Executive summary
Climate change, biodiversity loss and wider environmental degradation are major, imminent threats facing our planet and our societies. International initiatives such as the Paris Agreement, the Aichi Biodiversity Targets under the Convention on Biodiversity and the Sustainable Development Goals are helping governments around the world commit to co-ordinated action. In pursuit of these commitments, many governments have set national goals, unique to their local contexts and capabilities, to help protect the environment (e.g. biodiversity) and mitigate climate change. Public expenditure amounts to a significant proportion of economic activity – thus, government tax and spending decisions can have powerful social, environmental and economic implications for a country. Given that the budget document is the government’s central policy document and the important role it plays in determining how resources are allocated to deliver national goals, it is appropriate that priorities related to the environment and climate change be considered as part of the budget process.
Green budgeting offers a range of tools and techniques for governments seeking ways to bring green perspectives to bear on the budget process. One of the central green budgeting tools in many countries is green budgeting tagging. This tool involves assessing each individual budget measure and giving it a “tag” according to whether it is helpful or harmful to green objectives. Green objectives may relate to climate or other areas of the environment, such as biodiversity, air and water challenges (quantity and quality). Information gathered from tagging individual measures can be useful to understand how overall budget policy impacts cross-cutting goals relating to climate and the environment. Lessons from country experiences highlight the diversity of approaches, rooted in the national context but aligned to international commitments (e.g. Nationally Determined Contributions).
Before any country starts green budget tagging, it is helpful to have clarity on why it is being introduced – identifying what “problem” it is trying to solve. This helps in assessing whether or not tagging is indeed the right approach. Designing an approach to green budget tagging requires an awareness of key decisions such as defining what is “green” by taking into consideration national objectives and existing international principles and standards, deciding what budget measures to tag across sectors and administrative levels, developing a classification system to categorise information, and identifying information needs to develop a weighting system that takes into account the relevance of different budget measures.
Given that green budget tagging is still relatively new, countries tend to take an adaptive approach to implementation, allowing the scope and processes to evolve as capacity and familiarity develop over time. Most countries start by tagging expenditures that make a positive contribution to green objectives. However, some countries also tag revenues as well as budget lines that negatively impact green objectives. Approaches vary considerably depending on the political rationale for introducing green budget tagging. Over time, greater convergence on these aspects may emerge and will support cross-country comparisons and analysis.
The information produced by green budget tagging can be powerful when it is fed into policy making and budget decisions. As such, it is important for countries to consider how the information from green budget tagging can be used alongside evidence from other green budgeting tools, such as environmental impact assessments and the application of a green perspective to performance setting and spending review, to inform budget decision making and provide greater accountability and oversight. Ensuring that green budget tagging is more than a paper exercise is also important for generating buy-in for its introduction and development.
Emerging lessons have highlighted key challenges in the implementation of green budget tagging. These include identifying the appropriate level of granularity for tagging; deciding what to do with budget measures related to climate adaptation as distinct from climate mitigation; tagging negative budget items; and balancing trade-offs across environmental, social and economic objectives. Budget tagging is by its nature subjective and requires sound judgements across government, even when there may be incentives to “greenwash” or underestimate relevant budget items as part of the process. As such, it is important to ensure that tagging decisions are open to scrutiny, both internally and externally, with opportunities for oversight by the supreme audit institution, parliament and civil society as part of the larger effort.
Green budget tagging should not be a stand-alone tool, but works most effectively as part of a broader approach to green budgeting with a strong strategic framework (such as relevant strategies, policies and plans that include clear goals for government policy) and a supportive enabling environment (such as capacity development, clear guidance for government stakeholders and suitable financial management information systems). The implementation of green budget tagging will be most effective where there is strong political and administrative leadership, and a scaled approach to its introduction.
On a more strategic level, green budget tagging should be coherent with other public financial management reforms. For example, tagging exercises can complement the implementation of reforms such as performance budgeting or developing a medium-term expenditure framework, since they provide information on financial resources allocated to high-level policy priorities. Implementing tagging alongside a wider set of government actions, such as regulatory reform, green public procurement and the integration of green criteria into cost-benefit analysis for infrastructure investment, are also important for maximising progress towards national climate and environmental goals. A whole-of-government approach encompassing legal, regulatory, policy and budget decisions has significantly more potential to be effective than the implementation of a single, stand-alone tool.