Measure to manage: How countries identify climate-relevant expenditures in their budgets

Last September, the French Ministry of Economy, Finance and Recovery premiered  the publication of its first green budget, measuring the impact of the state budget on climate and the environment. For us, the French budget was just the latest – though arguably most comprehensive and sophisticated – in a series of approaches to identify climate-relevant public expenditures. In early spring, we began tracking and analyzing climate change budget tagging methodologies from around the world and set up interviews with the government officials implementing them. We wanted to understand this rapidly growing practice, its benefits, and challenges.

As climate change is a transversal issue, climate-relevant expenditure escapes conventional economic and functional budget classifications. Climate change budget tagging is one way for countries to better understand how much – or how little – they spend on mitigation and adaptation.  We discovered that since the introduction of the first systems in 2012, at least 19 national and subnational governments have introduced tagging systems (including France). Several countries are currently in the process of adopting them. Developing countries in Asia were the frontrunners, with some of the earliest systems being set up in Nepal, the Philippines and Indonesia. 

We found that countries have similar objectives for introducing climate tagging: to help them to align their budget with climate change policy priorities, identify financing gaps, mobilize domestic and international finance, raise awareness, and make improvements in transparency and accountability. Interestingly though, the methodological choices for tagging show a great variety: definitions, coverage, institutional setups, and the integration in the budget cycle are context specific. When it comes to the type of expenditures covered under tagging systems, however, all methodologies (excluding the French one) have two omissions in common. Tagging focuses exclusively on direct expenditures and excludes tax expenditures and subsidies (e.g. fossil fuel subsidies); and tagging does not account for expenditures with a detrimental impact on climate and contrary to climate policy goals (e.g. investments in energy generation from fossil fuels).

Incomplete coverage is not the only challenge with climate tagging. Perhaps the most crucial shortcoming in our view is the limited impact that tagging has had on planning and budgeting. Programs and expenditures are generally assessed and tagged after they have been planned and budgeted. We found no evidence of tagging data informing resource allocation. Very few countries track and report on actual expenditures under climate-relevant items. 

We identified two main benefits of currently applied climate tagging practices. They do increase awareness of climate change issues in central finance and line agencies, especially where they are part of broader efforts to mainstream climate action. They also help communicate a government’s commitment to climate action, enhance transparency and enable accountability. Publishing climate-relevant expenditures (e.g. as part of the budget document, or in a separate report) is a precondition for these benefits to materialize, and citizen climate budgets can further strengthen this aspect.

Our World Bank report on climate change budget tagging offers a detailed review of climate change budget tagging methodologies and practices, its predecessors in pro-poor and gender-responsive budgeting, other climate finance reporting approaches, and its linkage to sovereign green bonds. We have drawn the following key lessons from our analysis:

Lessons Learned for effective climate change budget tagging :

1. Define the objectives of the climate budget tagging initiative and consider alternatives. 
2. Define the policy scope of the tagging methodology. 
3. Engage key institutional stakeholders in the design and implementation of climate budget tagging. 
4. Ensure that line agencies are actively involved. 
5. Align definitions of climate-relevant activities and expenditures with national climate change policies and strategies. 
6. Identify and tag activities and expenditures that have adverse climate impacts. 
7. Structure the tagging methodology so that it supports the implementation of national climate policy. 
8. Embed budget tagging across the budget cycle. 
9. Use complementary reporting systems to extend the principles of climate budgeting beyond the central government. 
10. Design the tagging system so that it facilitates the mobilization of climate finance. 
11. Generate information that decision makers need in formats they can use. 
12. Undertake periodic expenditure reviews to test the alignment of plans and budgets with climate policy goals and impacts on climate outcomes. 
13. Invest in capacity building. 
14. Promote transparency, engagement, and debate on climate policy. 

Download and read the World Bank’s full report on climate change budget tagging today.