High Time for Green Budgeting

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Posted by Murray Petrie[1]

In a previous PFM blog I discussed the urgent need for stronger mechanisms of environmental stewardship. This article discusses the closely related topic of ‘green budgeting’.

Green budgeting refers to use of the budgetary system to achieve improved environmental outcomes (OECD 2018). Some of the environmental impacts of fiscal policy are positive. Examples include funding for environmental protection, R&D spending on green technologies, environmental regulation, the collection, monitoring, reporting of environmental data, and research on how to conserve the environment.

Other environmental impacts of fiscal policies can be negative, such as those from fossil fuel and agriculture subsidies or subsidised water and electricity consumption. The OECD estimates that between 2010 and 2015 direct government expenditure on subsidies for fossil fuels amounted to US$373-617 billion annually across 76 major economies.  

In contrast, the amount governments spend on biodiversity was only around one-tenth of that amount. Further, the tax system is an important tool to ‘correct’ prices for activities that generate negative externalities, e.g., carbon emissions and pollution. Yet World Bank estimates show that specific carbon taxes and emissions trading systems cover only about 15% of global emissions.

What is green budgeting? The OECD launched the Paris Collaborative on Green Budgeting in December 2017. The objective is to adapt conventional budgeting tools to help align national expenditure and revenue processes with climate and other environmental goals. This requires establishing clear connections between public finance and environmental impacts.

The OECD has identified several components of green budgeting that might be included in the annual budget documentation or a separate ‘Green Budget Statement’. These components include:

The OECD also recommends periodic (less than annual) supplementary reports:

In addition to these elements, consideration could be given to the publication of:

Technical work is underway to support better understanding of the impacts of fiscal policies on the environment, including the OECD’s Cost-Benefit Analysis and the Environment 2018, and a spreadsheet tool developed by the IMF. This tool incorporates domestic externalities from fuel use to help countries evaluate policy trade-offs and progress towards their Paris Agreement climate change mitigation pledges.

Some governments have started to integrate climate change and wider environmental sustainability analysis into the budget process:

There are a host of opportunities to build on these developments. International organizations such as the World Bank, the IMF, the OECD, and international multi-stakeholder networks such as GIFT and the Open Government Partnership are starting to work on and promote the development and diffusion of common international norms and commitments on green budgeting. GIFT, as a multi-stakeholder network, is well-placed to promote a role for national CSOs in developing green budgets in their countries.

[1] Lead Technical Advisor, Global Initiative for Fiscal Transparency (GIFT).

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