the ex ante phase of the budget (tagging planned allocations before the budget is approved and executed) or the ex post phase (an evaluation of expenditures after the budget has been executed). Undertaking the tagging exercise ex ante can theoretically provide useful evidence to help frame budget and policy decisions as they are being formulated. However, typically, programmes and projects are tagged after they have been approved, too late to inform the design of the budget (although they can still inform the following budget cycle), rationalising rather than informing resource allocation (World Bank, forthcoming[2]). The scope for tagging to make significant impact on resource allocation is the greatest where tags are applied before measures have been planned and budgeted. Information may also be presented in reports accompanying the draft budget and supporting parliamentary oversight. In the Philippines, the tagging is applied during the budget preparation; then updated after budget hearings, once the proposed budget is developed to the Congress; and finally, once Congress has approved the budget. This allows the information to be taken into account in budget preparation, but also ensures that any changes to the budget emanating from budget hearings or legislative review are reflected (UNDP, 2019[8]).
Green budget tagging may also be done on an ex post basis. Ex post tagging provides a more accurate picture of how the budget was used, after budget execution. From an accountability perspective, there are strong benefits of doing both ex ante and ex post reporting, as it allows oversight of how the government intends to use the budget, and also whether or not the government actually allocated resources in the way it had planned. This is further illustrated in Figure 2. It also allows scope for policy learning and adaptive governance, which is associated with more successful tagging systems (Resch et al., 2017[30]). At present, most countries undertake green budget tagging at the ex ante phase of the budget process. However, Italy is an example of a country that does budget tagging at both the ex ante and ex post phases.
When considering ex post evaluations, it is important to consider that it is difficult to obtain a global view of the environmental impact of budget measures when only a selected set of tagged budget items are assessed. France, for example, conducts systematic environmental assessments of all budget actions in coherence with the recommendations from the independent High Council for Climate (Haut Conseil pour le Climat) (Haut Conseil pour le Climat, 2019[31]). Another example can be seen in Sweden with the established Climate Policy Council evaluating how government policies address the country’s climate objectives (Swedish Ministry of the Environment and Energy, 2018[32]).
Note
← 1. Green bonds are bonds that signify a commitment to exclusively use the funds to finance or refinance “green” projects, assets or business activities.