## htnea2022006 — How to Make the Management of Public Finances Climate-Sensitive (“Green PFM”) — Selected sections ## Source details **Canonical URL:** [htnea2022006 — How to Make the Management of Public Finances Climate-Sensitive (“Green PFM”) — Selected sections](https://www.imf.org/-/media/files/publications/howtonotes/2022/english/htnea2022006.pdf) ## Other formats - [Markdown version](/-/media/files/publications/howtonotes/2022/english/htnea2022006.pdf.md) - [Structured JSON version](/-/media/files/publications/howtonotes/2022/english/htnea2022006.pdf.json) --- ### Introduction and role of fiscal policy / PFM - Fiscal policies are a key element of governments’ integrated strategies to combat climate change and should translate NDCs into precise, granular government policies. - PFM defined as the laws, organizations, systems, and procedures to secure and use public resources effectively, efficiently, and transparently (North 1991); PFM is “what makes fiscal policy work” (Hemming 2013, 18). - Fiscal policies supporting mitigation, adaptation, biodiversity preservation, and environmental protection are already reflected in domestic expenditure and tax policies in most countries. - Post-COVID-19 recovery choices, notably infrastructure investment, will shape long‑term environment and climate outcomes (IMF 2020a). ### Need to adapt PFM for climate specificity - Every government policy can have direct or indirect climate impacts that should be considered in budgets. - Consideration of climate impacts requires: - Methodologies for climate impact assessment; - Procedures to ensure systematic use of those assessments in budget preparation and allocation; - IT systems to consolidate and manage information through the budget cycle; - Transparency requirements for oversight bodies (parliaments and SAIs), financial markets, donors, and the public. ### Definition and scope of "green PFM" - Green PFM = integration of a climate‑friendly perspective into PFM practices, systems, and frameworks—especially the budget process—to promote fiscal policies that respond to climate concerns. - Key scope points: - Adapts existing PFM processes and tools; does not design green fiscal instruments (for example, carbon taxation or green subsidies are outside its scope). - Explicitly considers PFM functions that cut across or go beyond the budgetary cycle (coordination with other public entities, fiscal transparency). - Distinct from but akin to “green budgeting”; focuses on adapting PFM frameworks/practices rather than designing fiscal instruments. ### Interaction with other priority-based budgeting approaches - Green PFM is one “budgeting for high-level priorities” approach alongside gender‑responsive budgeting and SDG budgeting. - At least half of the SDGs (6, 7, 9, 11, 12, 13, 14, and 15) are directly meaningful to environmental issues. - Mainstreaming lessons from gender and SDG budgeting apply (coordination mechanisms, CoA and FMIS adaptations, managing interactions with macro‑fiscal objectives). - Recommendation: avoid overburdening existing systems; focus on mainstreaming critical priorities consistent with institutional capacity and resourcing. ### Recent evolution, uptake, and evidence - Early budget‑environment efforts date to the 1980s (France, Norway); concrete green PFM examples emerged in the late 2000s (Bangladesh, Nepal). - Coalition of Finance Ministers for Climate Action (launched 2019) supports Helsinki Principles; Helsinki Principle 4 (“Mainstream”) targets macroeconomic policy, fiscal planning, budgeting, PIM, and procurement. - OECD survey (2021a): 60 percent of the OECD membership are not implementing any green budgeting. - Examples of impact: - Bangladesh: climate‑related expenditure in the national budget increased since climate budget implementation in 2017. - Several Asia‑Pacific countries adopted climate change financing frameworks with UNDP support (Bangladesh, Indonesia, Pakistan). - Green PFM reforms can foster access to climate finance, especially for countries exposed to climate disasters and in LIDCs (IMF 2016, 2019c; Fouad and others 2021). ### IMF engagement related to green PFM - IMF Climate Macroeconomic Assessment Program (CMAP) launched 2021; covers climate risk, preparedness, national strategy, mitigation, risk management, adaptation, macroeconomic implications, and national processes (PFM). CMAP report for Samoa published early 2022. - Fiscal Affairs Department outputs: infrastructure governance and climate resilience, greening the post–COVID‑19 recovery (IMF 2020a), access to green finance (Fouad and others 2021), staff climate note on green PFM (Gonguet and others 2021), joint paper with OECD and European Commission on common green budgeting principles (2021). - Capacity development: seminars (small island states 2019), workshops, and PIM assessment module on climate change (IMF, 2021). ### Scope and approach of the how‑to note - Holistic approach applicable to all countries regardless of capacity; presents entry points and interactions across the budget cycle and beyond. - Two complementary approaches: - Identify entry points within the budget cycle; and - Identify interactions with PFM functions that cross or go beyond the budget cycle. - Key principles for effective implementation: - Secure political backing and ensure basic PFM practices are in place; - Rely on strong MoF stewardship; - Integrate strategy within existing PFM reform agenda; - Sequence reforms appropriately; - Communicate to secure stakeholder buy‑in and manage expectations. ### Budget cycle entry points (overview) - IMF budget cycle conceived as a four‑step cycle anchored by a legal framework: 1. Setting strategic and fiscal policy goals and targets; 2. Preparation of the annual budget and legislative approval; 3. Control and execution of the approved budget and preparation of accounts and financial reports; 4. (cycle continues beyond excerpt). - NDCs: 193 countries have submitted NDCs; most span until 2030, quite a few until 2050; some span at least until 2025. --- ### Strategic planning and fiscal framework: anchoring green objectives - Strategic plan and MTFF entry points: - Create strategic/development plan; - Prepare medium‑term fiscal framework (MTFF) with macro forecasts; - Identify fiscal risks, including climate risks; - Design fiscal policy in context of strategic plan and MTFF. - Country examples embedding green objectives: - Indonesia: top six policy areas and 21 priority programs targeting green benefits. - China: 14th Five‑Year Plan (2021–2025) sets sustainable energy goals toward carbon neutrality by 2060. - Ireland: two of ten strategic objectives in national development plan (2021–2030) have green focus. - EU: Green Deal roadmap aiming for climate neutrality by 2050 and commitment to foster green budgeting. - Nepal: 15th Plan (FY 2019/20–2023/24) includes a climate change chapter. - South Africa, Fiji, Samoa: strategic plans aligned with climate objectives. - MTFF and macro‑critical green objectives: - Denmark developing GreenREFORM model with yearly forecasts from 2015 to 2100. - Scotland provides carbon footprint assessment of draft budgets. - Bangladesh preparing climate‑inclusive MTMF; Samoa’s MTMF aligned to climate objectives. - Fiscal rules and escape clauses should allow flexibility for climate emergencies (examples: Germany—parliamentary majority required; Brazil—congressional approval required). - Long‑term fiscal sustainability analyses should account for climate impacts: - Switzerland 2021 Report identified four channels through which climate could negatively affect fiscal sustainability. - Georgia IMF technical assistance projects debt‑to‑GDP to rise by about 18 percentage points over the next 50 years under a volatile climate scenario. - New Zealand 2016 Long Term Fiscal Statement included natural capital chapter. - European Commission 2021 Fiscal Sustainability Report included stress tests for extreme weather and climate events. - Green financing strategy and instruments: - Assess financing gap and mobilize loans, grants, debt swaps, climate funds, carbon markets, green bonds, insurance. - As of May 2021 among OECD countries, 19 sovereigns had issued green bonds exceeding $130 billion; sovereign green bonds account for only 0.2 percent of all government debt securities. - Examples: Ireland’s first Sovereign Green Bond (2018) with annual disbursement reporting; UK launched Green Gilts and Green Savings Bonds in 2021 and raised more than £16 billion. ### Budget preparation: embedding climate in rules, appraisal, and tagging - Key instruments and practices: - Greening the budget circular to require climate‑related information from line ministries (examples: Bangladesh, Burkina Faso, Kenya). - Mandatory environmental and climate impact assessments and cost‑benefit analysis (examples: France since 2008 constitutional reform; EU; Thailand manual since 2015). - Green spending reviews (example: Ireland’s National Biodiversity Expenditure Review 2018; Bangladesh review of taxes/subsidies/pricing). - Public investment appraisal with climate risk management (Peru’s INVIERTE.PE from February 2017; Netherlands requirement to consider climate effects). - Green budget tagging: classify budget components by climate impact—no single international standard; examples: Philippines, Nepal, France (2021 budget covers whole budget including tax expenditures and uses EU Taxonomy of Sustainable Environmental Outcomes). - Mainstreaming into program and performance budgeting (example: Uganda performance‑based budgeting with climate indicators coordinated by Uganda Bureau of Statistics). - MTBF integration examples: Indonesia’s 2012 Mitigation Fiscal Framework; Morocco’s climate medium‑term expenditure framework; Bangladesh’s MTBF (since 2018/19) integrates climate‑relevant figures for each line ministry across three years plus narrative. ### Budget execution, accounting, reporting, and procurement - Tracking green expenditure during execution prevents “greenwashing.” - Options for tracking and reporting: - Adapt Chart of Accounts (CoA) to capture climate tagging segments: - Bangladesh CoA includes a four‑digit climate change budget code segment across six themes and 44 programs. - Kenya added an eighth analytical FMIS segment (four digits: subject of tagging; focus—adaptation/mitigation/both; relevance level—principal/significant/not targeted). - Ensure FMIS supports green reporting: Bangladesh’s local FMIS, iBAS++, enables climate expenditure monitoring. - Dedicated implementation reports comparing budget and actuals (examples: Indonesia’s Climate Expenditure Report; Climate Budget Reports in the Philippines). - Country reporting/monitoring examples: Nepal quarterly/annual KPIs; Pakistan climate expenditure tracking system; Bangladesh MoF climate budget report to parliament every fiscal year tracking allocations, actuals, and national climate investment plan progress. - In‑year responsiveness and risk management: PFM systems should allow in‑year responsiveness for climate emergencies while preserving financial integrity (supplementary budgets, short‑term cash availability, business continuity). - Environmental financial accounting and disclosure: nascent in public sector; IPSASB work on sustainability reporting may help. Example: Auckland (New Zealand) aligning accounting practices with TCFD recommendations. - Green public procurement (GPP): - Public procurement ≈12 percent of global GDP, or $11 trillion per year. - GPP integrates environmental considerations across procurement lifecycle; credible eco‑labels support identification. - Examples: European Commission developed >20 common GPP criteria since 2008; Dominican Republic National Policy of Sustainable Public Procurement 2021; Ecuador, Nicaragua, Uruguay GPP policies. ### Control and audit: internal and external oversight - Objective: reasonable assurance that rules are followed, funds used for intended purposes, and information is accurate—critical to prevent and detect “greenwashing.” - Internal control and audit: - Internal audit units can incorporate climate into work programs. - Examples: UK National Audit Office guide for audit and risk assurance committees; New South Wales Internal Audit and Risk Management Policy requires consideration of climate risks. - External audit (SAIs) and parliament: - SAIs perform financial, compliance, and performance audits; parliament examines audit reports and holds government accountable. - SAIs need technical expertise for climate audits; INTOSAI recognizes complexity. - Examples: Canada’s Commissioner of the Environment and Sustainable Development conducts performance audits; Bangladesh introduced guidelines for climate performance audit. - Performance and thematic audits: - European Court of Auditors (2016) special report on EU 20 percent climate spending target found tracking weaknesses and lack of mitigation/adaptation distinction. - UK NAO reports on net zero arrangements and local‑central collaboration. - Austria auditor general issued climate‑related performance audits (2020 energy industry measures against energy poverty). - Parliamentary scrutiny: - Parliaments can demand corrective measures and scrutinize climate finance. - Examples: Pakistan Standing Committee on Climate Change; Nepal handbook for members to scrutinize climate finance; Uganda Natural Resources Committee coordinates with Budget Committee to reflect climate priorities. - Independent advisory bodies / climate watchdogs: - Provide objective analysis, monitor policy consistency with targets, and propose interim carbon budgets. - Examples: Ireland Climate Change Advisory Council (Climate Action and Low Carbon Development Act 2015); Philippines Committee on Climate Change (autonomous under Office of the President); UK Climate Change Committee (independent statutory body); Netherlands Advisory Division of the Council of State. ### Legal framework: embedding green PFM in law - Legal frameworks underpin green PFM across the budget cycle. - Constitutional and statutory evolution: - Environmental rights and climate provisions incorporated over decades; examples of climate‑specific constitutional provisions in Thailand, Vietnam, Zambia; Ecuador Article 414 lists climate actions. - Climate laws typically set targets, mitigation/adaptation objectives, monitoring, institutional duties, independent advisory bodies, and carbon budgets (examples: UK Climate Change Act 2008/2019 amendments, Philippines Climate Change Act 2009/2012, Netherlands Climate Act 2019, Kenya Climate Change Act 2016, Germany Federal Climate Change Act 2019). - Embedding green PFM through legislation, amendments, or directives: - Sweden via Climate Act, New Zealand and Mexico via public finance law amendments, Austria via budget law reform, Finland and Canada via government decrees/directives; Italy adopted practices without new legislation. - Typical legal mandates: - Incorporate green goals into budget formulation; - Produce green budget documents at submission; - Control and monitor implementation at audit stage. - Country legal design examples: - New Zealand: Public Finance (Wellbeing) Amendment Act 2020 amended Public Finance Act 1989—introduced well‑being objectives (including environmental) and reporting (Budget Policy Statement, Fiscal Strategy Report) and requires well‑being indicators at least every four years. - Mexico: Fiscal Responsibility Law (2012 update) included cross‑cutting climate budget; National Planning Law (2018) integrates SDGs into development plans and connects SDGs with budget programs. - Sweden: Climate Act (2018) requires annual climate report in budget bill and a climate policy action plan every fourth year. - Philippines: Climate Change Act (2009, amended 2012) requires agencies and local governments to allocate funds for climate programs; Department of Budget and Management to prioritize and allocate budget for climate change–related programs and projects. - Norway: Climate Change Act (2018) requires a budget proposal statement on how the budget contributes to climate targets and an annual account to parliament on adaptation/preparedness. - Kenya: Climate Change Act (2016) mandates integration of National Climate Change Action Plan into sectoral strategies and empowers National Climate Change Council to advise the president on priority strategies to be incorporated into functions and budgets. - Legal design recommendations: - Strong legal (binding) basis increases effectiveness, continuity, enforcement, and reduces rollback risk during crises. - Key PFM legal elements: MoF mandate for green PFM, powers to collect information and monitor, obligations on public entities, definitions (for example, “green,” “mitigation,” “adaptation,” “climate‑relevant revenue” and “expenditure”), delineation of institutional roles, prescribed budget principles/stages with minimum content and dates for green PFM deliverables. - Delegate operational details to secondary legislation for procedural flexibility (especially for climate emergencies). - Ensure coherence and avoid overlap/ambiguity when enacting climate laws; cross‑reference PFM laws and consider necessary amendments. --- ### Section 4: Independent oversight and audit of the budget (highlights) - Strategic planning and MTFF should integrate climate targets with planning, allocation, execution, and control. - MTFF and macro‑fiscal modeling examples: - Denmark GreenREFORM model (yearly forecasts 2015–2100). - Scotland carbon footprinting of draft budgets. - Bangladesh climate‑inclusive MTMF; Samoa MTMF aligned to climate objectives. - Fiscal rules: allow escape clauses for climate emergencies; examples Germany and Brazil require legislative approval for escape clause activation. - Long‑term fiscal sustainability examples: Switzerland 2021 report, Georgia technical assistance projecting debt‑to‑GDP rising by about 18 percentage points over the next 50 years under a volatile climate scenario. - Green financing and sovereign green bond figures: - As of May 2021: 19 sovereigns issued green bonds exceeding $130 billion; sovereign green bonds represent 0.2 percent of all government debt securities. - UK Green Gilts and Green Savings Bonds raised more than £16 billion. - Control/audit roles reiterated: internal audit, SAIs, parliament, independent advisory bodies. ### Section 6: Green PFM legal frameworks and country examples (selected) - Mexico: cross‑cutting climate change annex in PEF incorporated in each annual budget since 2013; 2021 National Budget Law tightened reporting—Ministry of the Environment must report mitigation/adaptation actions on its website in open data format and update quarterly. - United Kingdom (Scotland): Climate Change Act (2009) requires assessment report to Parliament on direct/indirect GHG impact of expenditure proposals (see “Carbon Assessment of the 2020–21 Budget”). - France: Energy and Climate Law (2019) required a report to parliament on positive/negative effects of the 2020 budget bill; first “Green Budget” annex prepared under article 179 of 2020 Budget Act and published as annex to 2021 Finance Bill. Article 179 of the 2020 Budget Act 2019‑1479 of December 28, 2019, stipulates the environmental impact appendix. - Uganda: PFMA 2015 amended by National Climate Change Act 2021 to require each accounting officer to prepare a budget framework paper that considers climate change and for the Minister of Finance, in consultation with the National Planning Authority chairperson, to issue a certificate that the paper is responsive to climate change and contains adequate allocations (Uganda Climate Change Act 2021, article 30 amended section 9 of the Public Finance Management Act, 2015). - Italy: Government Accounting and Public Finance Act (Law 196/2009) requires Final Statement of Account include special annex describing outturns of environmental expenditure (article 36 (6)). - Canada: Auditor General Act amended to provide Auditor General a mandate related to environment and sustainable development carried out by the Commissioner of the Environment and Sustainable Development (R.S.C., 1985, c. A‑17, articles 7, 15, 21). ### Box 3: Budget reporting, public participation, fiscal risk management, coordination with SNGs/SOEs (selected) - Budget reporting and public participation: - Budget documentation should make positive and negative climate impacts “clear and readily available.” - Tagging and carbon emission estimates can be used; country examples: - Italy: "Eco‑Budget" annual breakdown by environmental objective. - Philippines: annual National Climate Budget Brief based on climate‑tagged expenditure and website monitoring. - Honduras: detailed climate‑relevant expenditure tables in analytical report (most recent 2019). - Public participation mechanisms: elevate green outcomes in participatory national planning and prebudget consultations; empower independent fiscal councils or climate commissions; public consultations on social, environmental, and climate impacts. - Examples: Canada (annual pre‑budget consultations, 2020 selected climate change); South Korea participatory budget with environmental project proposals. - Fiscal risk management: - Climate creates adaptation, mitigation, and transition fiscal risks. - Transition risks: stranded assets, reputational costs, spillovers (for example, carbon border tax). - Methodologies: analyze historical disaster losses and fiscal costs; link hazard assessments to asset locations to estimate exposure; assess explicit and implicit government obligations; use modeling and qualitative classifications when quantification is difficult (“probable,” “possible,” “remote”). - Country examples: Colombia implicit contingent liability estimate (2011); Philippines 2015 fiscal risk statement with disaster scenario in debt sustainability analysis; Peru Multiannual Macroeconomic Framework (2015–2017) considered El Niño macro‑fiscal consequences; UK 2021 Fiscal Risks Report chapter on climate fiscal risks; Ireland 2021 Budget Economic and Fiscal Outlook rates climate change and renewable energy targets as a "high fiscal risk." - Risk management strategies: enhance disaster preparedness; create fiscal buffers; ensure budget flexibilities (contingencies, provisioning); use risk transfer instruments (insurance); integrate climate in PIM systems. - International frameworks: UN Sendai Framework for Disaster Risk Reduction 2015–2030 (four elements listed). - Country practices: Côte d’Ivoire publishes annual fiscal risk statement with natural disaster analysis (Côte d’Ivoire 2022); Turks and Caicos Fiscal and Strategic Policy Statement 2022–2026 identifies natural disasters as primary fiscal risk and describes mitigation and financing measures. - Coordination with SNGs and SOEs: - SNGs and SOEs are critical for delivery and financing of green objectives; central government should support subnational PFM capacity and design incentives and transfers to enable green investments. - Examples: Indonesia and India target transfers to SNGs for low‑carbon investments (India uses an equalization grant variable promoting forest conservation); China imposes provincial environmental reporting and monitoring; France partnership contracts with local governments; Denmark Partnership for Green Public Procurement. - SOE channels of central influence: ownership policy documents (Norway State Ownership Policy expects SOEs to be “exemplary corporate citizens”), shareholder resolutions/directives to boards, transparency/reporting requirements, green criteria in SOE investment appraisals including shadow carbon pricing, explicit treatment of quasi‑fiscal effects, and climate‑related conditionalities in bailouts. ### How to implement green PFM: five guiding principles (overview and Principle 1) - Five guiding principles (overview): 1. Ensure prerequisites (functional PFM elements and political backing). 2. MoF as primary driver. 3. Appropriate sequencing of reforms. 4. Communication to ensure buy‑in and manage expectations. 5. Integrate green PFM with existing PFM reform agenda. - Principle 1 highlights: - Implement green PFM only if fundamental PFM systems are functional (basic financial compliance, sound budget processes, functional FMIS). - These fundamentals are also required to access climate finance (for example, the Green Climate Fund). - Overly sophisticated green PFM in the absence of basic PFM standards or absorption capacity can be counterproductive; some green practices can be incorporated as core systems develop. - Strong political backing and ownership are more necessary for green PFM than standard PFM reforms since green concerns are not a natural MoF mandate; clear political signals are required. ### Sequencing, pilots, capacity, and communication (implementation practicalities) - Sequencing recommendations: - Start upstream in the budget cycle (capacity for ex‑ante assessment of climate impacts, link to NDCs). - Move downstream to measure actual results and hold governments accountable progressively. - Rollout strategies: - Test runs before full rollout (France prepared test runs in 2019 and early 2020 before the 2021 green budget). - Pilot ministries/agencies with high environmental footprints or buy‑in (Bangladesh, Indonesia, Nepal used pilots). - National first, then subnational; some federations saw subnational leadership (California, Punjab); Philippines local governments experimented with tagging in 2014 after central level started. - COVID‑19 recovery packages present opportunities to test green PFM practices. - Capacity building: - MoF needs a nucleus of climate expertise; train/hire staff and build capacity across stakeholders (Ministry of Environment, line ministries, parliament, independent fiscal institutions, climate committees, SAIs). - Diagnostic tools: IMF CMAP, World Bank Country Climate and Development Report, UNDP Climate Public Expenditure and Institutional Review, climate‑responsive PEFA. - Communication and stakeholder engagement: - Internal: steering committees, working group meetings, orientation seminars (Philippines annual tagging orientation). - External: prebudget consultations, civil society engagement, ad hoc progress reports (India Punjab brainstorming workshop 2014; France merged environment‑friendly expenditure documents then produced green budget document 2021). ### Climate‑sensitive public investment (Annex 1 highlights) - Public investment is key for green, resilient transformation. - IMF/global numbers: - On average, about 30 percent of public investment value is lost due to inefficiencies; better governance can reduce inefficiencies by half. - Investment needed to close global infrastructure gap estimated at $94 trillion by 2040—equivalent to about 3.5 percent of annual global GDP. - To achieve the SDGs: estimated 8.5 percent of annual global GDP would be needed by 2030 for infrastructure in LIDCs and about 3 percent of GDP in emerging markets. - Infrastructure and climate impacts: - Natural disasters cost about $18 billion a year in low‑ and middle‑income countries through direct infrastructure damages. - These events disrupt infrastructure services and impose a cost between $391 billion and $647 billion a year in these countries. - Approximately 70 percent of global GHG emissions come from infrastructure construction and operations. - IMF tools: - PIMA and Climate PIMA mainstream climate considerations across five PIM components: climate‑aware planning; coordination; appraisal and selection; budgeting and portfolio management; risk management. - International experiences show better integration at planning than implementation stages—focus on project development, implementation cycles, and cross‑sector/level coordination. *Source: htnea2022006 — Introduction; Section 4; Section 6; Box 3; implementation guidance; Annex 1 — IMF staff, HOW TO MAKE THE MANAGEMENT OF PUBLIC FINANCES CLIMATE‑SENSITIVE—“GREEN PFM”, Fiscal Affairs Department, December 2022.* ### Introduction ����������������������������������������������������������������������������������������������������������� ### Introduction ### Role of fiscal policy and public financial management (PFM) - Fiscal policies are a key element of governments’ integrated strategies to combat climate change. - Nationally determined contributions (NDCs) resulting from the 2015 Paris Agreement should be translated into precise and granular government policies. - Climate dimensions of Sustainable Development Goals (SDGs) should be reflected in countries’ development priorities and incorporated into medium-term planning and annual budget allocation decisions. - Fiscal policies supporting climate change mitigation or adaptation, biodiversity preservation, and wider environmental protection have already been reflected in domestic expenditure and tax policies in most countries. - The urgent and existential nature of climate threats, their potential impact on macroeconomic and macro-fiscal outlooks, and the scope of required changes make climate policy among the biggest challenges of our times. - How countries tackle the post-COVID-19 recovery—via infrastructure investment in particular—will shape the environment and the climate in the long term (IMF 2020a). - PFM addresses the laws, organizations, systems, and procedures available to governments to secure and use public resources effectively, efficiently, and transparently (North 1991). - PFM is “what makes fiscal policy work” (Hemming 2013, 18). ### Need to adapt PFM for climate specificity - Every government policy can have direct or indirect climate impacts; these effects may be significant and should be considered when creating budgets. - Consideration of climate impacts requires: - Methodologies for climate impact assessment; - Procedures to ensure systematic use of those assessments to inform budget preparation and allocation; - Information technology (IT) systems to consolidate and manage information throughout the budget cycle; and - Transparency requirements for oversight bodies (parliaments and supreme audit institutions (SAIs)), financial markets, donors, and the public. ### Definition and scope of "green PFM" - Green PFM is defined as the integration of a climate-friendly perspective into PFM practices, systems, and frameworks—especially the budget process—with the objective to promote fiscal policies that respond to climate concerns. - Green PFM does not require a novel PFM approach but rather an adaptation of existing PFM processes and tools. - Green PFM: - Excludes the design of green tax and expenditure policies (for example, carbon taxation or green subsidies are outside its scope). - Explicitly considers broad PFM functions that cut across or go beyond the budgetary cycle, such as coordination with other public sector entities or fiscal transparency. - Green PFM is akin to “green budgeting” but adopts a different scope: it focuses on adapting PFM frameworks and practices rather than designing fiscal instruments. ### Interaction with other priority-based budgeting approaches - Green PFM is one example of “budgeting for high-level priorities” or “priority-based budgeting,” which elevates a chosen strategic priority across the budget cycle. - Other examples include gender-responsive budgeting and SDG budgeting. - At least half of the SDGs (6, 7, 9, 11, 12, 13, 14, and 15) are directly meaningful to environmental issues. - Lessons from gender budgeting and SDG budgeting (for instance, Ireland’s experience and UN Women (2016) on incorporating gender equality into climate projects) can be drawn upon for green PFM implementation. - Challenges in mainstreaming priorities include the need for coordination mechanisms, adaptations to systems such as the chart of accounts (CoA) and financial management information system (FMIS), and managing complex interactions between macro-fiscal objectives and strategic priorities. - Recommendation: avoid overburdening existing systems; focus on mainstreaming critically important priorities in line with institutional capacity and resourcing. ### Recent evolution, uptake, and evidence - Early efforts to highlight the budget’s role in environmental goals date to the 1980s (France, Norway); concrete green PFM examples emerged in the late 2000s, notably in Asia (Bangladesh, Nepal) with UNDP support. - The Coalition of Finance Ministers for Climate Action (launched in 2019) supports implementation of the Helsinki Principles; the fourth principle (“Mainstream”) aims to “take climate change into account in macroeconomic policy, fiscal planning, budgeting, public investment management (PIM), and procurement practices.” - According to an OECD survey on green budgeting practices (2021a), 60 percent of the OECD membership are not implementing any green budgeting. - Scarcity of green PFM practices may reflect limited connection between fiscal policy and NDCs, limited appetite for changes to the budget process, and, in LIDCs, preexisting PFM capacity limitations and uncertainty about where to start. - There is growing evidence of green PFM impacts, mostly on outputs: in Bangladesh, climate-related expenditure in the national budget has increased since the first implementation of the climate budget in 2017. - Green PFM reforms can foster better access to climate finance, especially in countries exposed to climate-related disasters and in LIDCs (IMF 2016, 2019c; Fouad and others 2021). - Several Asia-Pacific countries adopted climate change financing frameworks with UNDP support (for example, Bangladesh, Indonesia, and Pakistan; UNDP 2017). ### IMF engagement related to green PFM - Launched in 2021, the IMF’s Climate Macroeconomic Assessment Program (CMAP) covers climate risk and preparedness, national strategy, mitigation, risk management, adaptation, macroeconomic implications of climate policy, and national processes (PFM). The CMAP report for Samoa was published in early 2022. - Fiscal Affairs Department outputs include publications on infrastructure governance and climate resilience (Schwartz and others 2020), greening the post–COVID-19 recovery (IMF 2020a), a paper on access to green finance (Fouad and others 2021), a staff climate note on green PFM (Gonguet and others 2021), and a joint paper with the OECD and European Commission on common principles for green budgeting (2021). - Capacity development initiatives include a seminar on fiscal policy and PFM in small island states (2019), workshops on climate change and fiscal policy, and a Public Investment Management Assessment module on climate change (IMF, 2021). - The IMF contributes to the Coalition of Finance Ministers for Climate Action with a focus on mainstreaming climate change in fiscal policy and public finance (Helsinki Principle 4). ### Scope and approach of this how-to note - The how-to note proposes a holistic approach to green PFM applicable to all countries regardless of capacity. - It provides a complete picture of entry points and areas of interaction, supported by country examples (Figure 1). - Two complementary approaches are adopted: - Identifying entry points within the budget cycle; and - Identifying interactions with PFM functions that go across and beyond the budget cycle. - The note proposes guiding principles for countries embarking on green PFM reforms and key principles for effective implementation: - Securing political backing for the reform and ensuring that basic PFM practices are in place; - Relying on a strong stewardship role of the Ministry of Finance (MoF); - Integrating the strategy within the existing PFM reform agenda; - Ensuring appropriate sequencing of green PFM reforms; and - Communicating to ensure buy-in from stakeholders and to manage expectations. ### Identifying entry points within the budget cycle - The IMF envisions the budget process as a four-step cycle anchored by a legal framework: 1. The setting of strategic and fiscal policy goals and targets 2. The preparation of the annual budget and its approval by the legislature 3. The control and execution of the approved budget and the preparation of accounts and financial reports 4. (cycle continues in full document) *Source: htnea2022006 - Introduction (htnea2022006 - Introduction �����������������������������������������������������������������������������������������������������������)* ### 4. The independent oversight and audit of the budget ### 4. The independent oversight and audit of the budget ### Strategic planning and fiscal framework: anchoring green objectives - Strategic planning and fiscal framework stage integrates climate targets into the budget cycle (planning, allocation, execution, control). - Key steps in the stage: - creation of a strategic or development plan; - preparation of a medium-term fiscal framework (MTFF) with macroeconomic and macro-fiscal forecasts; - identification of fiscal risks, including climate-related risks; - design and description of fiscal policy in the context of the strategic plan and MTFF. - NDCs (national climate plans) can help anchor adaptation and mitigation in planning: - A total of 193 countries have submitted NDCs. - NDCs span at least until 2025; most cover the period until 2030 and quite a few cover the period until 2050. - Country examples of embedding green objectives in strategic plans: - Indonesia: highlights top six policy areas and 21 priority programs to achieve greatest green benefits. - China: 14th Five-Year Plan (2021–2025) contains precise goals on sustainable energy to support carbon neutrality goal by 2060. - Ireland: two of ten strategic objectives in national development plan (2021–2030) have a green focus. - EU: Green Deal roadmap to make Europe climate-neutral by 2050 and explicit commitment to foster green budgeting practices. - Nepal: 15th Plan (FY 2019/20–2023/24) includes dedicated chapter on climate change. - South Africa, Fiji, Samoa: strategic plans aligned with climate objectives. - MTFF as entry point for “macro-critical” green objectives: - MTFF can include green forecasts such as GHG emissions reductions, modeled using macroeconomic tools. - Country examples integrating climate into macro-fiscal modelling: - Denmark developing GreenREFORM model with yearly forecasts from 2015 to 2100. - Scotland provides carbon footprint assessment of draft budgets. - Bangladesh preparing climate-inclusive medium-term macroeconomic framework (MTMF). - Samoa’s MTMF aligned to climate objectives. - Fiscal rules and escape clauses: - Fiscal rules should retain flexibility for climate-related emergencies (escape clauses with parliamentary approval). - Examples: Germany’s fiscal rule escape clause (requires majority vote in parliament); Brazil’s escape clause (requires congressional approval). - Long-term fiscal sustainability and climate: - Long-term fiscal sustainability analysis should account for climate impacts. - Examples: - Switzerland’s 2021 Report on the Long-Term Sustainability of Public Finances identified four channels through which climate could negatively affect fiscal sustainability. - Georgia: IMF technical assistance projects debt-to-GDP to rise by about 18 percentage points over the next 50 years under a volatile climate scenario. - New Zealand’s 2016 Long Term Fiscal Statement included chapter on natural capital. - European Commission included stress tests of extreme weather and climate-related events in 2021 Fiscal Sustainability Report. - Green financing strategy and instruments: - Plan should assess financing gap and mobilize all sources: loans, grants, debt swaps, climate funds, carbon markets, green bonds, insurance. - As of May 2021, among OECD countries, 19 sovereigns had issued green bonds exceeding $130 billion; sovereign green bonds account for only 0.2 percent of all government debt securities. - Examples: - Ireland: first Sovereign Green Bond (2018) with annual reporting on disbursement. - UK: launched Green Gilts and Green Savings Bonds in 2021; more than £16 billion raised. ### Budget preparation: embedding climate in rules, appraisal, and tagging - Budget preparation is critical to translate green priorities into actual allocations; risk of green PFM focusing on reporting without affecting decisions. - Instruments and practices: - Greening the budget circular (budget call circular) signals climate priorities and compels line ministries to provide climate-related information and justifications. - Examples: Bangladesh, Burkina Faso, Kenya adapted budget circulars to require climate-related information and provide tagging instructions. - Mandatory environmental and climate impact assessments and cost-benefit analysis for new budget measures: - Examples: France (since 2008 constitutional reform), EU (impact assessments must address environmental issues), Thailand (manual for climate change cost-benefit analysis used since 2015). - Green spending reviews to analyze baseline (ongoing) expenditure for climate impact and identify savings: - Example: Ireland’s National Biodiversity Expenditure Review (2018); Bangladesh launched review of policies (taxes, subsidies, pricing). - Public investment appraisal and climate risk management: - Examples: Peru’s INVIERTE.PE (from February 2017) includes climate risk management in minimum requirements for public investment projects; Netherlands requires public investment projects to consider climate effects and adaptation. - Green budget tagging: - Purpose: classify each budget component by climate impact to give an overall picture of climate-related expenditure and monitor changes year-to-year. - No single international standard; countries should ensure robustness and clarity and align taxonomy with budget system and environmental policies. - Examples: Philippines and Nepal implemented tagging; France (2021 budget) covers whole budget including tax expenditures and tracks both positive and detrimental environmental impacts using EU Taxonomy of Sustainable Environmental Outcomes. - Mainstreaming into program and performance budgeting: - Program-based frameworks use outputs and outcomes to inform allocations and report progress toward targets. - Example: Uganda’s performance-based budgeting allows entities to set indicators; Ministry of Water and Environment and Office of the Prime Minister provide guidance on climate-related indicators; Uganda Bureau of Statistics coordinates data collection. - Multiannual budget frameworks (MTBF) should integrate climate concerns: - Examples: Indonesia’s 2012 Mitigation Fiscal Framework; Morocco’s climate medium-term expenditure framework; Bangladesh’s MTBF (since 2018/19) integrates for each line ministry a figure for total climate-relevant amount for each of three years plus narrative on expected impact. ### Budget execution, accounting, reporting, and procurement - Tracking green expenditure during budget execution is essential to avoid “greenwashing” and ensure actual delivery. - Options for tracking and reporting: - Adapt chart of accounts (CoA) to capture climate tagging segments: - Bangladesh CoA includes a four-digit climate change budget code segment across six themes and 44 programs. - Kenya expanded CoA in its FMIS with an eighth analytical segment (four digits: subject of tagging; focus—adaptation/mitigation/both; relevance level—principal/significant/not targeted). - Ensure FMIS supports green reporting: - Bangladesh’s local FMIS, iBAS++, enables monitoring and production of climate expenditure information. - Use dedicated implementation reports comparing budget and actuals: - Examples: Indonesia’s Climate Expenditure Report; Climate Budget Reports by the Climate Change Expenditure Tracking Unit in the Philippines. - Country reporting and monitoring examples: - Nepal: climate change–relevant ministries prepare sector-specific climate-related key performance indicators and monitor quarterly and annually. - Pakistan: climate change expenditure tracking system generates reports to track effectiveness of green expenditures. - Bangladesh: MoF prepares and presents a climate budget report to parliament with budget documents every fiscal year, capturing allocations and actual expenditure and tracking progress of national climate investment plans against financing targets. - In-year responsiveness and risk management: - PFM systems should strengthen in-year responsiveness for increasing climate-related emergencies while preserving financial integrity (supplementary budgets, short-term cash availability, business continuity). - Environmental financial accounting and disclosure: - Environmental financial accounting in public sector is nascent; disclosure of climate exposure and management increasing but measurement and recognition remain rare. - Ongoing work by International Public Sector Accounting Standards Board on sustainability reporting may help. - Example: Auckland (New Zealand) adopted accounting practices aligned with Task Force on Climate-related Financial Disclosures recommendations. - Green public procurement (GPP): - Public procurement ~12 percent of global GDP, or $11 trillion per year. - GPP integrates environmental considerations into procurement procedures and criteria across lifecycle stages; credible verifiable standards (eco-labels) aid identification. - Examples and developments: - European Commission developed more than 20 common GPP criteria since 2008. - Dominican Republic developed National Policy of Sustainable Public Procurement in 2021. - Several Latin American and Caribbean countries (Ecuador, Nicaragua, Uruguay) developed GPP policies. ### Control and audit: internal and external oversight of green PFM - Objective: provide reasonable assurance that rules are followed, funds used for intended purposes, and information is accurate—critical to prevent and detect “greenwashing.” - Actors and roles: - Internal control and audit (MoF, line ministries, internal audit/inspection bodies): - Internal audit can be first line of defense by incorporating climate focus into work programs. - Examples: - UK National Audit Office good practice guide for Audit and Risk Assurance Committees highlights internal audit role in climate risk management. - New South Wales (Australia) Internal Audit and Risk Management Policy requires consideration of climate-related risks in risk assessments and audit committee oversight. - External audit (supreme audit institution—SAI) and parliament: - SAI conducts financial, compliance, and performance audits; parliament examines audit and evaluation reports and holds government accountable. - SAIs need specific technical expertise to audit climate issues effectively; INTOSAI recognizes climate audit requires deep technical understanding. - Examples: - Canada: Commissioner of the Environment and Sustainable Development conducts performance audits related to environment and sustainable development for the auditor general. - Bangladesh: guidelines for climate performance audit introduced by Office of the Comptroller and Auditor General. - Performance and thematic audits on green policies: - SAIs can undertake audits of impact and effectiveness of green policies after budget execution. - Examples of SAI and external audit work: - European Court of Auditors (2016) special report on EU target to spend at least 20 percent of budget on climate-related action; highlighted tracking weaknesses and lack of distinction between mitigation and adaptation. - UK National Audit Office reports: scrutiny of government arrangements for achieving net zero and collaboration between central government and local authorities on net zero. - Austria: auditor general has issued performance audits including climate-related topics (2020 report on energy industry measures against energy poverty). - Parliamentary scrutiny: - Parliaments and committees scrutinize government performance on climate and can demand corrective measures. - Examples: - Pakistan: parliamentary Standing Committee on Climate Change reviews national strategy and law application. - Nepal: parliament developing handbook for members to scrutinize climate change finance. - Uganda: Natural Resources Committee scrutinizes climate policies; chairman also member of Budget Committee to help reflect climate priorities in budget. - Independent special bodies / climate watchdogs: - Independent advisory councils or committees provide objective analysis, monitor consistency of policies with targets, and recommend interim carbon budgets. - Examples: - Ireland: Climate Change Advisory Council (established under Climate Action and Low Carbon Development Act 2015). - Philippines: Committee on Climate Change (autonomous under Office of the President). - UK: Climate Change Committee (independent statutory body that proposes carbon budgets and reports to parliament). - The Netherlands: Advisory Division of the Council of State assesses adequacy of climate goals and related aspects. ### Legal framework: embedding green PFM in law - PFM legal framework is essential to translate climate objectives into transparent, accountable actions across the budget cycle. - Evolution of legal provisions: - Environmental rights in constitutions and environmental laws date from the 1970s onward; countries have added climate-specific constitutional provisions (Thailand, Vietnam, Zambia). - Example of specific constitutional provision: Ecuador’s constitution includes a section listing climate actions (Article 414). - Climate laws and statutory frameworks: - Climate laws typically set climate targets, mitigation/adaptation objectives, monitoring mechanisms, and institutional duties, including independent advisory bodies and carbon budgets. - Examples: UK Climate Change Act (2008, amended 2019), Philippines Climate Change Act (2009), The Netherlands Climate Act (2019), Kenya Climate Change Act (2016), Germany Federal Climate Change Act (2019). - Ways countries have embedded green PFM: - Through climate laws (Sweden), amendments to public finance laws (New Zealand, Mexico), budget law reform (Austria), or government decrees/directives (Finland, Canada). - Some countries implemented practices without further legislative amendments using existing environmental provisions (Italy). - Typical legal mandates for green PFM practices: - Law often mandates incorporating green goals during budget formulation, producing green budget documents at submission, and controlling/monitoring implementation at audit stage. - Examples of legal design and mandates: - New Zealand: Public Finance (Wellbeing) Amendment Act of 2020 amended Public Finance Act of 1989 to introduce well-being objectives (including environmental) with reporting requirements in Budget Policy Statement and Fiscal Strategy Report; Minister of Finance to present well-being indicators report at least every four years. - Mexico: Fiscal Responsibility Law (2012 update) included cross-cutting budget of climate change; National Planning Law (2018) integrates SDGs (including climate) into national development plans and connects SDGs with budget programs. - Sweden: Climate Act (2018) requires annual climate report in budget bill and a climate policy action plan every fourth year. - Philippines: Climate Change Act (2009, amended 2012) requires agencies and local government units to allocate adequate funds for climate programs; Department of Budget and Management responsible for formulation of national budget ensuring prioritization and allocation for climate change–related programs and projects. - Norway: Climate Change Act (2018) requires budget proposal statement on how proposed budget contributes to climate targets and annual account to parliament on adaptation and preparation for climate change. - Kenya: Climate Change Act (2016) mandates integration of National Climate Change Action Plan into sectoral strategies and empowers National Climate Change Council to advise president on priority strategies to be incorporated into functions and budgets of government entities. - Legal design recommendations and considerations: - Strong legal basis (binding legislation) for green PFM practices increases effectiveness, continuity, and enforcement and reduces risk of arbitrary rollback during crises. - Key elements to be embedded in primary PFM legislation include: - legal mandate of MoF to promote and implement green PFM practices; - legal powers for Minister of Finance to collect information and monitor implementation; - obligations on public sector entities; - definitions of key terms (for example, “green,” “mitigation,” “adaptation,” “climate-relevant revenue” and “expenditure”); - delineation of institutional roles (for example, Ministry of Environment role); - prescribed budget principles and stages with minimum content and dates for green PFM deliverables. - Flexibility: delegate operational details to secondary legislation to allow procedural adjustment (especially for climate emergencies). - Ensure coherence and avoid overlaps/ambiguity when enacting climate laws—cross-reference PFM laws and consider amendments where needed. - Practical legal outcomes: - Countries should evaluate existing PFM legal framework to assess whether it provides basis for green PFM practices and whether new laws or revisions are needed to harmonize and institutionalize green considerations across the budget cycle. *Source: IMF staff (How to Make the Management of Public Finances Climate-Sensitive—“Green PFM”), December 2022.* ### section 6. ### Section 6 ### Green PFM legal frameworks and country examples - Mexico: The Budget and Fiscal Responsibility Federal Law introduced a new mandate for the government to integrate a cross-cutting budget (the Presupuesto de Egresos de la Federación, or PEF) that presents information on budget programs contributing to specific policy goals, including a “climate change annex” on climate change adaptation and mitigation. - The climate change (adaptation and mitigation) cross-cutting budget annex is incorporated in each annual budget (since 2013), and spending is reported quarterly. - The 2021 National Budget Law also included a provision to tighten the reporting requirements by requiring that “the Federal Executive, through the Ministry of the Environment and Natural Resources, must report on its website the actions that the Federal Government is implementing for mitigation and adaptation to climate change. The information must be reported in open data format and updated on a quarterly basis.” - United Kingdom (Scotland): Scotland’s Climate Change Act (2009) includes a specific provision on the impact of budget proposals on emissions. - The act requires submission of an assessment report to the Parliament of Scotland on the direct and indirect impact on GHG emissions of expenditure proposals in any financial year. - See “Carbon Assessment of the 2020–21 Budget.” - France: Energy and Climate Law (2019) required government to submit a report to parliament on positive and negative effects of the 2020 budget bill on climate change. - Subsequently, the first report (“Green Budget”), including an assessment of the “green impact” of all state budget expenditures on all environmental domains, has been prepared in accordance with article 179 of the 2020 Budget Act and published as an annex to the 2021 Finance Bill. - Article 179 of the 2020 Budget Act 2019-1479 of December 28, 2019, stipulates that the government submit to parliament, as an appendix to the budget bill, a report on the environmental impact of the budget. - Uganda: Uganda’s Public Finance Management Act (PFMA) 2015 was amended by the National Climate Change Act (2021) to include climate considerations in the budget processes. - The amendments require that each accounting officer, in consultation with the relevant stakeholders, prepare a budget framework paper that considers climate change (in addition to balanced development and gender responsiveness) and submit this paper to the Minister of Finance. - The PFMA then mandates that the minister, in consultation with the chairperson of the National Planning Authority, issue a certificate stating that the budget framework paper is responsive to climate change and contains adequate allocation for funding climate change measures and actions. - Uganda Climate Change Act 2021, article 30 amended section 9 of the Public Finance Management Act, 2015. - Italy: The Government Accounting and Public Finance Act (Law 196/2009) requires that the Final Statement of Account contain, in a special annex, a description of the outturns of expenditure for programs of an environmental nature. - The annex presents the execution of environmental spending with information by activity and spending phase. - Government Accounting and Public Finance Act (Law 196/2009), article 36 (6). - Canada: The Auditor General Act was amended to provide the auditor general a specific mandate related to the environment and sustainable development. - This mandate is carried out by the Commissioner of the Environment and Sustainable Development and includes conducting performance audits, overseeing the environmental petitions process, auditing the federal government’s management of environmental and sustainable development issues, and reporting annually to parliament its independent analysis and recommendations on the federal government’s efforts to protect the environment. - The Auditor General Act (R.S.C., 1985, c. A-17), articles 7, 15, 21. ### Identifying interactions with PFM functions across and beyond the budget cycle - Some important PFM functions touch on every step of the budget cycle and constitute critical elements of a successful green PFM strategy—including fiscal transparency. - Some aspects are only partly addressed through the budget cycle, such as coordination with state-owned enterprises and with subnational governments. ### Fiscal transparency: principles and entry points - Credible green budgeting requires that green commitments, targets, forecasts, costs, outputs, and outcomes be transparently reported and available in a clear and timely fashion to the civil society and the public while giving the public an opportunity to participate in shaping the budget choices. - Transparency defined: the comprehensiveness, clarity, reliability, timeliness, and relevance of public reporting on the state of public finances. - Transparency is critical for effective fiscal management and accountability. - Transparency helps strengthen the credibility of efforts to mainstream green elements into the budget—by ensuring that legislatures, markets, and citizens have the information they need to hold the government accountable for the announced commitments and targets and that these stakeholders understand the climate impact of fiscal policies. - Numerous entry points exist for green elements in budget and fiscal reporting, highlighted earlier in the budget cycle sections. - Overarching principles summarized: - Budget documentation should include evidence on the climate impacts of fiscal policies and the link between fiscal policy and climate change. - For instance, documentation can highlight the link between NDCs, GHG emissions targets, the economy, and fiscal policy. - Documentation should also identify where fiscal policies might improve climate and/or wider environmental outcomes. - Budget documentation should include elements on fiscal risks related to environmental degradation and climate change (see next section). *Source: htnea2022006 - section 6.* ### Box 3. Green PFM as Part of the Legal Framework: Country Examples ### Box 3. Green PFM as Part of the Legal Framework: Country Examples ### Budget reporting and public participation - Budget documentation should make the positive and negative climate impacts of the forthcoming budget "clear and readily available." - Initial reporting can highlight where expenditure is expected to have an impact on climate or wider environmental outcomes through a "tagging" system; estimates of the carbon emissions resulting from the budget could also be provided. - Country examples: - Italy: the "Eco-Budget" provides an annual breakdown of government spending by environmental objective. - Philippines: a National Climate Budget Brief is published annually based on climate-tagged expenditure data; a government website also allows monitoring of data generated by the tagging system. - Honduras: detailed tables on climate-relevant expenditure presented in a dedicated analytical report (most recent iteration dates to 2019). - Public participation should be encouraged at all stages of the budget cycle to strengthen fiscal transparency, improve policy advice quality and legitimacy, and act as an accountability mechanism. - Mechanisms to build public participation in green budgeting include: - Inclusion or elevation of green outcomes in participatory national planning mechanisms and prebudgeting consultations. - Empowerment of independent fiscal councils or climate change commissions to independently assess, report, and consult on green budgeting targets and outcomes. - Public consultation on social, environmental, and climate impacts of the budget. - Country examples of participatory approaches: - Canada: annual pre-budget consultations; in 2020 climate change and protection of the environment was a selected policy for consultation. In 2021 the Department of Finance opened a public consultation, "Tax Reduction for Zero-Emission Technology Manufacturing." - South Korea: a yearly participatory budget where the public sends project proposals; eligible proposals go through project maturation and may be integrated into the budget proposal sent to parliament. Several submitted projects relate to environmental issues. ### Fiscal risk management - Climate change creates fiscal risks through adaptation and mitigation costs and through transition risks (policy, technological, and other changes). - Adaptation costs include preventive costs (for example, building infrastructure to higher standards) and recovery costs (for example, replacing damaged infrastructure). - Mitigation often entails higher capital expenses for clean infrastructure, though renewable costs have fallen and operating costs may be lower. - Transition risks include loss of value of public "stranded assets" as carbon prices increase; failure to meet GHG-reduction commitments leading to reputational costs or sanctions; and spillovers from other countries' measures (for example, a carbon border tax or restrictions on air travel affecting tourism). - Other environmental risks with fiscal impacts include biodiversity loss (linked to increased pandemic risk), pollution, site degradation, pest infestation and animal diseases, and hazardous substance storage or transportation. - Methodologies to estimate economic and fiscal costs: - Start with analysis of historical economic losses from disasters and associated fiscal costs. - Link forward-looking hazard assessments to the location of assets and networks to estimate exposure and vulnerability. - Assess government explicit obligations for fiscal support after a disaster and estimate implicit exposures. - Use modeling, assessment, and qualitative risk classification tools; where quantification is difficult, use classifications such as "probable," "possible," and "remote." - Country examples of assessments and forward-looking estimates: - Colombia: estimate of the value of its implicit contingent liability from disaster damages to private property (Government of Colombia. 2011). - Philippines: 2015 fiscal risk statement included a debt sustainability analysis incorporating a scenario involving large natural disasters (Republic of the Philippines 2015–16, 32). - Peru: 2015–2017 Multiannual Macroeconomic Framework considered macroeconomic and fiscal consequences from a severe weather episode (El Niño) (IMF 2015, p. 68). - United Kingdom: 2021 Fiscal Risks Report contains a chapter on fiscal risks from climate change, including implications of alternative paths to meet the legislated goal to reduce net GHG emissions to zero by 2050 and alternative scenarios and sensitivities (Office for Budget Responsibility 2021, chap. 3). - Ireland: 2021 Budget Economic and Fiscal Outlook rates climate change and renewable energy targets as presenting a "high fiscal risk" because failure to meet obligations could result in significant financial costs or sanctions (Government of Ireland 2021). - Risk management strategies should mitigate expected increases in climate-related fiscal risks and can include: - Enhancing disaster preparedness. - Creating fiscal buffers. - Ensuring budget flexibilities (for example, contingencies for natural disasters, provisioning). - Using risk transfer instruments (for example, insurance). - Integrating climate change issues in public investment management systems. - International frameworks and country practices: - The UN Sendai Framework for Disaster Risk Reduction 2015–2030 elements: (1) understanding disaster risk, (2) strengthening disaster risk governance, (3) investing in disaster risk reduction, and (4) enhancing disaster preparedness. - Côte d’Ivoire: publishes an annual fiscal risk statement with qualitative analysis of fiscal consequences from natural disasters and mitigation measures (Côte d’Ivoire 2022). - Turks and Caicos: Fiscal and Strategic Policy Statement 2022–2026 identifies natural disasters from climate change as a primary fiscal risk and describes risk reduction measures (for example, improving building codes, strengthening reefs), risk financing (catastrophic risk insurance and mandatory private insurance), and possible post-disaster responses. ### Coordination with other public sector entities (SNGs and SOEs) - Subnational governments (SNGs) and state-owned enterprises (SOEs) can play major roles in delivering public services and financing or constructing infrastructure relevant to green objectives. - Challenges include often-weaker PFM capacity at the subnational level, particularly in emerging markets and developing economies; central governments should support local-level capacity development via training, study tours, and financial support for hiring. - Central governments can create incentives for SNGs to deliver green strategies without infringing financial autonomy, and may need to adapt fiscal transfers to compensate local governments disproportionately burdened by climate change (heightened disaster exposure or impacts of mitigation policies on "brown" sectors). - Country examples on coordination and incentives: - Indonesia and India: part of budget transfers to SNGs can be explicitly targeted at low-carbon investments or green policies (India: a variable in the equalization grant that promotes forest conservation). - China: the central government imposes environmental requirements on provincial governments via reporting obligations and monitoring of performance indicators. - France and Denmark: softer mechanisms such as France’s partnership contracts with local governments and Denmark’s Partnership for Green Public Procurement between the Ministry of the Environment and municipalities and regions illustrate vehicles for green objectives. - Role of SOEs: - SOEs, especially in emerging markets and climate-relevant sectors (electricity, oil, and gas), can be among the largest companies and are critical for green objectives. - Central government influence channels (more effective with strong centralized financial oversight at the MoF or a specialized agency) include: - Ownership policy documents to convey cross-cutting importance of green objectives in state portfolio management. - Example: Norway’s State Ownership Policy expects SOEs to act as "exemplary corporate citizens" regarding climate and the environment while delivering financial targets. - As shareholder, the government can issue resolutions or directives to boards (for example, require commitment to lower emissions). - Imposing transparency and reporting practices on SOEs, such as publishing a climate and/or environmental strategy or regular assessment of the potential financial impact of climate risks. - Explicitly setting green or climate efficiency as a criterion in technical and financial appraisal of SOE investment plans, reviewed by the central government; for example, establishing a shadow carbon price for cost-benefit analyses of SOE investment projects. - Quasi-fiscal activities: green objectives may influence SOE pricing policies; such effects should be made explicit and SOEs appropriately compensated. - Climate-related conditionalities as part of SOE bailout packages are an example of the state's influence as shareholder. ### How to implement green PFM: guiding principles (overview and Principle 1) - Implementation guidance emphasizes five guiding principles for successful design and implementation of a green PFM reform strategy; these principles are applicable across countries regardless of development or PFM capacity. - Capacity development, including work by IMF’s Fiscal Affairs Department and the Coalition of Finance Ministries for Climate Action, can support design and implementation and help counter misconceptions about green PFM. - A strategy is necessary: countries should prioritize which green PFM practices to implement based on national priorities and capacity, identify stakeholders, plan and monitor implementation, and identify capacity development needs. - Diagnostic tools that can help identify reform priorities and design realistic strategies include the IMF’s Climate Macroeconomic Assessment Program, the World Bank’s Country Climate and Development Report, the UNDP’s Climate Public Expenditure and Institutional Review, and the climate-responsive Public Expenditure and Financial Accountability. - Principle 1 (prerequisites for successful green PFM reforms): - Greening PFM systems makes sense only if elements of a functional PFM system are in place. - Priorities: ensuring basic financial compliance, sound budget preparation and execution processes, ideally underpinned by a functional FMIS. - These fundamental PFM features are also required to access climate finance (for example, the Green Climate Fund). - It may be counterproductive to implement sophisticated green PFM practices where basic PFM performance standards are not met or absorption capacity is limited; however, some green practices can be incorporated as core systems are developed (see Principle 3). - Strong political backing and ownership are more necessary for green PFM reforms than for standard PFM reforms because incorporating green concerns is not a natural part of the MoF mandate; the MoF will act only with a clear political signal. - The MoF has a direct stake in overall PFM improvements, but green PFM requires explicit political buy-in to overcome stakeholder resistance and to mobilize resources for reform design and implementation. *Source: Box 3. Green PFM as Part of the Legal Framework: Country Examples (htnea2022006).* ### introduction of a MTBF (2007–8), which was really initiated at the ### htnea2022006 - introduction of a MTBF (2007–8), which was really initiated at the ### Five guiding principles for implementing green PFM reforms - Prerequisites should exist for green PFM reforms. - Elements of a functional PFM system are in place. - Strong political backing and ownership are even more necessary. - Some degree of green expertise needs to be developed for key actors in the PFM processes. - The MoF should be the primary driver. - The MoF has the requisite knowledge and skills to instill green practices into PFM processes. - The MoF can determine which changes are realistic without hampering the effectiveness of PFM processes. - Governments should design appropriate sequencing of green PFM reforms. - It could be a good idea to start with green PFM reforms along the upstream part of the budget cycle. - It can also be beneficial to roll out green PFM reforms gradually, starting with a few pilot ministries or agencies with a limited set of new practices. - Government should communicate the progress to ensure buy-in and manage expectations. - Initial consultation meetings and workshops can be helpful to engage internal and external stakeholders. - There is also value in consulting with parliament and the civil society when designing the reform strategy. - Green PFM reforms should be integrated with the existing PFM reform agenda. - Developing and steering green PFM reforms draw upon the same set of skills as the design and implementation of an overall PFM reform agenda. ### Political leadership and examples of early adoption - Leadership is important, particularly at the beginning of the reforms, to embed green PFM tools in the legal framework and successfully implement them. - Country examples: - France: the first green budget appended to the 2021 budget law resulted from a clear political commitment at the level of the Minister during the 2020 budget discussion one year earlier; it built on momentum from France’s participation in the OECD’s Paris Collaborative on Green Budgeting. - Bangladesh: the MoF published the Climate Fiscal Framework, which sets out the principles and tools for integrating climate finance into the country’s PFM system. - Nepal: set up in its MoF a Climate Change Finance Unit, mandated to deal with all climate finance issues with line ministries; staff received specific training in climate change and climate finance coordination. - Fiji: embedded into the Ministry of Economy a Climate Change Unit as a focal point of expertise to support macroeconomic and fiscal processes. - Philippines: Climate Change Commission participates in technical budget hearings, while leadership is held by the Department of Budget and Management and the National Economic and Development Authority. ### Capacity building and institutional roles - Some degree of green expertise must be developed for key actors in PFM processes. - MoF staff are not climate experts and cannot rely solely on Ministry of Environment; a nucleus of staff with climate expertise is required within the MoF. - This may require additional training for existing MoF staff, hiring staff from the outside, or a mix of both. - Complementary actions: build capacity across stakeholders, set up environmental data collection and monitoring, and ensure ministries/agencies in charge of climate/environment are equipped to perform monitoring and reporting, engage in policy analysis, and interface with fiscal policies and budgeting. - At the central level, stakeholders include: - The Ministry of Environment. - Line ministries. - Parliament and independent fiscal institutions. - Climate change committees. - The Supreme Audit Institution. - The MoF must be the primary driver because it holds budget legislation, regulation, manuals, guidance, and IT tools (such as FMIS) and has institutional leverage to implement green practices across ministries. ### Misconceptions about green PFM (Box 4) - Misconception 1: Treating green PFM as an end in itself. - Green PFM belongs to a wider PFM reform agenda and to an overall national strategy to mitigate and adapt to climate change; it is one building block among laws, regulations, and taxes. - Misconception 2: Considering that green PFM is a nice add-on for advanced economies only. - Important aspects can be implemented by smaller emerging or developing countries; climate budget tagging can attract international climate finance transfers to LIDCs and emerging markets. - Misconception 3: “Cutting and pasting” green PFM practices adopted in other countries. - A one-size-fits-all approach is bound to fail; country-specific assessment of PFM capacity and prerequisites is needed. ### Sequencing and rollout strategies for green PFM reforms - Countries should prepare sequenced action plans identifying stakeholders, timelines, and legal framework adaptation needs; timeline should be updated regularly by the coordinating body. - Logical sequencing: - Start with upstream part of the budget cycle: developing capacity to assess and analyze green or climate impacts of fiscal policies (notably through an explicit link with NDCs). - Next, move downstream: measure actual results and compare to ex ante assessments; progressively hold governments accountable relative to initial assessments until green PFM becomes mainstreamed. - Rollout strategies: - Test runs: test operability before full rollout. - France: preparation of the first green budget in 2020 for the 2021 budget was preceded by a 2019 test run covering four policy areas and a second test run in early 2020 applied to the whole budget. - Pilot institutions: start with a few pilot ministries or agencies with high environmental footprints or with capacity and senior management buy-in. - Bangladesh, Indonesia, and Nepal started implementing green budget tagging in a few green-intensive pilot ministries before wider rollout. - Central versus subnational governments: commonly start at national level before subnational rollout; some federal systems saw subnational levels lead (state of California in the US, state of Punjab in India). - Philippines: local government units started experimenting with climate investment tagging in 2014, a year after the process started at the central level. - COVID-19 recovery packages can be opportunities to kick-start or test new green PFM practices. ### Communication and stakeholder engagement - Communicating progress and gathering feedback early are important to build awareness and manage expectations. - Initial consultation meetings and workshops help engage internal and external stakeholders and train them on basic objectives. - Consulting with parliament and civil society is valuable for understanding needs, especially regarding fiscal transparency. - Communication devices: - Internal: regular updates from the steering entity; steering committee or working group meetings; seminars and conferences as part of the budget process. - Orientation meetings on climate expenditure tagging are held annually in the Philippines. - External: leverage existing documents (progress reports on PFM reform strategy, green strategies, budget documents) or produce ad hoc progress reports on green PFM reforms. - India (Punjab) held a 2014 brainstorming workshop on green budgeting with civil servants, civil society, and private sector experts. - France: National Assembly amendment to the 2019 budget law requested merging environment-friendly expenditure documents into a single document, later replaced by the first green budget document in 2021. ### Climate-sensitive public investment management (Annex 1) - Public investment is key for growth, recovery, and transformation to an inclusive, green, and resilient economy; massive and targeted public investment will be necessary to meet environmental objectives. - IMF analysis and global investment needs: - On average, about 30 percent of public investment value is lost due to inefficiencies; better infrastructure governance can reduce inefficiencies by half. - Investment needed to close the infrastructure gap globally is estimated at $94 trillion by 2040—equivalent to about 3.5 percent of annual global GDP. - To achieve the SDGs, an estimated 8.5 percent of annual global GDP would be needed by 2030 for infrastructure investments in roads, electricity, water, and sanitation in LIDCs and about 3 percent of GDP in emerging market economies. - Climate and disaster impacts on infrastructure: - Natural disasters cost about $18 billion a year in low- and middle-income countries, through direct damages to infrastructure assets. - These events disrupt infrastructure services and impose a cost between $391 billion and $647 billion a year in these countries. - Approximately 70 percent of global GHG emissions come from infrastructure construction and operations. - Risks include stranded assets and financial unviability of fossil-fuel infrastructures under transition-related policy and market changes. - IMF tools and approaches: - Public Investment Management Assessment (PIMA) framework assesses infrastructure governance and develops action plans. - Climate PIMA diagnoses infrastructure governance from the climate change perspective and mainstreams climate change considerations in five key components of public investment management: 1) climate-aware planning, 2) coordination between entities, 3) project appraisal and selection, 4) budgeting and portfolio management, 5) risk management. - International experiences show countries are generally better at integrating climate change at the planning stage than at the implementation stage, highlighting the importance of targeting climate mainstreaming in project development and implementation cycles and ensuring coordination across sectors and levels of government. *Source: IMF staff, HOW TO MAKE THE MANAGEMENT OF PUBLIC FINANCES CLIMATE-SENSITIVE—“GREEN PFM”, Fiscal Affairs Department, December 2022.* ### References ### htnea2022006 - References ### Gender budgeting and social inclusion - Alonso Albarran, Virginia, Teresa Curristine, Gemma Preston, Alberto Soler, Nino Tchelishvili, and Sureni Weerathunga. 2021. “Gender Budgeting in G20 Countries.” IMF Working Paper 2021/269, International Monetary Fund, Washington, DC. - Chakraborty, Lekha S., Marian Ingrams, and Yadawendra Singh. 2019. “Macroeconomic Policy Effectiveness and Inequality: Efficacy of Gender Budgeting in Asia Pacific.” Working Paper 920, Levy Economics Institute of Bard College, Annandale-on-Hudson, NY. - International Monetary Fund (IMF). 2017a. “Gender Budgeting in G7 Countries.” IMF Policy Paper, Washington, DC. - Public Expenditure and Financial Accountability (PEFA). 2020. “Supplementary Framework for Assessing Gender Responsive Public Financial Management.” PEFA, Washington, DC. - UN Women. 2016. 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Contingent liabilities: The Colombian experience | PreventionWeb - Republic of the Philippines. 2015–16. “Fiscal Risks Statement.” Department of Budget and Management. https://www.dbm.gov.ph/wp-content/uploads/DBCC_MATTERS/FiscalRisk-Statement/FRS_2015-2016.pdf. - Caselli, Francesca, Hamid Davoodi, Carlos Goncalves, Gee Hee Hong, Andresa Lagerborg, Paulo Medas, Anh Nguyen, and Jiae Yoo. 2022. “The Return to Fiscal Rules.” IMF Staff Discussion Note 22/02, International Monetary Fund, Washington, DC. - Harris, Jason, Tjeerd Tim, John Zohrab, Viera Karolova, and Jyoti Rahman. 2022. “Georgia: Updating the Balance Sheet and Quantifying Fiscal Risks from Climate Change.” IMF Country Report 22/150, International Monetary Fund, Washington, DC. https://www.imf.org/en/Publications/CR/Issues/2022/05/27/Georgia-Technical-Assistance-Report-Updating-the-Balance-Sheet-and-Quantifying-Fis-cal-Risks-518383. ### Climate finance, access, and country-level assessments - Fouad, Manal, Natalija Novta, Gemma Preston, Todd Schneider, and Sureni Weerathunga. 2021. “Unlocking Access to Climate Finance for Pacific Island Countries.” IMF Departmental Paper 21/20, International Monetary Fund, Washington, DC. - Dabla-Norris, Era, James Daniel, Masahiro Nozaki, Cristian Alonso, Vybhavi Balasundharam, Matthieu Bellon, Chuling Chen, and others. 2021. “Fiscal Policies to Address Climate Change in Asia and the Pacific.” IMF Departmental Paper 21/07, International Monetary Fund, Washington, DC. - Government of Bangladesh. 2019. “Climate Financing for Sustainable Development. 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Accessed October 31, 2022. https://www.ipsasb.org/publications/consultation-paper-advancing-public-sector-sustainability-reporting. - INTOSAI Working Group on Environmental Auditing. 2019. “Research Paper: Potential Criteria for Auditing Climate Change Adaptation—Strengthening Resilience and Adaptive Capacity to Climate-Related Hazards.” July 2019. https://www.environmental-auditing.org/media/113688/21e-wgea_climate-change_2019_corbel.pdf. - Wong, Michelle R., and Willemien Roenhorst. 2017. “Supreme Audit Institutions and Climate Change Adaptation: Auditing to Address a Complex Risk.” SAIs and Climate Change Adaptation. Spring 2017. http://intosaijournal.org/sais-and-climate-change-adaptation. - Niemenmaa, Vivi, Meeri Tarvainen, Simon Hämäläinen, India Roland, Sari Aroalho, and Kaire Kesküla. 2021. “Environmental and Climate Audits on the Rise.” INTOSAI (International Organisation of Supreme Audit Institutions). 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December 2, 2021. https://www.lse.ac.uk/granthaminstitute/news/the-11-nations-heralding-a-new-dawn-of-climate-constitutionalism/. - United Nations Environment Programme (UNEP). 2019. Environmental Rule of Law: First Global Report. Nairobi, Kenya: UNEP. - World Bank. 2020. World Bank Reference Guide to Climate Change Framework Legislation: Equitable Growth, Finance and Institutions Insight. Washington, DC: World Bank. ### Audit, risk, and public sector governance practices - National Audit Office. 2020. “Achieving Net Zero.” December 4, 2020. https://www.nao.org.uk/wp-content/uploads/2020/12/Achieving-net-zero.pdf. - National Audit Office. 2021a. A Good Practice Guide for Audit and Risk Assurance Committees. 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September 29, 2021. https://www.treasury.govt.nz/publications/strategies-and-plans/long-term-fiscal-position/he-tirohanga-mokopuna. ### Macroeconomic frameworks, modelling, and institutional analysis - Hemming, Richard. 2013. “The Macroeconomic Framework for Managing Public Finances.” In The International Handbook of Public Financial Management, edited by Richard Allen, Richard Hemming, and B. Potter. London: Palgrave Macmillan. - North, Douglass. 1991. “Institutions.” Journal of Economic Perspectives 5 (1): 97–112. - OECD. 2021d. Introductory Note on Integrating Climate into Macroeconomic Modelling: Drawing on the Danish Experience. Paris: OECD. - OECD. 2021e. Climate Change and Long-Term Fiscal Sustainability. Paris: OECD. - Parry, Ian, Simon Black, and James Roaf. 2021. “Proposal for an International Carbon Price Floor Among Large Emitters.” IMF Climate Note 2021/001, International Monetary Fund, Washington, DC. ### Country documents, assessments, and budgetary measures - Côte d’Ivoire. 2022. “Declaration sur les risques budgétaires 2022–2024.” Ministère du Budget et du Portefeuille de l’État. Accessed October 31, 2022. http://dgbf.gouv.ci/wp-content/uploads/2021/11/17-DRB-2022-2024.pdf. - Government of France. 2020. “Report on the Environmental Impact of the 2021 Central Government Budget”. Accessed November 14, 2022. Le projet de loi de finances et les documents annexés pour 2021 | budget.gouv.fr - Government of Ireland. 2019. “Climate Action Plan 2019: To Tackle Climate Breakdown.” Accessed November 1, 2022. https://assets.gov.ie/25419/c97cdecddf8c49ab976e-773d4e11e515.pdf. - Government of Ireland. 2021. “Budget 2021 Economic Outlook and Developments”. Accessed November 11, 2022. https://www.gov.ie/en/collection/62f05-budget-publications/ - Government of The Netherlands. n.d. “Assessment Framework.” Council of State. Accessed October 31, 2022. https://www.raadvanstate.nl/climate/assessment-framework. - Government of Odisha. 2019. “Cyclone Fani: Damage, Loss and Needs Assessment”. Accessed November 14, 2022. Cyclone Fani Damage, Loss, and Needs Assessment | PreventionWeb - Government of Canada. 2020. “Pre-Budget Consultations 2020.” Accessed October 21, 2022. https://budget.gc.ca/2020/prebudget-prebudgetaire/index-en.html. - United Kingdom. 2021. “Spending Review 2021. Priority Outcomes and Metrics.” UK Treasury, London. - Republic of the Philippines. 2015–16. “Fiscal Risks Statement.” Department of Budget and Management. https://www.dbm.gov.ph/wp-content/uploads/DBCC_MATTERS/FiscalRisk-Statement/FRS_2015-2016.pdf. *References list from How to Make the Management of Public Finances Climate-Sensitive—“Green PFM”, NOTE 22/06* --- _Source: https://www.imf.org/-/media/files/publications/howtonotes/2022/english/htnea2022006.pdf_