UNDP Guidance Note on Budgeting for Climate Change

Posted by Asif Shah[1]

As countries recover from the COVID-19 pandemic shock, there are growing calls to build greener budgets that help accelerate the transition to net zero-carbon economies.

UNDP has recently published a Guidance Note for governments to integrate climate change into budgeting, as part of the SDG budget reform agenda. The Guidance Note focuses on two stages of the budget cycle:

• the macro fiscal framework and
• budget preparation and approval.

Orienting government accounting and reporting systems to capture data relevant to climate change is central to green budgeting. Organizations such as the IMF, the OECD, UNDP, and the World Bank, for example, have been supporting countries in tagging budget transactions related to climate change. Such initiatives are helpful for policy makers and improve budget transparency and accountability.

The UNDP Guidance Note articulates three key principles to improve green budgeting: 1) build on a country's systems and practices to ensure sustainability; 2) ensure flexibility in the process and align the efforts with the budget cycle; and 3) clearly define roles and responsibilities and ensure an effective coordination mechanism.

The Guidance Note argues for using technical data prepared by government agencies responsible for the Environment, Climate Change, and Science and Technology to inform the government's macro-fiscal estimates. It recommends the establishment of a forum headed by the Ministry of Finance with the participation of other relevant agencies, technical directorates, the central bank, research institutes, academia, and the private sector to provide necessary analytical support in undertaking this analysis.

For the budget preparation stage, the Guidance Note recommends including climate change issues in the budget circular thus obligating spending agencies to prepare their budget submissions through a climate lens. Changes in the attitudes and culture of government officials and ministers are also required. The Guidance Note recommends including climate change topics in budget hearings and negotiations for informed decisions by policymakers and deeper budget scrutiny by parliamentarians.

One size doesn't fit all - bringing out the best of each country

Countries have varying levels of sophistication in their PFM skills, tools, and capacities. The Guidance Note recommends a flexible and proportionate approach on the extent to which and how countries apply principles of good practices on green budgeting. It also recommends the pooling of local knowledge and bringing together relevant stakeholders in the budget process.

An important consideration for the Guidance Note is its relevance to different settings. While it is applicable to both annual and medium-term budgeting, budgets that include performance information over a medium-term horizon can provide an enabling environment and an advanced platform for integrating climate change considerations more easily into the budget process. Legislatures can play an important gatekeeper's role to ensure that the budget is prepared with a climate lens. The Guidance Note offers a glimpse of the approaches adopted by different legislatures to enhance the quality of their debates and provides recommendations for strengthening budget scrutiny.

The impact of climate change and the policy responses of the government often have a disproportionate effect on different social groups. The Guidance Note considers how gender and social inclusion aspects of policy can be addressed in tandem to minimize the adverse impacts of climate change on the poor. It recommends tools like the climate public expenditure and institutional review, vulnerability loss and damage assessments, and fiscal incidence analysis to ensure inclusive budgeting.

The countries that have embarked upon mainstreaming climate change in their PFM system or countries that are planning to do so can make use of this Guidance Note for adopting a more structured and coherent approach. The central budgetary authorities, technical directorates, sector ministries and local governments will find the Note especially useful in improving their budgeting practices.

[1] Public Finance Adviser with UNDP, Climate Finance Network and Governance for Resilient Development in the Pacific.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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