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March 15, 2021

PFM and Climate Change – Death by a Thousand Diagnostics

PFM and Climate Change
Posted by Bryn Welham and Mark Miller[1]

PFM diagnostics have become a growth business in recent years. The PEFA assessment is perhaps the most widely known, but it is certainly not alone. A 2018 PEFA stocktake identified 45 different PFM diagnostic tools. Diagnostics are also increasingly being set up for individual sectors and policy challenges. A recent ODI report identified seven diagnostic frameworks in the health sector alone.

As the attention of international policy makers shifts to how fiscal policy can be used to help ‘build back better’, PFM-focused climate diagnostic tools are the new in-thing. The PEFA secretariat are currently consulting on a pilot climate change module containing 22 draft indicators covering issues such as climate sensitive procurement oversight and whether expenditure can be tagged as climate relevant or not. The IMF will soon pilot a new climate-change focused public investment management assessment tool. It is likely that other such assessments will follow.

Surely, this is a good thing and the more focus on climate issues the better?  Perhaps.  Getting governments to think about climate change adaptation and mitigation policy is indeed the right thing. The ability of governments to use PFM systems to implement those policies matters too. But it’s not clear that the new PEFA module will deliver on either of those objectives.

Missing the policy woods for the PFM tree

From a theoretical perspective, the new climate PEFA module focus too much on means and not enough on ends. In this respect, a climate PEFA module  risks repeating the conceptual problems of the earlier gender module.

PFM systems are mainly about the ‘how’ (i.e. how are we managing finances to meet our various policy goals), not the ‘what’ of public finances (i.e. what are our policy goals?).  A full view of the ‘what’ means looking beyond scoring central government PFM systems with an A-D on their ‘climate-responsiveness’ (whatever that means).  It means considering:

  • SOEs (almost entirely out of scope) that might be operating under regulations that encourages them, for example, to rapidly build coal-fired power stations;
  • local governments (out of scope of a regular PEFA) who may be subsidising massive deforestation; and
  • private companies (again, out of scope) merrily drilling for oil and gas, where governments may be turning a blind eye (or even subsidising).

Mitigating and adapting to climate change will likely require changes to many policy areas (e.g. energy, agriculture, social protection, taxation, industrial policy). Often the best way to address such challenges will not necessarily be through public spending (the focus of PFM diagnostics). Using tax systems and regulation may be more effective in changing behaviours in the private sector. The less a policy area has to do with central government spending, the less relevant is a PEFA-style financial systems assessment. This point applies to other complex, cross-cutting policy challenges such as improving gender equity or addressing under-nutrition.

Climate change means very different things for very different countries

The complexities of climate change as a policy problem call in to question the wisdom of a single, standard assessment approach. For the largest emitters, fiscal incentives to the private sector will be critical in supporting a transition to a more sustainable economy. In economies at risk from climate-related disasters, investment in disaster insurance may be a priority. In countries where large swathes of the population are reliant upon increasingly unreliable rain-fed agriculture, spending policies to support climate change adaptation may not look very different from those required to reduce poverty.  Standardised assessments will miss these differences and assume a one-size of PFM system fits-all.

Building back before building back better

If it’s capability that really matters, wouldn’t climate-oriented PFM diagnostics help bureaucracies to better address climate change?  Possibly – but additional diagnostics risk focusing attention on PFM issues that may not really matter.  PFM reform capacity and commitment is limited and there is an opportunity cost to focusing on new PFM reforms at the expense of existing ones. Most developing countries still lack basic working PFM systems. Creating more PEFA indicators, and consequently longer reports, is a distraction and obscures the PFM areas that matter for every public policy outcome. 

Prior to the crisis, many countries continue to score poorly on basic core PFM processes like aggregate expenditure and revenue management, reliable release of cash to budget units, and the ability to produce reliable financial statements. These challenges have been compounded by the COVID-19 crisis as basic processes come under greater pressure. Finance ministries have been passing supplementary budgets, searching for expenditure savings, regularly having to revisit fiscal forecasts, agreeing emergency relief programmes, and negotiating with creditors. The additional burden of work has not been made easier by adapting to remote working arrangements.  Building back these key foundational systems may be more important to climate change than PEFA climate module concerns over whether the government’s fiscal policy statement contains a reference to climate change. The priority during and after the crisis should be to ‘build back’ PFM systems and ‘worry about better later’.

 

[1] Overseas Development Institute (ODI), United Kingdom.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

Comments

Points well-taken: more important to get basic PFM functionality right than have climate buzzwords to categorize something as "green." Indeed ESG is going mainstream in many areas, including in PFM, apparently. There are certainly right ways and wrong ways to do that, and surely the authors and other PFM professionals can keep moving the conversation forward. The point of my comment is to note that the focus on climate is a bit short-sighted, a bit naive. ESG is coming. Climate is just one part of the E. Get ready for biodiversity/nature factors, a smorgasbord of social indicators, and potentially also governance issues. I'd recommend using current lessons of problematic "climate rollout" in PFM to nip problems in the bud as stakeholders start applying the many, many other ESG concepts.

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