Green Budgeting in OECD Countries

2. Green budgeting across the OECD

Abstract

This section provides an overview of green budgeting practices across the OECD, based on results from the 2020 OECD and European Commission – Joint Survey on Emerging Green Budgeting Practices (Survey reflects green budgeting practices that were either under implementation or planned as of end-June 2020) . After providing an overview of green budgeting across the OECD, it sets out information on the extent to which green budgeting practices have in place the key elements of an effective approach to green budgeting, as set out in the OECD Green Budgeting Framework. It then goes on to provide information on the impact of green budgeting and the use of green budgeting in COVID-19 recovery efforts.

Note, the European Commission will also be publishing a separate report with results specific to EC countries.

Overview of green budgeting across the OECD

More than a third of OECD countries surveyed practise some form of green budgeting (14 out of 35 country responses), seen in Figure 2.1. This includes countries with longstanding practice, such as Italy (since 2000) as well as more recent initiatives, such as that introduced in France, which has presented its first comprehensive “green budget” in 2020.

Figure 2.1. Status of Green Budgeting in OECD countries

Note: Data not available for Israel and the United States. New Zealand practices “Wellbeing budgeting” where the Environment is categorised as a natural capital as part of the country’s wellbeing approach.

As described in Box 1.1, the survey defined green budgeting as using the tools of budgetary policy-making to help achieve environmental and climate goals. This includes evaluating environmental impacts of budgetary and fiscal policies as well as assessing their coherences towards the delivery of national and international commitments to contribute to informed, evidence-based debate and discussion on sustainable growth (OECD; European Commission, 2020[2]). For the purpose of standardisation and consistency, the survey considered existing practices as of end-June 2020. As such, practices outside of this cut-off date were not considered for analysis (e.g. Hungary). Additionally, practices that fall tangentially with green budgeting practices, such as New Zealand’s “Wellbeing budgeting” initiative, were not included if specific green budgeting tools and approaches commonly seen across the OECD were reported to not being utilised as part of a country’s approach.1 Lastly, some countries utilise a “light” form of practice where an approach (e.g. green budget tagging) does not comprehensively review the budget in the manner seen in other OECD country practices2.

As detailed later in this report, green budgeting practices vary in nature. Some employ comprehensive tagging against green objectives (France) while others like Colombia tag against green objectives that sit within a broader framework for high-level priorities (e.g. budgeting for the Sustainable Development Goals). Green budgeting is implemented in a heterogeneous way across all 14 OECD countries that practice it, with approaches attuned to national contexts.

Of the countries that do not practice green budgeting, 5 countries (Slovenia, Poland, Latvia, Greece, and Chile) plan to introduce green budgeting in the future. Chile, for instance, is planning to conduct a Climate Public Expenditures and Institutional Review (CPEIR) to determine the appropriate approach in relation to existing budget systems. Slovenia and Poland are also considering the most appropriate approach in their own national contexts. Greece plans to integrate green dimensions to its existing performance budgeting practice while Latvia is still at the early stages and have not yet developed a plan.

Among countries that do not practice green budgeting, the three biggest impediments to its introduction are the lack of existing methodology for assessing environmental effects, the lack of a modern performance budgetary framework, and a lack of political will (Figure 2.2). The lack of existing methodologies reflects the fact that green budgeting is still a relatively new practice and highlights the importance of platforms such as the OECD Paris Collaborative on Green Budgeting for sharing expertise (Box 2.1). Other factors could also be due to challenges to the application of existing environmental policy such as a lack of information or the varying quality of environmental impact assessments.

Box 2.1. The OECD Paris Collaborative for Green Budgeting

The OECD Paris Collaborative on Green Budgeting was launched by the OECD Secretary-General Angel Gurría and French President Macron at the One Planet Summit in Paris on 12 December 2017. It aims to design new, innovative tools to assess and drive improvements in the alignment of national expenditure and revenue processes with climate and other environmental goals. This serves as a crucial step in achieving a central objective of the Paris Agreement on climate change as well as of the Aichi Biodiversity Targets and the United Nations’ Sustainable Development Goals – aligning national policy frameworks and financial flows on a pathway towards low greenhouse gas emissions and environmentally sustainable development.

The lack of a modern performance budgeting framework is related to the fact that practices such as green budgeting are reliant on an outcomes approach being embedded in the budget process and are therefore supported by strong linkages between planning, programmes and budgeting. Most successful practices of green budgeting leverage these elements of good practices, and in a number of OECD countries reforms in this regard are either ongoing or have not yet been implemented.

Figure 2.2. Challenges to introducing green budgeting for countries not implementing

Note: Data not available for Israel and the United States.

The majority of OECD countries practicing green budgeting have plans to further develop it in the future (13 out of 14 countries) (Figure 2.3). This highlights the evolving nature of green budgeting across the OECD. Countries such as Ireland, which have recently introduced green budgeting, plan to adapt and incorporate additional dimensions – such as tagging negative expenditures and tax expenditures - as capacity develops over time. Colombia, which has also recently introduced green budgeting, also plans to further develop its green budget tagging approach to facilitate greater accountability and transparency amongst parliament and the public. In many European countries green budgeting considerations will also evolve in relation to requirements set out as part of the introduction of the European Green Deal (Box 2.2).

Figure 2.3. Are there plans to further develop green budgeting?

Note: Data not available for Israel and the United States. The Netherlands is looking to enhance evaluation mechanisms to better-reflect the effectiveness of climate policy.

Box 2.2. European Green Deal and the Recovery and Resilience Facility

The European Green Deal is the European Union’s plan to make the EU’s economy sustainable by turning climate and environmental challenges integral to policy considerations in the medium and long-term. It aims to transform Europe into a resource-efficient and competitive economy where there are no net emissions of greenhouse gases by 2050, considerations of economic growth decoupled from resource use and processes for a just transition in place such that no segments of society are left behind in the process.

The European Green Deal is helping guide the COVID-19 recovery towards green growth. In December 2020, the European Council and the Parliament reached a provisional agreement on a €672.5 billion Recovery and Resilience Facility (RRF). The RRF will help member states address the economic and social impact of the COVID-19 pandemic whilst ensuring that their economies undertake the green and digital transitions, becoming more sustainable and resilient. In order to receive support from the RRF, member states must prepare national recovery and resilience plans setting out their reform and investment agendas until 2026. At least 37% of each plan’s allocation has to support the green transition. Each reform and each investment should respect the ‘do no significant harm principle’. In order to determine the share of plans dedicated to the green transition, member states will be invited to tag the green content of the proposed measures in line with the methodology for climate tracking already applied in the context of cohesion policy funds. Member states will have to specify whether the reform or investment fully contributes (100%), partially contributes (40%) or has no impact (0%) to green objectives.

Building block 1: Strategic framework for green budgeting

As highlighted in section 1, a strong strategic framework is one of the building blocks underpinning an effective approach to green budgeting (building block 1). Across the OECD, the three biggest strategic drivers for introducing green budgeting have been to promote environmentally responsive policymaking, to help achieve international commitments and to help achieve national commitments or goals (Figure 2.4). International commitments will likely include the climate commitments set out through Nationally Determined Contributions (NDCs) under the Paris Agreement. In addition to these factors, there may be national circumstances which provide a strategic driver for introducing green budgeting. For instance, France’s approach for green budget tagging has been driven by its desire to demonstrate greater transparency and accountability in its pursuit of green objectives. Ireland’s approach has been partially driven by requirements relating to introducing and managing green bonds. In Chile, though there is no current practice for green budgeting, consideration for its implementation has been driven by its commitment to the NDCs where accounting for its public spending on climate change is a big component to the country’s efforts.

Figure 2.4. Top 5 drivers for introducing green budgeting in OECD countries

Note: Data not available for Israel and the United States.

Green budgeting in OECD countries is most commonly underpinned by high-level political commitment (7 countries), the budget law (7 countries) and administrative practice (6 countries). For example, Denmark has a high-level political commitment to green budgeting driven by ministerial desire for the promotion of programmes which reduce carbon emissions. In Austria, green considerations were embedded during reforms to its budget law in 2013 where a requirement was introduced to identify the environmental impact of individual budget measures. In Canada, a Cabinet Directive requires that new policy and proposals (including budget measures) submitted to a Federal Minister or to Cabinet for approval are accompanied by environmental assessments on programmes where environmental effects are likely.

Figure 2.5. Legal basis or authority for green budgeting

Note: Data not available for Israel and the United States.

Lessons from gender budgeting have shown the value of a strong legal basis in helping to drive the reform and sustain it over time. Whilst most countries have environmentally-responsive legislation citing important requirements for the management of natural resources, regulations and plans for emissions reductions, it is less common to have the budget law requiring green perspectives within the budget process.

The seven OECD countries that have introduced green budgeting and have the practice embedded in their national budget law are Austria, Colombia, France, Italy, Mexico, the Netherlands and Portugal. For example, Italy, with one of the longest-running practices of green budgeting amongst OECD countries, has specific requirements under the Law of Accounting and Public Finance for reporting on budget spending and execution related to environmental protection (Box 2.3).

Box 2.3. Legal basis for green budgeting in Italy

Green budgeting in Italy was introduced at the request of parliament for improved transparency on environmental expenditure. This was established through the introduction of Law 196/2009 (Law of Accounting and Public Finance, article 35, paragraph 6) where it required the government to present a report on environmental expenditures as part of the General State budget Final Accounts (Ecobilancio, translated Eco Budget). In 2011, building off of Law 196/2009, the Parliament required an additional reporting on budget execution on the same items (Ecorendiconto, translated Eco Report). This also required environmental accounting regulations to be carried out by the Italian National Statistical Office (ISTAT) for the regular production of statistical data on environmental accounts at the national and regional level.

Source: (OECD; European Commission, 2020[2])

A strong green budgeting strategic framework will also include a national strategy that sets out the specific priorities and objectives for green budgeting. Within the OECD, seven countries (Austria, Canada, Colombia, France, Ireland, Mexico and Portugal) have a national strategy that guide green budgeting efforts. These may be broader strategies relating to sustainable development (Canada and Colombia), strategies specific to a green transition (Portugal) or a specific climate change strategy as seen in Mexico’s Estrategia Nacional de Cambio Climatico (Box 2.4). In many cases, national strategies complement other frameworks and practices to create a wider system for budgeting for high-level priorities. In Mexico, for instance, the country’s green budgeting approach is linked with its Sustainable Development Goal (SDG) budgeting approach through the goals set out in the National Development Plans where budget tagging is done in relation to programmes contributing to biodiversity as well as other SDGs.

Box 2.4. Mexico’s Estrategia Nacional de Cambio Climático (National Strategy of Climate Change)

To deal with the challenges and effects of climate change, and to follow through on the country’s international commitments, Mexico developed a National Strategy of Climate Change (Estrategia Nacional de Cambio Climático) to move the country towards a competitive, sustainable and low-cost economy. This strategy defined six-year objectives and specific actions for climate change adaptation and mitiation under the following pillar objectives:

• Reduce vulnerability and increase the resilience of society to the effects of climate change

• Reduce vulnerability and increase resilience of the strategic infrastructure and productive systems

• Store and properly use sustainable ecosystems and maintain environmental services

• Accelerate energy transition to clean energy sources

• Reduce energy intensity through efficiency schemes and responsible consumption

• Transition to sustainable cities with low carbon footprint

• Promote better agricultural practices, quarry and forestry and preserve natural carbon sinkholes

• Reduce pollutant emissions and promote health and wellness co-benefits.

The strategy also includes a wide set of policy instruments for the Federal, State and Municipal level as well as policy pillars which include objectives to have mechanisms for measurement, reporting and verification (MRV), economic instruments that focus on climate and platforms for research and development and develop fiscal policies. The strategy also includes goals to identify and allocate budgetary resources in pursuit of these objectives.

Source: (Government of Mexico, 2013[3])

Administrative leadership for green budgeting

A key element of a strong strategic framework for green budgeting is clear institutional arrangements for its implementation. This includes the identification of the most appropriate government authority to lead on its implementation.

The central budget authority (CBA) usually has a key leadership role in relation to green budgeting across OECD countries alongside other government actors (Figure 2.6). Other potential actors most commonly include the Ministry of Environment, Line Ministries and other government departments and agencies.

Examples of countries where the CBA leads green budgeting efforts are Denmark, Ireland and Mexico. For instance, in Ireland, the Department of Public Expenditure and Reform (DPER) leads the green budget tagging process with support from the Department of Environment, Climate & Communications.

In other countries, the CBA shares its lead role with other actors (Austria, Canada, Colombia, France, Italy, the Netherlands, Portugal, Sweden, and the United Kingdom). For example, in Colombia, responsibility is maintained jointly between the CBA and the Ministry of Environment. In France, green budget tagging is conducted by a small-dedicated team from the Ministry of Ecological Transition’s General Commission for Sustainable Development (CGDD), the Budget Department (DB), the Tax Legislation Department (DLF) and the Treasury Department (DGT). In Sweden, responsibility is shared across a number of government agencies for environmental impact assessments of individual budget measures with the Swedish Environmental Protection Agency playing a coordinating role in preparing an overall report to the government. In Austria, the United Kingdom and Canada, specific government entities also have allocated responsibilities. For example, in Austria, in addition to the CBA and the Ministry of Environment, regional budget authorities also serves as an authority for the country’s green budgeting efforts. In the United Kingdom, authorities also extend to the Department for Business Energy and Industrial Strategy and in Canada, to the Privy Council Office

There are few countries where the CBA does not play a role in leading the country’s green budgeting efforts. However, one example is Portugal, where since 2016 the Ministry of Environment has led in identifying linkages between fiscal and environmental policy, using the Environmental Fund to provide cross-cutting financing for environmental policies.

Figure 2.6. Administrative authorities playing a leading role for green budgeting

*Note: Data not available for Israel and the United States.

*Note on Other: In Austria, responsibility includes regional budget authorities (sub-federal level), in Canada responsibility includes the Privy Council Office and in the United Kingdom the Department for Business Energy and Industrial Strategy shares responsibility with the CBA and Ministry of Environment.

The variety of institutional actors reflects the need for different skills to support the implementation of green budgeting. CBA’s often rely on the policy expertise of the Ministry of Environment for example. It is also likely to be driven by the extent to which there is a pre-existing culture of collaboration in relation to other initiatives such as gender budgeting or SDG budgeting. For instance, Canada has a strong culture of cross-government collaboration in ensuring that a Gender Based Analysis (GBA+) is provided for all budget proposals, involving engagement from the Department of Finance, line ministries and the federal Department for Women and Gender Equality Canada (WAGE) much like the cross-governmental arrangements it has also put in place for green budgeting (OECD, 2018[4]). In Mexico, the CBA (Ministry of Finance and Public Credit) has a strong leadership role in relation to the country’s comprehensive performance budgeting system used as a basis for tagging budget programmes relating to different SDGs. These arrangements have been built upon to tag its budgetary programmes to identify how budget programmes align to goals related to the environment and climate.

Green budgeting across different levels of government

Subnational government expenditure represent a sizeable portion of public spending on climate and the environment. Approximately 55% of spending and 64% of climate and environmental investments occurring at the subnational level (OECD, 2019[5]). Of the 14 countries practicing green budgeting in the OECD, 3 countries reported also have green budgeting at the subnational level (Austria, Colombia, and Portugal)3, as seen in Figure 2.7. In Austria, Colombia, and Portugal, green budgeting is already practiced both at the regional level and the municipal level. In other instances, regional governments have taken the lead in developing a green budgeting approach. Though there currently is not a practice at the central level, in Spain, the Andalusian government made efforts to incorporate green perspectives to its budget process (Box 2.5).

Box 2.5. Green budgeting in Andalusia

Faced with the prospect of environmental and climate vulnerabilities in the region, the Andalusian government made commitments to address climate and environmental measures alongside efforts to promote economic growth. Building on its longstanding experience in gender budgeting, the government worked to mainstream green perspectives to its budgeting framework by reporting on how its budgetary programmes contribute to the region’s green objectives. Like gender budgeting, the government’s approach to green budgeting includes having a strong legal framework, an institutional structure, as well as processes for classifying budgeting programmes and auditing. Their approach also include reviewing the region’s fiscal framework to ensure taxes promote economic growth, resilience and fairness alongside environmental objectives. This effort has facilitated the development of green budget fund to finance sustainability projects in the region.

Figure 2.7. Levels of government practising green budgeting

*Note: Data not available for Israel and the United States.

Towards a more integrated approach which incorporates other high-level priorities

The evolution of green budgeting has coincided with the usage of other forms of budgeting practices that seek to make progress against higher-level priorities. One of the most common examples is gender budgeting, used to help promote greater alignment between budget policy and gender equality goals. In New Zealand, the country’s well-being budgeting approach provides the framework for the government to pursue environmental priorities such as use of budget policy statements and well-being domain assessments, further detailed on Box 2.6.

Box 2.6. Well-being budgeting in New Zealand

New Zealand has developed a framework which considers domains for well-being in its policymaking process. The Living Standards Framework (LSF) has worked to identify four “capitals” (Natural, Financial and Physical, Human, and Social) to help drive the basis for its recent wellbeing budget. This process, driven by the Labour-led coalition in 2019, is attempting to develop multi-dimensional considerations to its budgeting process by facilitating cross-sectoral coordination through shared objectives by ministries and using evidence to drive person-centric needs and long-term considerations. The Government sets out a list of 5 outcomes to focus, determined every year, to ensure discretionary resources are prioritised to these areas.

The recent wellbeing budget has developed 5 outcomes to focus the government’s efforts:

1. Taking Mental Health Seriously – Supporting mental wellbeing for all New Zealanders, with a special focus on under 24-year-olds

2. Improving Child Wellbeing – Reducing child poverty and improving child wellbeing, including addressing family violence

3. Supporting Māori and Pasifika Aspirations – Lifting Māori and Pacific incomes, skills and opportunities

4. Building a Productive Nation – Supporting a thriving nation in the digital age through innovation, social and economic opportunities

5. Transforming the Economy – Creating opportunities for productive businesses, regions, iwi [indigenous communities] and others to transition to a sustainable and low-emissions economy

Existing frameworks (e.g. Living Standards Framework) and wellbeing domain assessments provide the structure for analysis if the government identifies green objectives as its set of priorities.

In pursuit of multiple high-level objectives, countries are looking to design and introduce green budgeting, where other practices such as gender budgeting and well-being budgeting already exist.

Other countries have adopted different means to develop holistic policy frameworks that help to address multiple high-level priorities. In Iceland, for example, goals for gender equality, the SDGs, specific sectoral strategies and political priorities are encapsulated in the national strategy where targets feed into a set of 180 goals for expenditure areas and functions, seen in Figure 2.8.

Figure 2.8. Linking high-level priorities in Iceland

These early approaches to integration suggest the importance of considering the national context so that it is rooted in political commitment, existing strategic frameworks and capacity across the public administration. The emergence of the European Green Deal across EU member states and intentions for Green New Deal as signalled in Korea indicate greater attention and focus will be made in aligning government efforts to address the challenges of climate change and the environment. The evolution of country approaches in pursuit of this priority will be an interesting area for further research in coming years.

Building block 2: Tools and methods of green budgeting

The selection of appropriate tools and methods for implementing green budgeting is the second building block to an effective approach. There is significant variation in the number of tools and methods, in relation to the budget process, used for green budgeting across OECD countries, seen in Figure 2.9. Of the 14 countries practicing green budgeting, the majority utilise more than one tool or method in its implementation (12 countries), seen in Table 2.1. On average, countries utilise about 6 different tools or methods for green budgeting. OECD countries using green budgeting tools more than the average are United Kingdom (10 tools), Ireland (9 tools), France (8 tools), Norway (8 tools), the Netherlands (7 tools) and Colombia (7 tools). Illustratively, Denmark‘s green budgeting toolkit includes; ex ante environmental assessments (of individual budget measures), ex post green budget tagging, environmental cost benefit analysis, carbon assessment, the use of a shadow price for carbon in the evaluation of public policies, environmental tax reform and a green perspective in the country’s spending review process. At the other end of the scale, Luxembourg, and Mexico have just one tool in their green budgeting toolkit.

There is also variety in the type of tools and methods used for green budgeting. The four most common tools for green budgeting are ex ante or ex post environmental impact assessments (12 countries), environmental cost-benefit analysis (10 countries), carbon assessments (10 countries) and carbon pricing instruments (9 countries) as part of a country’s larger green budgeting approach.

Figure 2.9. Tools of green budgeting

*Note: Data not available for Israel and the United States. The data represents usage of tools in relation to the budget process.

Table 2.1. Use of green budgeting tools

*Note: Data not available for Israel and the United States.

The tools and methods selected will depend on the strengths of the existing budget process and existing enablers for implementing environmental policy. A strong performance budgeting structure, for instance, can provide a framework to apply a set of indicators and targets in relation to green goals and programme budgeting can support green budget tagging whilst a sound practice of environmental policy evaluation can provide the basis to include such analysis to the budget process.

The role of green budgeting tools throughout the budget cycle

It is helpful if the choice of tools allows green dimensions to feed into policy and budget decision-making throughout the budget cycle (Figure 2.10).

Figure 2.10. Role of evidence from green budgeting tools at different stages of the budget cycle

Implementing green budgeting at the ex ante budget phase creates opportunities to use tools of green budgeting to inform budget decisions. For example, in Norway, official guidance requires environmental cost-benefit analysis of government measures prior to final decision-making (Government of Norway, 2018[6]). Similarly, in the UK, environmental considerations are taken into account as part of ex ante cost-benefit assessments that inform budget decision-making (Box 2.7).

Box 2.7. Environmental dimension to ex ante cost-benefit analysis in the United Kingdom

In the United Kingdom, the Green Book is issued by HM Treasury and provides information on how to appraise policies, spending proposals, programmes and projects by providing instructions and supplementary guidance on the design and use of monitoring and evaluation before and after implementation. This ranges from policy and programme development, taxation and benefit proposals, as well as changes to existing public assets and resources. In particular, it provides an integrated approach to the assessment of climate mitigation, transition and other sustainability considerations across all government programmes. This encourages departments across the government to robustly quantify and monetise (wherever possible) the differential “green” impacts in calculations for value-for-money and cost-benefit assessments.

During the budget approval phase, the provision of green budget statements or other reports can foster greater transparency and accountability. For example, in Austria, the Parliamentary Budget Office publishes a green budgeting “landscape” to support budget scrutiny at parliament. This presents summary information on green goals, activities and targets from across different budget chapters. In Italy, the

Ministry of Environment, Land and Sea (MATTM) developed a catalogue of harmful subsidies in response to a request from the Italian Parliament. This helps support oversight of proposed government subsidies from a green perspective. In France, the Green Budget presented alongside the budget provides an overview of budget measures and their alignment with France’s green objectives (Box 2.8).

Implementation during the concurrent and ex post phases creates the opportunity to use green budgeting to inform in-year adjustments and to improve scrutiny of budget execution. Within the OECD, Italy has had a longstanding practice of reporting on its environmental programmes of both budget execution and final accounts presented to Parliament to inform considerations of budget decisions in accordance to environmental objectives.

Box 2.8. The French “Green Budget” statement

In 2017, France committed to the OECD Paris Collaborative on Green Budgeting, launched by the OECD, to assess the compatibility of its public finance trajectories with the Paris Agreement and other environmental goals. As part of these efforts, France developed its first comprehensive “Green Budget” as part of the 2021 Budget that provides an overview of budget measures and their alignment with France’s green objectives. Specifically, as included as part of the larger PLF 2021 (la loi de finance pour 2021), all budget measures including revenues as well expenditures were categorised in according to the extent they have a favourable, neutral or negative impact on six environmental dimensions (based on the EU taxonomy regulation). This “Green Budget” aims to facilitate transparency and accountability in the government’s commitments towards green objectives as well as to help inform better decisions by policymakers.

The role of tax policy in green budgeting

Carbon pricing instruments can be effective green budgeting tools on the revenue-side to encourage low-carbon investment and consumption choices to address green objectives (Box 2.9). As part of a green budgeting approach, carbon pricing can serve as a core tool of a green tax policy framework to provide a technology-neutral case for low-carbon investment and consumption, to promote green growth (OECD, 2020[7]).

Box 2.9. Carbon pricing instruments

Carbon pricing can be an effective tool to reduce emissions as it helps to increase the price of carbon-based energy and thus, decreasing demand for it. It encourages substitution towards less carbon-intensive forms of energy and lowers demand for energy overall. As such, emitters have an incentive to cut emissions as long as it is cheaper than paying the price, decentralising abatement decisions whilst providing an ongoing incentive to cut emissions and stimulate innovation.

Countries use different tools to price carbon emissions, or a combination of them:

• Explicit carbon taxes, which typically set a tax rate on energy use based on its carbon content (e.g. EUR 40 per metric ton of CO₂),

• Specific taxes on energy use (such as fuel taxes), which typically set per physical unit or unit of energy, but can be translated into effective carbon tax rates based on carbon content of each form of energy,

• Emission Trading systems, where the price of tradable emission permits represents the opportunity cost of emitting an extra unit of carbon regardless of the method to allocate permits.

In most cases, having a carbon price in place does not fully determine the effective carbon price in a country due to tax exemptions for specific sectors or energy users. As such, across the OECD, many countries fall short of benchmarks set for pricing carbon emissions (i.e. Carbon pricing gap).

Though carbon pricing is widely used across the OECD, Austria, Denmark, Italy, Luxembourg, and Mexico, do not report it as being part of their larger green budgeting efforts (OECD, 2019[8]) (OECD; European Commission, 2020[2]). This may be due to countries viewing green budgeting as an initiative that focuses only on expenditures, as in the case of Italy, or that the scope and mandate of the efforts not as broad-reaching towards policy domains with a traditional environmental focus. To illustrate this point, Figure 2.11 shows the ubiquity of carbon pricing instruments such as emission trading systems (ETS) or having fuel or carbon taxes in place across the OECD (all OECD member states), of which, only a handful of countries report practicing some form of green budgeting.

Figure 2.11. Use of carbon pricing instruments across the OECD

*Note: Data on green budgeting not available for Israel and the United States. Data on ETS and Fuel and Carbon taxes reflects findings from 2018. Canada, Japan, and The United States has ETS at the subnational level and all countries under the EU implement EU ETS.

Tools that support green policy-making but that are not part of green budgeting efforts

A majority of OECD country respondents (27 countries) report that they have tools or processes in place outside the budget process to promote environmentally responsive or green policies (27 out of 37). Across the OECD, about a third of member states (12 countries) report having some form of environmental impact assessments mainstreamed in the policy development process as well as an environmental component to regulatory impact assessments, seen in Figure 2.12.

Figure 2.12. Green tools used outside of the budget process

*Note: Data not available for Israel and the United States.

In some countries, these tools used outside of the budget process may be considered already effective- limiting the value-add of introducing green budgeting approach. For instance, in Switzerland, it is mandatory to analyse the environmental and economic effects of new policy propositions. As this already sets the basis for identifying the environmental effects of many budget measures, introducing a new tool or approach, such as budget tagging, may only provide limited value. In Germany, separate reports on identifying harmful spending and tax expenditure are published by the Federal Environmental Agency as a means to demonstrate greater transparency and accountability (Umweltbundesamt, 2016[9]).

In Portugal, there is a criteria for estimating impacts on greenhouse gas (GHG) emissions as part of ex ante cost-benefit analysis in the transport or energy sectors. However, this is not considered as part of its overall green budgeting effort (OECD, 2018[10]).

Box 2.10. Hungary’s Green Programme

Following the passage of the Second National Climate Protection Strategy in 2018, Hungary made a commitment to undergo a gradual transition to a low carbon emission economy. In support of this strategy, the Hungary Central Bank, Magyar Nemzeti Bank (MNB) developed the “Green Program” to integrate environmental and sustainability considerations to its supervisory duties. Set along the three pillars of the National Climate Protection Strategy, the programme aims to:

• Identify and assess the risks climate change and other ecological anomalies to financial stability. This includes facilitating the greening of financial services and mobilising funds for green goals by analysing “green” products offered by financial institutions and investigating the role of environmental considerations for financial services (i.e. environmental parameters for loans)

• Promote greater awareness engagement and training amongst domestic financial institutions

• Transition Bank operations to decrease its ecological footprint and increase transparency by publishing environmental disclosures

Additionally, there is a lot of variation in country practices of those not practicing green budgeting, as reported in the survey. In Belgium, responsibilities for environmental policies are shared between federal and regional levels. In Poland, the National Fund for Environmental Protection and Water Management was created to help finance ecologically beneficial investments while in Hungary, the Central Bank of Hungary leads the Green Program that supports the maintenance of the stability of the financial sector by integrating green perspectives to economic growth, seen in Box 2.10. As countries consider green budgeting approaches in pursuit of green objectives, it is therefore important to identify how it fits within the broader framework for environmental and climate policies.

Building block 3: Accountability and transparency

The third building block of an effective approach to green budgeting is measures that promote accountability and transparency, facilitating impartial scrutiny of, and input to, the quality and completeness of assessments, processes and reporting.

The majority of OECD countries that do green budgeting take action to provide transparency and accountability for their green budgeting practice (13 out of 14 countries). The way in which green budgeting information is communicated tends to vary by country, with many selecting the “other” category (Figure 2.13). This includes countries like Denmark where a separate report is published highlighting the estimated effects on carbon emissions or the Netherlands and Sweden where information is presented as part of a set of objectives in relation to environmental quality or sustainable development.

Figure 2.13. Ways in which green budgeting information is communicated

*Note: Data not available for Israel and the United States.

Just two countries (Italy and France) publish a green budget statement. Green budget statements are typically statements that are published alongside the budget and provide information such as:

• A general green budget statement: This summarises in broad narrative terms how measures introduced in the budget are intended to support green priorities and goals.

• A green progress statement: This provides a more detailed exposition of how the budget measures advance the government’s green agenda, by reference to established objectives and indicators.

• Distributional impact analysis: This is an assessment of how specific green measures (both revenue and expenditure) affect individuals, households or firms.

The countries that publish green budget statements are Italy and France. Italy publishes two green budget statements (Ecobilancio and Ecorendiconto) where information and analysis of green expenditure and revenues, progress indicators and a qualitative narrative statement is presented. France, as referenced earlier in Box 2.8, publishes how the state budget (including expenditure and revenue) affects its green objectives.

Building block 4: Enabling environment

The fourth and final building block to an effective green budgeting approach is a supportive enabling environment, helping to ensure efforts are sustained and improved over time. This includes key elements such as ensuring appropriate training and skills are in place, coordination mechanisms across multiple ministries and stakeholders, clear guidance for implementing green budgeting tools and a modern performance budgeting framework which enables the alignment of strategy, programmes and performance to the budget.

Within the OECD, the most common elements put in place to support the implementation of green budgeting are:

• Detailed instructions in the annual budget circular (France, Italy, Luxembourg, Mexico, Norway, Portugal and Sweden)

• Training and skills development within the CBA (Austria, Canada, Colombia, Denmark, Mexico, and Portugal)

• An inter-agency group to ensure coordination across the government (Canada, Colombia, Denmark, France and Mexico), as seen in Figure 2.14.

Figure 2.14. Enabling factors for green budgeting

*Note: Data not available for Israel and the United States.

These supportive elements are particularly important given how new green budgeting is in many countries. For countries like France, Italy and Mexico where green budget tagging has been introduced, central guidance has been instrumental in ensuring that there is a standardised and consistent approach. This guidance helps provide for the quality and validation of information tagged.

Existing practices for programme or performance budgeting are also identified as supportive of green budgeting. In Mexico, the country’s longstanding efforts in modernising its budget towards a more programme and performance-based structure has provided a useful platform for green budget tagging. In Austria, likewise, the performance budgeting framework has provided a useful platform to incorporate tracking of progress towards green objectives.

Challenges in implementing green budgeting

The majority of OECD countries practicing green budgeting have noted a lack of methodologies and a lack of resources as two of the main challenges for implementing green budgeting (Figure 2.15). These are similar challenges as identified by countries not yet implementing green budgeting (Figure 2.2). For instance, one of the main challenges for considering and implementing green budgeting is the lack of methodologies for a coherent approach to green budgeting. This can be explained as countries are still working to identify approaches most suited to their national context. For example, there may not be existing identification of appropriate methodologies for assessing environmental effects, the identification of appropriate roles and responsibilities (e.g. CBA and Ministry of Environment) as well as a lack of capacity and resources in time and staff to effectively implement these efforts. In other cases, countries may be hesitant to implement an approach (at this time) mindful that over time there may be requirements introduced at the supranational level (e.g. European Union) to have some standard form of practice.

Across most OECD practices, countries plan to continuously iterate and adapt their methodologies over time. For example, countries like France and Ireland have plans to adapt their green budgeting efforts as capacity grows across the public administration and as the process becomes more normalised as part of the budget process over the coming years. This includes potentially inserting additional dimensions for analysis (e.g. negative expenditures and tax expenditures) or evolving the methodology to better-evaluate budgetary programmes where the environmental effects may not be clear (e.g. public housing and staffing budgets).

Figure 2.15. Main challenges implementing green budgeting

*Note: Data not available for Israel and the United States.

Impact of green budgeting

For green budgeting to improve its effectiveness overtime, it is important to examine the ways in which it is – or is not - delivering impact. Half of OECD countries practising green budgeting (7 countries) have seen it have impact across some or all sectors, promoting an environmental perspective in policy development and resource allocation.

Figure 2.16. Have green budgeting efforts been effective in promoting environmental perspective in policy development and resource allocation

*Note: Data not available for Israel and the United States.

In Denmark, where sector-specific impacts are observed, green budgeting has helped highlight the effectiveness of budget measures in addressing environmental priorities. In Luxembourg, green budgeting has helped to foster greater dedication across all levels of government to use the budget to address environmental objectives, bringing sector-specific improvements.

For countries where green budgeting has been effective in promoting an environmental perspective for all sectors, green considerations have become an integral part of the budget process, or have become mainstreamed in appraisals and evaluations applied across government. In Sweden, impacts across all sectors have been observed, green budgeting has improved the reporting of progress towards environmental goals, and provided greater transparency for Parliament (Riksdag). In the United Kingdom, the HM Treasury Green Book (Box 2.7) incorporates guidance to ensure analysis and quantification of energy use and emissions of greenhouse gasses (GHGs) on appraisal and evaluation in the central government. This has helped to improve the quality of the environmental assessment of proposals that have both a direct and indirect impact on energy use, generating improved evaluation of policies across all of government.

Half of OECD countries practising green budgeting have not observed its impact in promoting a clear green perspective in policy development and resource application. This is partly because green budgeting is still a very new practice in many countries. Ireland highlighted the need for green budgeting processes to grow and develop to generate greater interest and use by key stakeholders.

At present, only 3 OECD countries practicing green budgeting currently have tools or processes in place to measure the impact of their approach (Colombia, Mexico and Sweden). For example, Sweden has a Climate Policy Council which independently evaluates how government policy (including budget bills) is progressing against the country’s green objectives. Mexico uses its performance evaluation system to monitor and evaluate the results and impact of measures supporting green objectives.

Some countries also noted challenges in identifying the actual impact of budget measures while others such as Austria and Colombia highlighted opportunities for improvement in the metrics and use of information for decision-making processes. Others, such as Italy, noted that challenges exist in generating sufficient interest in the information provided through green budgeting. It has seen limited engagement and discussion of information presented alongside the budget, citing the need for greater public perception of environmental objectives in discourse on public spending.

Green budgeting in COVID-19 recovery efforts

Recovery from the social and economic disruptions caused by the COVID-19 pandemic will require concerted policy action. As countries consider recovery packages, there are opportunities to prioritise green policy choices that help promote environmental objectives and speed up structural change towards the low-carbon transition, increasing society’s resilience to future shocks and reducing future risks. Governments can use green budgeting to identify and prioritise investments that support a low-carbon recovery which can help to mobilise public resources towards transformative investments in line with achieving climate and environmental goals (OECD, 2020[7]). Over half of OECD countries that have responded took actions to integrate green into recent COVID-19 rescue measures (Figure 2.17).

Figure 2.17. Were actions taken to integrate green perspectives into recent COVID-19 rescue measures?

*Note: Data not available for Israel, Korea and the United States.

Note on “Other”: In Spain, the Ministry of Ecological Transition has promoted a series of measures directly related COVID-19 (e.g. sanitary waste management), in Germany, the recovery included measures to facilitate structural transformation of the automotive industry and future-proof value chains, in Slovenia, the government has prepared the recovery plan to include green transition into its growth strategy, in Japan, recovery efforts included environmentally-responsive measures such as solar power generation facilities and high-performance ventilation equipment at public places, in Norway relevant government actions undergo considerations for environmental consequences.

Of the 20 OECD countries that took actions to include green perspectives within recent COVID-19 rescue measures4, 8 countries utilised environmental impact assessment and 6 countries used green budget tagging. Three quarters of countries (5 out 8 countries) that undertook ex ante environmental impact assessment for individual measures or the entire package of rescue measures had existing practices for these assessments embedded within the normal budget process. By comparison, just half of countries (3 out of 6) that used green budget tagging to integrate green perspectives into rescue measures had an existing practice.

Table 2.2. Recovery measures taken with green perspective

Note: Represents reported measures taken as of end-June 2020

Four countries, corresponding to 20% of countries that incorporated green perspectives into rescue measures did this through attaching green conditionality to the measures. Examples include Italy, which offered tax credits for climate-friendly rebuilding and renovation to improve energy efficiency and the United Kingdom, where the Treasury required businesses requesting support (as last resort) to commit to ambitious conditions on climate change and the UK’s Net Zero target of reducing net emissions. Another example can be found in Canada (Box 2.11).

Box 2.11. Canada’s green conditionality measures for recovery response

Emergency measures to support the Canadian economy during the COVID-19 crisis included provisions to encourage the recipients to contribute to environmental and climate goals. The Large Employer Emergency Financing Facility, for example, provides bridge financing to Canada’s largest employers to ensure continuity of operations. Recipient companies were required to commit to publishing annual climate-related disclosure reports, including information on how future operations will support environmental sustainability and national climate objectives.

Other actions taken to integrate green perspectives into rescue measures included offering training or capacity building, providing support to subnational governments to practice green budgeting and implementing specific environmentally responsive policies to address green goals. For example, in Portugal, specific training programmes on emerging skills related to energy and climate change were included in rescue measures to support employment and vocational training. In Colombia, guidance documents were provided to subnational governments to include environmental dimensions to development plans. In Spain, the Ministry of Ecological Transition included green measures, such as sustainable sanitary waste management processes, as part of the country’s COVID-19 recovery efforts while in Japan, specific environmentally responsive measures, such as investments in solar power generation facilities, were put in place as part of the country’s broader rescue measures.

40% of surveyed OECD countries did not incorporate green perspectives into recent COVID-19 rescue measures5. This may in part be because rescue measures required quick action focussed on communities and business most affected by the crisis. The primary focus for the initial rescue phase of the response has been on economic and household support.

Conclusions

Across most countries in the OECD, green budgeting is a new and evolving practice. As initiatives such as the European Green Deal by the European Union and other “Green” commitments come to the forefront of policy discourse, more countries are likely to adopt and adapt green budgeting practices to fulfil country commitments over the coming years. Early survey results show that countries lack the resources and appropriate methodology for implementing green budgeting. As countries work to identify the best approach for their national context, platforms such as the OECD Paris Collaborative on Green Budgeting can serve as a helpful forum to identify best practices and innovative approaches by bringing together country experiences and work-streams on climate and environmental policy. With green budgeting practices maturing over time, focussed research can be made on its effectiveness in promoting climate and environmental perspectives in policy development and resource allocation.

Notes

← 1.  New Zealand’s Wellbeing Budgeting approach does not use specific green budgeting tools commonly seen across the OECD. The Environment is categorised as a Natural Capital as part of the country’s wellbeing approach.

← 2.  For example, in Finland, green budget tagging approaches comprise of a “lighter” form of tagging where only specific budgetary programmes contributing to green objectives were reviewed and identified. For standardisation and consistency with other OECD country practices, the survey only included instances of green budget tagging where the review was comprehensive across all areas of the budget. As Finland has only reported budget tagging as its main tool and approach to green budgeting and as we did not consider the country’s tagging approach as consistent with other OECD practices, it was categorised as not practicing green budgeting.

← 3.  The survey results do not capture practices of green budgeting at lower levels of government if there is not an existing practice at the central level. As such, not all subnational practices are likely to have been reflected in the survey data.

← 4.  Measures taken before period of survey (as of end-June 2020)

← 5.  Measures taken before period of survey (as of end-June 2020)