The upcoming UNFCCC Climate Change Conference in Katowice highlights once again the urgent need to pursue co-ordinated and decisive action to combat climate change as agreed under the Paris Agreement. But climate goals are not the only call for action. The Sustainable Development Goals, the Aichi Biodiversity Targets and the UN Convention to Combat Desertification, among many other commitments, all demand urgent action— and budgets.
The way governments choose to spend their money will be decisive if these commitments are to be kept. Yet, between 2010 and 2015, fossil fuel subsidies amounted to USD 373-617 billion annually across 76 economies, which collectively contribute 94% of global carbon dioxide emissions (OECD, 2018). In contrast, the amount that governments spend on biodiversity, estimated at about USD 50 billion per year, is approximately one tenth of the spending on fossil fuels. Indeed, environmental protection averages around 1.3% of public expenditures (OECD, 2017) (see Figure 1).
Source: OECD (2017) Governance at a Glance 2017, https://stats.oecd.org/).
Equally, using the tax system to internalise negative environmental externalities is another example of greening the budget, while also generating substantial amounts of public revenue. In OECD countries, annual environmentally related tax revenue has decreased from 1.83% of GDP in 2000 to 1.56% in 2014 (see Figure 2). The potential of carbon pricing is also far from being realised. Currently 90% of carbon emissions are not priced at a level reflecting even a conservative estimate of their climate costs. Astonishingly, 60% are not priced at all (OECD, 2016) (see Figure 3).
Source: OECD (2016) Effective Carbon Rates: Pricing CO2 through Taxes and Emissions Trading Systems, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264260115-en.
So how do governments ensure that their actions reflect the environmental and social goals they have committed to? Do governments even know to what extent their budget decisions are helping or hindering progress towards achieving these targets? Shouldn’t governments provide criteria that would allow citizens to hold politicians accountable for climate and other commitments?
The role of green budgeting
“Green budgeting” is a key factor in this equation. In our view, budgeting is not a neutral administrative exercise, but one of the most effective tools that policy makers have to achieve important objectives like fighting climate change, cutting pollution, and protecting biodiversity. “Green budgeting” uses the tools of budgetary policy making to help achieve environmental targets. It does so by systematically examining existing and potential fiscal measures and policies to mainstream an environmentally informed approach into the national budgeting processes – contributing along the way to an evidence-based debate on sustainable growth. This process includes identifying and measuring environmental impacts of budgetary and fiscal policies and assessing their coherence with national and international commitments.
Over the last few years, many countries have begun to establish good practices towards the greening of their public finances. For example:
- Indonesia requires that all budgetary policy proposals include an assessment of green impacts and calculates the “Green Economy weight” (green economy expenditures as a proportion of total budget expenditures) of the proposal to publicise its contribution towards greening Indonesia’s economy.
- The UK Government’s 2015 Spending Review gave departments the scope to put forward information on environmental risks, impacts and obligations as part of their bids.
- Italy catalogues tax expenditures with regards to their environmental and financial impact and classifies them into environmentally harmful, friendly, uncertain or neutral subsidies to align them with their environmental goals.
- The EU is broadly on track towards their 20% target for climate-related spending in 2014-2020, and proposes a more ambitious goal of 25% of EU expenditure contributing to climate objectives for the upcoming EU budget proposal for 2021-2027.
- In Norway, a Green Tax Commission evaluates whether and how the increased use of climate and environmental taxes can secure lower greenhouse gas emissions, improved environmental conditions and sound economic growth.
Collaborating towards our green commitments
Despite these actions, comprehensive indicators of the degree and impact of budget and fiscal measures on the environment is either lacking, or, where they exist, are fragmented or buried in technical reports. If there is any good news, it may be that the relative lack of systematic engagement on these issues by budget practitioners to date means there is plenty of scope for raising awareness and to advance the role of public finances in our efforts towards reaching national and international environmental goals.
For this reason, the OECD launched the Paris Collaborative on Green Budgeting. The Collaborative is an open research platform that brings together environmental, tax, budget and fiscal affairs experts working to advance the required analytical and methodological groundwork. Tasks include proposing, developing and testing pragmatic and transparent tools needed to support green budgeting, including a voluntary reporting mechanism or “Green Budgeting Statement”; and new environmental cost-benefit analysis; supporting peer learning and the exchange of good practices; and offering targeted assistance for developing a Green Budget Strategy.
At the launch of the Collaborative, OECD Secretary-General Gurría stated that “the challenge we set ourselves in the Paris Agreement of keeping global temperature rises ‘well below’ 2C is not yet out of reach. But nor will it be easy. Our success will necessitate bold and decisive action to make the ‘one planet’ we have a greener, cleaner, more sustainable place.”
The Paris Collaborative on Green Budgeting is aiming to do just that. Initial outputs and good practices have been shared and discussed at a number of relevant OECD meetings, dedicated expert workshops and high level events. The UN High Level Political Forum Side Event on the Paris Collaborative on Green Budgeting examined emerging practices, key challenges and ways forward. Moving ahead, the Collaborative is working on pragmatic solutions to put Green Budgeting into practice. And we already see governments leading by example: France and Mexico aim to have a Green Budget in 2019.
References and further reading
Originally posted by The Green Fiscal Policy Network.