Green Budget Tagging

3. Using the information from green budget tagging

The information produced by green budget tagging can be powerful when it is fed into policy making and budget decisions. Using the information for awareness raising alone is unlikely to achieve substantial results and will not justify the time and effort that is involved. Resch et al. (2017[30]) point out: “Whatever the expenditure tracking methodology, it should be recognised that, unless the information resulting from the tag, analysis or review is used to inform climate change policy, planning or budgeting, or to strengthen accountability around climate change commitments, it will remain an academic exercise of limited operational value”.

This section looks at how green budget tagging can be used alongside other tools to build a larger stock of evidence on programmes relevant to national climate and environmental goals, and their impact. It then considers how this information can be used during budget decision making to improve the performance of government policy and, if desired, to qualify for green finance instruments. Finally, it outlines how the information from tagging can be presented to ensure transparency and facilitate oversight.

3.1. Using green budgeting to build a larger stock of evidence

Green budget tagging is one of many tools that can be employed as part of an overall green budgeting framework to help build a larger stock of evidence on how budget measures contribute to or deter from green objectives. A number of tools can work alongside green budget tagging to facilitate better understanding of the effectiveness of different measures and support budgetary decisions that align with policy goals, including: impact assessments, cost-benefit analysis, and a green dimension to performance setting or performance budgeting.

There are different types of impact assessments that can help inform budget decisions, including environmental impact assessments and carbon impact assessments. Environmental impact assessments can serve as a means to highlight the environmental impact of individual policies and programmes. Examples of this include the EU Directive on Strategic Environmental Assessment, which requests the assessment of policy plans or programmes for likely significant effects on the environment and the reasonable alternatives. Carbon impact assessments include methodologies to assess the impact of budget measures on GHG emissions.

Another tool that can gather useful evidence for budget decision making is cost-benefit analysis of projects and policies that have a deliberate aim of environmental improvement or are actions that affect, even indirectly, the natural environment. It helps decision makers to have a clearer picture of how society would fare under a range of policy options for achieving particular goals and improve policy responses. Ex ante cost-benefit analysis can be supported by an ex post assessment to cast light on the accuracy of the ex ante answer, or whatever decision rule was used to justify the policy or project (OECD, 2018[48]).

A green dimension to performance setting, or performance budgeting, can also ensure that there is due consideration to including climate or environmental indicators and objectives as part of the government’s performance framework. It also encourages regular data collection in relation to key environmental metrics, providing a basis for performance monitoring, impact evaluation and better budget decision making (OECD, 2019[49]). In this regard, countries can draw from experiences of gender budgeting, where countries such as Austria and Iceland require that each budget chapter have a performance measure related to gender equality.

While these tools may have been in place for a number of years, the evidence they provide can be underutilised. Where green budget tagging is introduced in the context of political momentum for improving how the budget supports green objectives, it can provide additional impetus for incorporating consideration of the evidence it provides in budget decision making.

3.2. Using this evidence to inform budget decision making and improve performance

The evidence gathered from green budget tagging and complimentary green budgeting tools is most valuable when it serves as a direct input to budget allocation decisions or as contextual information to inform budget planning, and to instil greater transparency and accountability throughout the budget process, by providing information to legislators and the public on how the budget contributes to national climate or environmental objectives. For this to work, the evidence, and analysis flowing from it should be available for relevant stakeholders at the time that they take key budget decisions. The evidence gathered through these tools can also provide input into processes designed to improve the performance of government policy, including programme evaluation and public expenditure or spending reviews.

3.2.1. Inputting evidence into different stages of the budget cycle

Information gathered through green budget tagging and other tools that support green budgeting can be input into the different stages of the government’s annual budget cycle to support the allocation of public resources in line with strategic priorities.

This information has a potential role at each stage of the budget cycle, as shown in Figure 3. The first stage that the evidence gathered through tools supporting green budgeting can be used for is the budget planning stage. Lessons from the Philippines show how tagging can inform budget planning and allocation decisions (Box 17). Other examples are provided by Pakistan, where the Ministry of Water has used information from climate budget tagging to integrate climate change into its medium-term budgetary framework. In Indonesia, the Ministry of Finance used climate budget tagging data to identify the gap between the existing public spending and the estimated cost of the national climate mitigation action (UNDP, 2019[8]).

Box 17. The use of budgeting evidence in budget allocation decisions in the Philippines

Each year, the Department of Budget and Management, as part of its budget preparation process, requires government agencies to provide an overview of their climate-relevant expenditures (previous, current and succeeding fiscal year). Climate-relevant programmes, activities and projects are then classified according to their allotment type (personnel services, maintenance and other operating expenses, financial expenses, and capital outlays). As part of this process, government agencies are requested to summarise and present their climate-related programme budget requests during technical budget hearings.

Source: World Bank (forthcoming[2]).

The next stage of the budget cycle is the budget approval phase. Here, information from tools such as green budget tagging can be used to instil greater transparency and accountability; for example, through facilitating the provision of a green budget statement accompanying the draft budget proposal (see Section 3.4).

During the implementation stage of the budget, information can be used to inform in-year adjustments. An example of the information from green budget tagging being used in this way is provided by Honduras, where the information generated through the tagging system appears to inform mid-year reallocations between climate change projects (World Bank, forthcoming[2]).

Finally, in the audit stage of the budget, information from green budgeting can be used to inform scrutiny of budget execution, and follow-up decisions on policy design and resource allocation in subsequent years.

Figure 3. Role for evidence from green budgeting at different stages of the budget cycle

3.2.2. Using information to improve the performance of government policy

Green budget tagging does not account for the effectiveness of budget measures. However, information from green budget tagging and other tools supporting green budgeting can also be used in budget processes such as spending or public expenditure reviews, programme evaluations and other analysis to help guide the efficiency and effectiveness in public budgeting. For example, information from green budget tagging can complement output and outcome performance information to give a more detailed picture of the progress towards climate and environmental policy, or as the basis for reviewing programme performance. Or mitigation expenditure by programme can be compared with how much GHG emission reductions are achieved for each programme, giving insights into relative value for money (UNDP, 2019[8]). Information from green budget tagging could also feed into spending reviews, a tool increasingly being used to increase the fiscal space available to government to finance its policy priorities (OECD, 2019[50]). For example, budget tagging might inform a thematic spending review relating to a specific climate or environmental priority of relevant budget measures that should be considered. Alternatively, tagging might help inform a broad spending review on the extent to which an overall package of measures contributes to different strategic objectives.

3.3. Using information to qualify for green finance instruments

A green bond is a type of debt instrument whose proceeds are exclusively earmarked to fund projects that deliver benefits to efforts related to climate change mitigation or adaptation; natural resource depletion; loss of biodiversity; air, water or soil pollution. Some countries have developed the use of green bonds as a key tool to channel investments to green assets in pursuit of their national climate and environmental objectives. In many instances, tagging processes go hand-in-hand with a country’s effort on green bonds (see Box 18 for the example of Ireland).

Box 18. Ireland’s use of green bonds

In October 2018, the Irish National Treasury Management Agency launched the country’s first sovereign green bond, where any proceeds raised can be devoted to eligible “green” expenditure with the government reporting to investors through annual allocation reports. These commitments made it necessary for Ireland to track all government expenditure on climate-related matters on an ongoing basis. In tracking government expenditure, to ensure consistency and alignment to the requirement of managing green bonds, Ireland utilised the International Capital Markets Association standard definition of “green expenditure” as the basis for its budget tagging classification methodology.

Source: Cremins and Kevany (2018[21]).

The information from green budget tagging can help strengthen a country’s framework for green bonds by providing a set of considerations for identifying the eligibility of projects, tracking finances and reporting. For example, Indonesia’s Ministry of Finance and National Development Planning Agency relied on its existing climate budget tagging system to assess projects eligible to be financed from its Green Sukuk (Indonesia’s green bond) as well as ensuring that associated projects are in accordance with the tenor of the Green Sukuk (UNDP, 2019[8]). However, although tagging efforts have been one of many tools used to support countries’ green finance initiatives and pursuit of green bonds, these do not necessarily require the use of green budget tagging.

3.4. Ensuring the results of green budgeting are transparent and open to independent oversight

As mentioned in Section 3.2, green budget tagging can help instil greater transparency and accountability during the budget process where the information or analysis from the exercise is made public. The provision of this in the form of a green budget statement (GBS) or a citizens’ climate or environmental budget can ensure that analysis is presented in a user-friendly way and is open to scrutiny by external stakeholders such as parliament and citizens.

3.4.1. Green budget statements

A GBS can be used to show summary information from green budget tagging. In this way, stakeholders can assess how the draft budget contributes to national climate or environmental objectives. Where the information and analysis drawn from green budget tagging is presented in a GBS or citizens’ budget, this can support greater transparency, accountability and public engagement on budget policy.

These statements may be published as part of the draft budget proposal, serving as one element contributing to deliberations at the approval phase of the budget cycle. Examples of countries that have already introduced a GBS in the form of chapters or supplementary reports to accompany the draft budget to provide an overview of relevant budget measures and their impact on climate and the environment are provided in Box 19.

Box 19. Examples of green budget statements

France: In order to enhance its reporting on the overall impact of public finance measures on the ecological transition, the French government developed a more comprehensive and updated yearly “Green Budget” for the 2021 Budget. The document mainly draws on the information gathered from green budget tagging, and also provides additional information such as the economic effect of environmental taxes on households and firms.

Bangladesh: In Bangladesh, the publication of an annual Climate Financing for Sustainable Development report generated from green budget tagging has helped to engage civil society to hold government accountable. The report presents the percentage of climate-related spending subsumed in total public expenditure, with the purpose of showing the government’s commitment to address the adverse effects of climate change. The report also intends to add to the knowledge and understanding of climate finance among a wider range of stakeholders in Bangladesh so they can be better engaged with and contribute to policy development and monitoring and hold decision makers to account.

Nicaragua: Final expenditures of activities linked to climate change and disaster risk reduction and environmental management are compiled and reflected in the government’s general liquidation report submitted to the National Assembly. This becomes subject to future audits by the General Comptroller.

Philippines: A climate budget brief, detailing climate change allocations, funding gaps and recommendations in relation to the National Climate Change Plan, is used to inform budget hearings. This coincides with a proposed climate budget as part of the President’s Budget to Congress as part of the annual budget process.

Sources: Government of France (2019[51]); Ministry of Finance of Bangladesh (2020[52]); World Bank (forthcoming[2]).

In addition to information and analysis from green budget tagging, a GBS could include information such as:

• A general green budget statement: summarises in broad narrative terms how measures introduced in the budget are intended to support green priorities and goals.

• A green progress statement: provides a more detailed exposition of how the budget measures advance the government’s green agenda, by reference to established objectives and indicators.

• Distributional impact analysis: offers an assessment of how specific green measures (both revenue and expenditure) affect individuals, households or firms.

3.4.2. Citizens’ budgets

Citizens’ budgets have been introduced to present to the budget in a way that makes sense to the general public and improve government accountability. Some countries, such as Bangladesh and Nepal, have now also introduced a “Citizens’ Climate Budget” to help bring about awareness of government action towards climate objectives. Lessons from Bangladesh highlight how green budget tagging can serve as a useful tool to engage and inform the public in this regard (Box 20).

Box 20. Bangladesh’s Citizens’ Climate Budget

The Ministry of Finance, in conjunction with the Climate Financing for Sustainable Development report, published a “Citizens’ Climate Budget” for the 2018/19 and 2019/20 budgets. It provided a concise summary of climate-related budget allocations for the current and upcoming fiscal year, as well as information on actual expenditures of previous budget cycles. The tagging has raised awareness of the government’s commitment to climate action – creating a demand for more information and more impact assessments from civil society organisations. In fact, it was only after demands by civil society to include more accurate expenditure figures did the government include actual expenditure information as part of its reports to the public.

Sources: World Bank (forthcoming[2]); UNDP (2019[8]).