Module 7 Mainstreaming in the budgetary process Country-led environmental and climate change...

Module 7Mainstreaming in the budgetary process

Country-led environmental and climate change mainstreaming

Implications of environment- and climate-

related policies and measures for public

revenue and expenditure

Implications of environment- and climate-

related policies and measures for public

revenue and expenditure

2

Implications of integration on the revenue side

REVENUES

3

Revenues

+

-

Taxes on economic activities related to environmental

and climate adaptation &

mitigation measures

Foreign grants & other financial

transfers related to environment

and climate change

Growth effects from increased

competitiveness

Reduced taxes on activities that shrink or fail to develop as

a result of environmental and/or climate change policies

Environmental Fiscal ReformPayment for Environmental Services

Carbon taxes /

taxed on polluting and high-emission activities

Implications of integration on the expenditure side

REVENUES

4

Expenditures+

-

Subsidies for environmentally

-sound and adaptation & mitigation-

related activities

Current expenditures in

relation to environmental

and climate change

(adaptation/mitigation) measures

Public investment (capital

expenditure) in environmental and/or climate

change (adaptation/ mitigation) -

related infrastructure

Reduced subsidies for

fuel consumption

and other high-emission activities

Reduced spending on health care, infrastructure

replacement etc. as a result of

successful adaptation and environmental

measures

Elimination on perverse

subsidies that promote

environmentally damaging activities

Linking the budget to policy

objectives and expected results

Linking the budget to policy

objectives and expected results

5

Linking spending to policy and results, with a medium-term outlook

National objectives and strategies

Medium-term budget perspective or expenditure

framework

Medium-term sector plans

Annual budget

Implementation & service delivery

Performance monitoring

6

The medium-term expenditure framework (MTEF)

• A forward-looking budgetary planning tool covering a 3 to 5-year period• systematically links strategic objectives (national/sectoral) and

related outputs/outcomes with actions required to achieve them, corresponding expenditures and resources

• supports the prioritisation of expenditures and the predictability of resources

• facilitates performance monitoring

• Can be established at the national level (inter-sectoral allocations) as well as the sectoral level (intra-sectoral allocations)

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In practice

• MTEFs are rather sophisticated tools, and few countries have full-fledged MTEFs

• The preparation of medium-term projections of national and/or sector expenditures is a good starting point

• The uncertainties associated with projections and forecasts should be recognised

8

What is the practice in your respective countries?

Entry points for environmental and

climate change mainstreaming

Entry points for environmental and

climate change mainstreaming

9

Basic conditions for influencing the budget

• Understanding the budgeting process and finding the appropriate entry points

• Coordinating with related policy processes- engaging with the actors who drive the budget

• Mobilising civil society

• Coordinating with donors- potential under General Budget Support

• Advocacy of appropriate financing to sector and subnational bodies

10

Environment and climate change at the resource allocation stage

• Mainstreaming environment/climate change requires:

- reallocating funding to more vulnerable and/or priority sectors and regions

- providing funding to environmental measures

- providing funding for adaptation- and/or mitigation-specific plans or activities

- adding environmental and climate change considerations to the criteria for screening and selecting projects and investments

- making room for ‘cross-sectoral’ activities (e.g. DRR)

• This process typically involves a mix of top-down and bottom-up processes

Source: OECD (2009a) 11

Key stages in budget preparation and related entry points (1)

Key stages Key actors

1. Determination of macroeconomic outlook

Min. of Finance/Planning, statistical office, central bank

2. Multi-year strategic planning: medium-term fiscal strategy, medium-term expenditure framework

Cabinet, Min. of Finance

3. Determination of next year’s:-expected revenues-acceptable level of deficit-global level of expenditures

Min. of Finance (Budget Dept, Macroeconomic Dept), Cabinet

4. Pre-allocation of expenditures among line ministries, according to policy priorities

Cabinet, Min. of Finance (Budget Dept)

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Impacts of CC on economic activity &

growth; Value of ecosystem services

Impacts of enhancing state of environment +

CC adaptation/mitigation on economic activity &

growth

Extra costs of measures

Extra resources required / pledged

Extra revenues / cost savings

Re-allocation of funds in support of environmental and adaptation/mitigation

objectives

Green accounting

Key stages in budget preparation and related entry points (2)

Key stages Key actors

5. Preparation/Circulation of budget circular & expenditure ceilings

Min. of Finance (Budget Dept)

6. Costing of sectoral policies, submission of bids

All ministries & government agencies

7. Review of sectoral bids, testing of cost estimates, finalisation of budget estimates

Min. of Finance (Budget Dept), Cabinet

8. Negotiations, followed by endorsement of budget

Min. of Finance, other Ministries/agencies, Cabinet

9. Preparation of appropriation bill and budgetary documents

Min. of Finance (Budget Dept)

10. Submission of budget to Parliament – Discussion & adoption

Min. of Finance, Parliament

13

Instructions on costing environmental and cc

(adaptation/mitigation) policies & measures

Costing & integration of environmental and climate change

policies & measuresUse of

environmental and climate risk screening

proceduresPrioritisation of environmental and

climate change policies & measures

Discussion of environmental and climate change policies &

measures

Keeping track of environment- and climate-related expenditures

• During budget preparation, implementation, monitoring and reporting, ‘keep track’ of main environment- and climate-related public expenditures- Adapt the budget classification- ‘Flag’ incremental environment- and climate-related

expenditures embedded in ‘non-environment’ and ‘non-climate’ programmes

• This is important for:- monitoring the implementation of environment- and climate-

related measures in national and sector strategies - reporting to the UNFCCC (national communications)- securing eligibility for funding from specific climate

adaptation/mitigation and environmental funds

14

Monitoring environment and climate finance: environment and climate markers

• Statistical codes developed by the OECD (DAC) to monitor the amount of aid resources targeted at environment and climate change

• Could be adapted for application to the national budgets of OECD and non-OECD countries

• e.g. Kenya is introducing an Electronic Projects Monitoring System (e-PROMIS) for capturing more ‘comprehensive and structures project information’ that will make it easier to identify climate change finance

15Sources: OECD-DAC (2011); Norrington-Davies and Thornton (2011)

Public Expenditure Review (PER)

Public Environmental Expenditure Review (PEER)

Climate Public Expenditure and Institutional Review

(CPEIR)

Public Expenditure Review (PER)


Climate Public Expenditure and Institutional Review

(CPEIR)

16

Public expenditure reviews (PERs)

• A tool for analysing how budget resources are planned, allocated and actually spent across competing claims, objectives and priorities

• PERs can be used as a tool for supporting the mainstreaming of climate change- Track adaptation- and mitigation-related expenditures- But also, importantly: focus on public expenditure’s overall

contribution to climate-resilient, low-emission development outcomes

• For environmental spending, it can take the form of a Public Environmental Expenditure Review (PEER)

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• Common aspects addressed:1. Levels and trends in environmental expenditure2. Disaggregation of environmental expenditure by type of activity3. Distribution of environmental expenditures in relation to env’tl

priorities4. Efficiency and effectiveness of environmental expenditures5. Government capacity for budget execution6. Fiscal decentralisation7. Sustainability of the environmental budget8. Ratios: current/capital expenditures & salary/non-salary expenditures9. Links between funding sources and environmental expenditures, and

potential for increasing revenues10. Institutional capacity for environmental planning and management

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A way of systematically assessing the equity, efficiency and effectiveness of public environmental

spending. (Markandya et al, 2006)

Source: Markandya et al (2006)

PEER example: Rwanda

• 2009 PEER:• Identified low degree of environmental expenditures• Recommended MINECOFIN increase resource

allocation to ENR sector

• 2013 Public Expenditure Review for Environment and Climate Change 2008-2012• Since 2004 expenditure on environment and cc

increased from 0.4% to 2.5%• MINECOFIN reintroduced annex on environment and

cc in National Budget Call Circular

Climate Public Expenditure and Institutional Review (CPEIR)

• UNDP tool currently piloted in Asia-Pacific countries

• Review:

- how national climate change policy aims were reflected in public expenditures

- how institutions might be adjusted to ensure that financing a response to climate change is delivered in a coherent way across government

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Entry points for mainstreaming climate-related aspects in a PER

Aspect Issues to consider

Budget planning process

Role of climate-related considerations in allocation decisions

Expenditure trends and categories

Actual spending on vs. allocations to: * adaptation- and mitigation-friendly measures* development programmes with a focus on climate risk management, climate-resilient / low-emission developmentAvailability of recurrent funding vs. capital investment for climate risk monitoring and management

Budget financing Level of and trends in allocations to climate-relevant sectors and agenciesOrigin of such allocations (internal vs. external funding)Possibility of increasing resources for climate-resilient development

21Sources: UNDP-UNEP (2011), World Bank (n.d.) GN4

Complementing with awareness raising tools

• Findings of public expenditure reviews (PERs, PEERs, CPEIRs) can be complemented with ‘awareness raising’ tools to inform budgeting, e.g.

- Economic analyses

- Communication and advocacy strategy and work plan

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Beyond-GDP and environmental accounting

• Indicators available• e.g. Adjusted Net Savings, Sustainable

Development Indicators, Green Growth Indicators, Human Development Index

Source: http://ec.europa.eu/environment/beyond_g

dp/indicators_en.html

System of Integrated Environmental and Economic Accounting (SEEA)

• SEEA Central Framework - international standard by UNSC (2012)

• Records:• Flows of raw materials from the environment to the economy• Exchanges of these materials within the economy• Returns of wastes and pollutants to the environment

• WAVES (Wealth Accounting and the Valuation of Ecosystem Services)• WB-facilitated global partnership to mainstream natural capital

accounting into national accounting system and development planning

Turning words into action Mainstreaming environment and climate change

in the budgetary process

Using Public Expenditure Reviews (PER), Public Environmental Expenditure Reviews (PEER) and Climate Public Expenditure and Institutional Reviews (CPEIR)

25

What can be done and what are the institutional and capacity needs in your

organisation?

External resources for environment and

climate change financing

External resources for environment and

climate change financing

Main sources: www.climatefundsupdate.org, UNDP-UNEP (2011)

26

Main sources of external financing for climate change (1)

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Source of funding Activities supported

Development cooperation programmes

Adaptation and mitigation with a focus on dvpt

Least Developed Countries Fund Preparation and implementation of NAPAs)

Special Climate Change Fund Adaptation (priority objective), technology transfers, mitigation in high-potential sectors

GEF Trust Fund’s climate change focal area

Mitigation projects, adaptation demonstration projects and ‘enabling activities’

Adaptation Fund Projects and programmes that reduce the vulnerability of communities and sectors to CC

Green Climate Fund(operations not yet started)

Channel for future multilateral funding for adaptation and mitigation

Clean Technology Fund Demonstration, deployment and transfer of low-emission technologies

Strategic Climate Fund (SCF) - Pilot Program for Climate Resilience

Climate risk and resilience mainstreaming in development planning


28


SCF- Forest Investment Program REDD- related activities, sustainable forest management

SCF - Program for Scaling Up Renewable Energy in Low-Income Countries

Deployment of renewable energy sources

Fast Start Finance (finished 2012) Adaptation and mitigation measures in developing countries

REDD+ (various streams of funding incl. UN-REDD, which promotes the mainstreaming of REDD strategies in national development)

Preparation, pilot implementation and deployment of national strategies for reducing emissions from deforestation/forest degradation

Prototype Carbon Fund Pioneering approaches to mitigation that contribute to sustainable development

BioCarbon Fund Carbon sequestration projects in forests and agro-ecosystems


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Forest Carbon Partnership Facility Preparation of national REDD strategies, pilot financial transfers based on verified emission reductions from REDD

Carbon Partnership Facility Long-term, post-2012 mitigation projects

Global Energy Efficiency and Renewable Energy Fund

Energy efficiency and renewable energy projects

Global Climate Change Alliance Mainstreaming of CC in poverty reduction and national development strategiesAdaptation, DRR, participation in REDD/CDM

MDG Achievement Fund, ‘environment and climate change’ thematic area

Mainstreaming of environmental issues in national and sub-national policies, planning and investment frameworks

Clean Development Mechanism Mitigation projects in developing countries

Voluntary carbon markets Mitigation projects

Sources of external financing for environment (1)

34


ACP-EU Water Facility Supply of water and basic sanitation

EU blending mechanisms: EU-Africa Infrastructure Trust Fund (ITF); Neighbourhood Investment Facility (NIF); Latin America Investment Facility (LAIF); Investment Facility for Central Asia (IFCA); Asia Investment Facility (AIF), Investment Facility for Caribbean; Investment Facility for Pacific

Environmental infrastructure, e.g. water and sanitation, renewable energy, sustainable transport

Global Environment Facility (GEF) Biodiversity, climate change, international waters, land degradation, the ozone layer, POPs

Multilateral Fund for the Implementation of the Montreal Protocol (MLF)

Activities under the Montreal Protocol on ozone-depleting substances, including industrial conversion, technical assistance, training and capacity building

Sources of external financing for environment (2)

35


Nagoya Protocol Implementation Fund Activities under the Nagoya Protocol on Access to Genetic Resources and the Fair and Equitable Sharing of Benefits Arising from their Utilization (to the CBD)

Nordic Environmental Development Fund (NMF)

Cleaner production investments, energy-efficiency, environmental investments on farms

Other environmental trust funds

Sources of information on climate-related finance

• www.climatefundsupdate.org

• www.carbonfinance.org

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Budget support

• The transfer of financial resources of an external financing agency to the National Treasury

• Provides extra resources for the national budget• either grants (e.g. EC) or loans (e.g. World Bank)

• National procedures apply to the commitment and disbursement of funds• implementation via the national Public Financial

Management system => reduced transaction costs, increased ownership

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Budget support and mainstreaming opportunities

• General eligibility conditions:

38

Existence of a well-articulated national or sectoral policy/strategy to which the budget transfer will contribute

Reasonably stable macroeconomic framework

Reliable or improving public financial management

Transparency and oversight of budget

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22

33

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Environmentally sustainable and climate-resilient

Potential use of SEA

PER, PEER, CPEIR

Budget support and mainstreaming opportunities

• Inclusion of key environmental and/or climate change indicators for disbursement of:• fixed tranche

• (paid in full as long as eligibility conditions are maintained)

• variable tranche • (paid in full or in part based on actual performance

against an agreed set of criteria and targets)• criteria/targets in principle taken from the PAF associated

with the supported policy or strategy• provides a results-oriented performance incentive

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Performance assessment indicators on climate change in Bhutan

• Under GCCA a Renewable Natural Resources – Climate Change Adaptation Action Plan mainstreamed into 11th 5-year Plan (2013-2018)• Activities include budgeting exercise for cc adaptation

actions• Conditions for release of variable tranche include on

‘climate change adaptation readiness’ of RNR sector’s monitoring and evaluation system and improvement of RNR statistical systems to allow for reliable collection of climate-related data

National climate and environment funds

• Several countries have established a ‘national climate fund’ and/or an environment trust fund’ to:- channel and manage external funding related to CC and

environment- leverage existing funds and initiatives (incl. those financed with

national resources)- Support mainstreaming into national development strategies

• Expected benefits:- Alignment of external funding with national priorities- Building of national capacities and institutions- Scaling up of the response to climate change and environmental

challenges

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Turning words into action

Promote mainstreaming through national budgetary processes

Using (EC) budget support to leverage for mainstreaming

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What can be done and what are the institutional and capacity

needs in your country/sector of responsibility?

Recap – Key messages

• Environment- and climate-related policies and measures can impact the national budget in multiple ways

• There are entry points for mainstreaming environment and climate change at practically all stages of the budgetary process – including at the stage of ex post evaluation (PERs, PEERs and CPEIR)

• It is recommended to set up systems to keep track of environment- and climate change-related expenditures

• Multiple sources of funding exist to support environment and climate change – focus on eligibility and objectives

• Where conditions are met, budget support is a suitable modality for supporting CC mainstreaming efforts

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Key references• Petkova N. (2009) Integrating Public Environmental

Expenditure within Multi-year Budgetary Frameworks. OECD Environment Working Papers no. 7. OECD Publishing, Paris

• Carbon Finance website of the World Bank: www.carbonfinance.org

• Climate Funds Update: http://www.climatefundsupdate.org/• Markandya, A; Hamilton, K and Sanchez-Triana, E (2006)

Getting the Most for the Money – How Public Environmental Expenditure Reviews Can Help. World Bank Environment Strategy Notes No. 16, September 2006.

• Climate Public Expenditure and Institutional Review: http://www.aideffectiveness.org/CPEIR

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References

• Carbon Finance website of the World Bank: www.carbonfinance.org

• Climate Funds Update: http://www.climatefundsupdate.org/

• Forest Trends (2013) Maneuvering the Mosaic, State of the Voluntary Carbon Markets 2013. Ecosystem Marketplace & Bloomberg New Energy Finance: Washington and New York.

• OECD (2009a) Integrating Climate Change Adaptation into Development Co-operation: Policy guidance. OECD Publishing, Paris. [Read-only, browse-it edition] Available from: http://browse.oecdbookshop.org/oecd/pdfs/browseit/4309171E.PDF

• OECD-DAC (2011) Handbook on the OECD-DAC Climate Markers. Organisation for Economic Cooperation and Development, Paris. Available from: http://www.oecd.org/dataoecd/56/18/48785310.pdf

• UNDP-UNEP (2011) Mainstreaming Adaptation to Climate Change into Development Planning: A Guide for Practitioners. UNDP-UNEP Poverty-Environment Initiative. Available from: http://www.unpei.org/knowledge-resources/publications.html

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References

• Norrington-Davies, G and Thornton, N (2011) Climate change financing and aid effectiveness, Kenya case study. OECD, ADB.

• Swanson, A and Lundethors, L (2003) Public Environmental Expenditure Reviews (PEERS), Experience and Emerging Practice. World Bank Environment Strategy Papers No. 7.

• World Bank (n.d.) Mainstreaming Adaptation to Climate Change in Agriculture and Natural Resources Management Projects. World Bank, Washington, DC. Guidance Note #4 – Developing Readiness for Institutional Capacity Development and an Enabling Policy Framework. [Online] Available from: http://climatechange.worldbank.org/climatechange/content/mainstreaming-adaptation-climate-change-agriculture-and-natural-resources-management-project

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