Embracing green budgeting: A game changer in fiscal policy

Green budgeting, once a niche concept, is now a core component of responsible fiscal management. The Vienna Development Knowledge Center's 2025 kickoff event focused on this increasingly important topic.

In short, green budgeting is an evolving approach to public finance that prioritizes environmental sustainability alongside traditional economic goals. It goes beyond simply allocating funds to "green" projects and involves incorporating environmental impacts into all aspects of the budget process. This means analyzing how spending choices affect the environment and strategically investing in a more sustainable future.

The following examples illustrate how this is reshaping budgeting practices worldwide: 

• Through a stepwise approach, the Austrian government has evaluated all expenditure programs and tax expenditures on a green-brown spectrum. Austria’s green budgeting includes multi-year program spending reviews  focusing on national and sub-national measures alignments,  setting clear environmental goals, understanding  financial consequences of not meeting these targets, and emphasizing  accountability in fiscal planning and results.
• In France, from 2023 to 2024, environmental friendly expenditures significantly increased from €32 billion to €38.6 billion (+6.6 bn), reflecting a strategic focus on beneficial budgetary initiatives. Mixed expenditures (partly environmentally friendly) rose from €2.7 to €3.1 billion (+0.4 bn), while unfavorable expenditures remained stable €11 billion. This increase in favorable expenditures, paired with stable unfavorable ones, demonstrates effective resource allocation.
• Indonesia has reoriented its fiscal policy from brown to green expenditures. The government has adopted Climate Budget Tagging to align transition activities categorized as “green”, particularly for coal decommissioning, with the national roadmap and pathways. The government made significant cuts to fossil fuel subsidies, reducing them by approximately $10 billion, and redirected these funds towards environmental initiatives, such as deployment of renewables. With a target to achieve a 23% share in the national energy mix by 2025, Indonesia sets an ambitious example of how rethinking budget priorities can substantially contribute to national energy goals and broader environmental benefits.

Mastering green budgeting is complex but essential for climate action. This approach shifts to program-based budgeting, linking each dollar to an  environmental goal. The process requires a dedicated team and fiscal knowledge. Successful nations combine centralized and decentralized strategies, using in-house teams or external experts.

Effective green budgeting is crucial because of the current financial and developmental pressures facing our world today. Green spending drives economies towards a sustainable, low-carbon future, while brown expenditures hinder these efforts. Green budgeting must focus on increasing green funding and reducing counterproductive spending to ensure that public funds contribute positively to the environment.                                    

As the practice of green budgeting evolves and spreads globally, it is increasingly crucial to evaluate its implementation effectiveness. That means not just initiating green initiatives but also monitoring their progress and impact over time. Establishing robust green budgeting baselines is a critical first step in this journey. For example,  Serbia's 2025 Budget has prioritized transparency by highlighting its green expenditures through a set of dedicated Annexes, earmarking  $1.09 billion for 64 green projects. This initiative demonstrates commitment and sets a standard for accountability in green finance.

For green budgeting to succeed globally, it must demonstrate its value, especially in developing countries with limited resources and expertise. Essential steps include prioritizing and sequencing green initiatives, building local capacity, and ensuring credibility. The need for reliable data and assessments is paramount, as underscored by  the European Court of Auditors. Tools like the Climate PEFA can help highlight gaps and guide improvements in how countries manage and report their environmental fiscal efforts.