Making Green Budgeting a success at state and regional level

Last month, state and regional government officials from the Next Generation Budgets project convened for the first green budgeting training led by the Institute for Climate Economics (I4CE). The session featured presentations by Sébastien Postic, and Marion Fetet from I4CE, exploring the fundamentals of green budgeting practices and how green budgeting tools fit into a broader framework – a useful process for financing a just transition and decarbonized economy.  

“This was a great first session. I am new to green budgeting and excited to learn more skills that can be implemented locally.” – Next Generation Budgets participant from the State of Hawaii. 

Through Next Generation Budgets - a project led by Climate Group, in partnership with the Government of North Rhine Westphalia and funded by Stiftung Mercator; states and regional governments from Europe and North America receive technical training to green their budgets with the best available knowledge and tools. Part of the program involves taking part in a community of practice to improve and learn ways to unlock climate finance for their territories.  

From national to local perspectives 

The session began with an example of the French national government’s green budgeting process established through its Budget Law in 2019. This process requires the government to submit an annual report on the environmental impact of the budget to parliament. 

In addition, the Constitutional law requires the government to conduct impact assessments (including environmental assessments) for new law proposals. In France, representatives from the Ministry of Finance (Directorate for Budget, Treasury and Economic Analysis, and Tax Policy) and the Ministry for Ecological Transition lead this process at the national level, with supervision from the Budget Directorate. As of 2023, green budgeting has been integrated deeper into the general budget process, with line ministries conducting green tagging for their proposed measures. 

Later in the session, I4CE demonstrated how green budgeting learnings can be transferred from a national level down to local government, using the Paris 2024-2030 Climate Plan as a key example. The city co-developed a green budgeting strategy with I4CE for two sections of its general budget (operating and investment), identifying city-relevant methodological choices and ensuring a cross-departmental effort, echoing the set-up of Next Generation Budgets taskforces. I4CE has worked on similar methodologies across local administrations in France, from large cities such as Grand Lyon and Strasbourg Euro metropole to regions such as Nouvelle Aquitaine and Grand Est. 

On a global level, as shown by the OECD in 2021, many countries are experimenting on the ground with various green budgeting tools. Looking at these options, I4CE identified some of the most relevant tools for Next Generation Budgets governments, including ‘ex-ante or ex-post green budget tagging, respectively meaning the tagging of forecasted expenditures before the budget is spent and the tagging of expenditures after funds have been spent, in the evaluation stage of the budget cycle. Other tools include the ‘regular review of environmentally harmful tax expenditures and subsidies as well as ‘statistical green tagging or reporting,’ which is a data-driven approach focused on tracking the overall expenditures on green activities. As seen below, ex-ante or ex-post green budget tagging is quite widespread in the countries used for this study, including Italy where two Next Generation Budgets participating governments are located. 

What is environmental budget tagging? 

A green budget is distinct from carbon budgets or emissions reduction pathways, as well as from the process of developing a climate action plan or a GHG inventory. While carbon budgets focus on setting specific emissions limits within a timeframe, and pathways outline the steps needed to reduce emissions, a green budget focuses on “identifying the elements in the State Budget that influence national emissions” and “categorizing these measures according to their impact, in terms of alignment with the national commitments and emission trajectory” (I4CE). 

Overall, it is important for governments to recognize that “a climate strategy is more than just green budgeting” (I4CE). 

What are the benefits and drawbacks of green budgeting? 

The advantage of implementing green budgeting methods is twofold for governments: they showcase their efforts towards reaching their climate objectives whilst also using these methods as an aid to steer their budgetary decisions. By adopting methods such as budget tagging, governments demonstrate their commitment to climate goals, facilitating their access to international financing and raising general transparency on government climate action. Green budgeting methods such as budget tagging also serve to ensure budget consistency across ministries, as well as improving the overall effectiveness of spending. 

Although green budgeting provides a good understanding of current practices, yet it is not in itself sufficient to measure progress towards aligning more public finance with climate objectives. It is not possible to simply infer from a green budget statement whether a government is efficiently allocating a sufficient portion of its budget towards its climate objectives. That is why I4CE is working to develop a framework for governments to construct their “financing roadmap to the transition” which follows four key steps:

  1. Understanding the investment needs and gaps with current investments,
  2. Allocating the bill
  3. Unlocking payments 
  4. Accounting for macro-economics 

Climate Group is excited to welcome Next Generation Budgets participants to an in-person workshop held in Brussels this year. The workshop agenda will include launching our Community of Practice (CoP), hosting an in-person green budgeting course, facilitating activities and networking dedicated to both green budgeting and climate finance. 

Want to find out more? Listen to I4CE's presentation here.