Posted by Elva Bova and Simona Pojar[1]
As many EU Member States are taking action to green their economies, how green are their budgets?
Green budgeting is a form of priority budgeting, which aims to align resources and incentives towards specific environmental priorities and goals. More precisely, it consists of budgetary practices whereby climate and environmental factors are identified within the budget and assessed with respect to specific performance indicators. Within this framework, an important step is to assess the overall greenness of a country’s budget.
Environmental goals are complex, so assessing the greenness of the budget is not always easy. A specific budgetary measure could contribute to several environmental goals simultaneously, and at times with opposite signs. For example, public investment in wind farms is favourable for the climate but unfavourable for biodiversity. In such cases, both the green and brown impact of the policy should be captured and measured. Moreover, some budgetary policies may have a limited short-term impact but affect the environment substantially over a longer period. For example, a tax benefit encouraging more teleworking might ultimately have positive effects on air quality. Similarly, investing in environmental education could help build a future generation that strongly supports ecological initiatives that protect the environment. Typically, however, fiscal analysis focuses on immediate impacts and the medium term, much less on long-term impacts. Where should countries draw the line in capturing potential environmental impacts?
There are other practical challenges in implementing green budgeting. One such challenge is that fiscal measures can be ‘more’ or ‘less’ green depending on their nature and the extent to which they are combined with other measures that are not green. For example, the impact of a scheme to promote the use of electric vehicles can be less green than spending on the energy efficiency renovations of buildings. At the same time, such renovations may not be ‘fully’ green if they use raw materials that are environmentally harmful. Finally, countries may need to recalibrate their environmental targets as green performance improves. For example, the use of some specific biofuels that currently must be combined with fossil fuels to be effective could achieve a substantial reduction of gas emissions and a favorable environmental score. However, this assessment is likely to change as new technologies emerge and countries adopt a net-zero CO2 emission policy.
Based on a screening of budgetary documents (Bova 2021)[2], only a handful of EU Member States currently present much information on the greenness of their budgets (Finland, France, Ireland, Italy, and Sweden). This information is presented in a wide variety of ways. As regards environmental objectives, Ireland and Sweden focus on climate change mitigation measures, while Finland, France and Italy also include other environmental objectives. The published EU budget examines its contribution to climate-change and biodiversity. Almost all these reports focus only on green (favourable) expenditures, except France, which also covers revenues and some tax expenditure, and reports on brown (unfavourable) impacts. The level of detail in the information reported also differs, with some countries featuring only a few tables or boxes in their budget plans, while others include more substantive reports (e.g., Italy and the EU budget).
The analysis and reporting of environmental measures and impacts in the budget is usually coordinated by a country’s central budget authority (typically in the finance ministry), with inputs from line ministries. At times, inputs are facilitated by written instructions (Italy), by intense discussions (Ireland) or inter-ministerial collaboration (France and Sweden). For the EU budget, financial officers from several Directorate-Generals conduct the tracking of environmental impacts based on a methodology agreed with the Climate and Budget Directorate‑Generals, which then validate the accuracy of the information. Finally, few countries have yet carried out any ex-post assessment or validation of the data, and responses of the media, independent experts and the wider public have been limited.
[1] Elva Bova and Simona Pojar are with the European Commission’s Directorate-General for Economic and Financial Affairs. The information and views set out in this article are those of the authors and do not necessarily reflect the official opinion of the European Commission.
[2] Green Budgeting in the EU: A First Review (europa.eu).
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