The Role of Green Budgeting Some Global Approaches
TerraGreen|November 2020
Making a country’s budget green is about integrating it into every aspect of our economy and ensuring there is no wasteful use of natural resources. In this article, Arvind Kumar says that budget should navigate a country’s economy on a path to move to the low-carbon, climate-resilient development path. He succinctly gives examples of some global approaches.
Arvind Kumar

According to the Organization for Economic Cooperation and Development (OECD), environmentally responsive or green budgeting means using the tools of budgetary policy-making to help achieve environmental goals. This includes evaluating environmental impacts of budgetary and fiscal policies and assessing their coherence towards the delivery of national and international commitments. Green budgeting can also contribute to informed, evidence-based debate and discussion on sustainable growth.

In essence, green budgeting refers to use of the budgetary system to achieve improved environmental outcomes (OECD 2018). Some of the environmental impacts of fiscal policy are positive. Examples include funding for environmental protection, R&D spending on green technologies, environmental regulation, the collection, monitoring, reporting of environmental data, and research on how to conserve the environment. Other environmental impacts of fiscal policies can be negative, such as those from fossil fuel and agriculture subsidies or subsidized water and electricity consumption.

What is Green Budgeting?

The OECD launched the Paris Collaborative on Green Budgeting in December 2017. The objective is to adapt conventional budgeting tools to help align national expenditure and revenue processes with climate and other environmental goals. This requires establishing clear connections between public finance and environmental impacts. The OECD has identified several components of green budgeting that might be included in the annual budget documentation or a separate ‘Green Budget Statement’. These components amongst others include impacts of existing spending and revenue policies and any new policies or measures being introduced in the budget.

To assess the impact of budget from the perspective of green budgeting, an ideal yardstick is to assess budget from major environmental goals, based on a taxonomy of environmental activities as being attempted by the The European Union (EU) in terms of the following parameters : (i) the fight against climate change, (ii) adaptation to climate change, (iii) sustainable water resource management, (iv) the transition towards a circular economy and technological risk prevention, (v) the prevention of pollution, and (vi) safeguarding biodiversity and sustainable management of nature, forests, and agricultural spaces.

From the taxation perspective, the approach entails use of the tax system to internalize negative environmental externalities of greening the budget, while also generating substantial amounts of public revenue. Tax system is an important tool to ‘correct’ prices for activities that generate negative externalities, for example, carbon emissions and pollution. Yet, the World Bank estimates show that specific carbon taxes and emissions trading systems cover only about 15 per cent of global emissions. The potential of carbon pricing is also far from being realized. Currently, 90 per cent of carbon emissions are not priced at a level reflecting even a conservative estimate of their climate costs.

The carbon tax can be used to support the long-term climate targets such as country-wide retrofitting and redesigning our fossil-fuelled transport system. Designed well, it can be done without penalizing rural households or lower income families. However, the carbon tax is not a silver bullet for our climate ills. It is essential but not sufficient. Nevertheless, it does incentivize every other investment decision towards cleaner, less polluting options. The key ingredient for public acceptance of an increasing carbon tax is public trust.

The Role of Green Budgeting— International Experiences

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