International climate finance is the main means of reconciling equity (developing countries have contributed little to climate change but are extremely vulnerable to its effects) with effectiveness and efficiency (a large share of the required mitigation is required in developing countries if global emissions targets are to be met).
Climate finance also presents a huge opportunity for developing countries to gain from win-win investments in adaptation and mitigation.
Transparency and accountability for climate finance is key to unlocking these gains. The International Budget Partnership recognizes that funds to respond to climate change are likely to be the single largest source of development finance for the foreseeable future and has initiated a program of activities to promote climate finance transparency and accountability.
Recognizing this, ‘climate budgeting’ by governments has developed over the last decade, particularly in the Asia-Pacific region, with the support of development partners such as the UNDP and the World Bank. An important motivation has been to package public investment projects for external financing.
This requires new systems to track government climate-related expenditures because they cut across existing expenditure classification systems – in the same way that gender-related or poverty-reducing expenditures require specially designed tagging systems if a country wishes to identify and report all related spending.
Following the world’s first Climate Budget in Nepal in 2013, climate budget tagging (CBT) systems have been introduced in about 20 countries. Many have published climate budgets parallel to the government’s annual budget using a variety of specially designed CBT methodologies.
While CBT is not costless, the benefits in many countries are likely to far outweigh the costs given the scale of climate finance and the long-term nature of climate change.
However, two things are noteworthy.
First, no country that has published a climate budget to date has disclosed environmentally harmful expenditures. Climate budget reports only cover those expenditures that are intended to be favorable for the environment.
Yet governments around the world continue to spend vast sums on direct subsidies and tax concessions for brown activities while paying lip service to their green credentials.
Second, the nearly 40 countries that have issued sovereign green bonds are contractually committed to transparent project evaluation and selection criteria and to the regular publication of detailed reports on how the funds have been spent, and on their impacts e.g., reductions in greenhouse gases. They provide no such assurances regarding all their other environment-related spending.
This means that countries issuing green bonds are now committed to providing far more transparency on their environmental spending to private investors than they are to their own legislatures, taxpayers, and citizens.
How can this greenwashing be offset?
One approach recently advocated is for in-country civil society organizations to publish their own ‘Green Guide to the Budget’ using publicly available information in existing documents and reports.
In this way, a picture could be built of the volume and allocation of public resources directed both to environmentally favorable and harmful activities, set in the context of the government’s environmental commitments and framed by cross-national benchmark indicators.
A Green Guide to the Budget could also incorporate civil society recommendations on green tax and expenditure policies to improve environmental outcomes and environmental justice, and a push for more transparency. It could be a vehicle to give more voice to women, indigenous peoples, and other marginalized groups that are often the most adversely affected by climate change and would help to offset the inside influence of fossil fuel and other environmentally destructive lobbies.
There are obvious capacity challenges, but a civil society initiative of this type may have the potential to shift the needle in some countries on accountability for environmental stewardship.
Some of society’s most pressing challenges don’t fit neatly into a box. Take persistent gender inequality. For over three decades, governments, international institutions, civil society organizations and affected women, themselves, have worked to address the structural, policy and cultural factors that perpetuate gender-based discrimination, exclusion, oppression and violence.
The drivers and manifestations of gender inequality are multiple and intersecting with other socio-economic factors and broader challenges of equity, inclusivity and sustainability. Any remedies invariably must cut across government ministries and sectors. Effective government responses require planning, policy making and public finance systems that (1) assess the problem in all its complexity, (2) design and adequately finance responses, (3) execute the relevant programs and activities and (4) assess outcomes and impacts. To support solutions that effectively “mainstream” gender equality considerations across the public sector, governments and civil society organizations have been using gender-responsive budgeting (GRB) approaches for over 25 years. These approaches support awareness raising; management and public accountability purposes, including identifying and tracking gender-related spending; impact evaluation, and ultimately improvements to planning and implementation.
Learning from GRB to ensure climate-responsive public budgets
Like gender inequality, climate change poses extremely complex and intersecting challenges and addressing them requires significant government intervention and coordination. In addition to the cross-cutting nature of an effective response, efforts to address climate breakdown are often components of a larger program or project, raising huge definitional and operational challenges.
Within the last decade, as governments in climate-vulnerable countries have sought to improve their public finance systems and practices to respond to climate change, several have turned to GRB for its possible lessons on developing and implementing climate change-responsive budget reforms. Climate-responsive budgeting has taken various forms, including climate tagging of budget lines, the use of environmental cost-benefit analysis for decision making and carbon pricing. To date at least 30 countries have conducted Climate Public Expenditure and Institutional Reviews (CPEIRs), which review legislation and public expenditure contributions to national climate goals and seek to identify specific public expenditure policy and management challenges. In addition, at least 19 countries have established some form of climate budget tagging according to estimates in a new report from the World Bank.
Gender equity in the face of climate breakdown
Climate breakdown exacerbates existing inequalities, including those of gender. Women and girls, particularly those who are living in poverty, are often more severely impacted by climate-related extreme weather events. Their ability to respond to climate hazards can be limited by barriers to asset accumulation; unequal access to property, natural resources or financial services like credit; and inadequate support to lessen their traditional care burdens from public services like education, health care, and disaster recovery support.
Moreover, women, especially those at the frontlines of climate change impacts, have few or no opportunities to participate in decision-making processes. Yet, given their relevant experience, knowledge and skills, this exclusion undermines effective responses to the climate crisis.
Clearly, gender-responsiveness, including the agency and leadership of women, must be at the center of the response to the climate crisis, if we are to have sustainable, equitable, low-emission and climate-resilient societies and economies. And public finance management sits at the center of any integrated government response to gender inequality and climate change that recognizes and responds to the dynamic relationship between them. Arguably, there needs to be “double mainstreaming” of both climate and gender. Governments need to take the next step of making their climate-responsive budgets also gender-responsive and vice versa.
New study looks at the state of gender-responsive climate change budgeting
To help accelerate progress toward more effective integration of gender and climate in public financial management, we studied existing practices, approaches, and opportunities—in search of guiding principles for gender-responsive climate change budgeting (GR-CCB). Beyond a broad scoping of interesting nascent efforts around the world, we dug more deeply into the experience of two countries—Mexico and Bangladesh—that face significant risks of negative impacts from climate change but represent different climate change policy and public financial management (PFM) contexts; each has engaged in gender- and/or climate change-responsive budgeting at the national and subnational level.
In the country assessments, we identify the policy models used and analyze key components of the different approaches, implementation considerations and impacts on decision making and outcomes. We also tried to analyze the budgets of two key sector ministries in each country to determine what portion of the respective ministry budget allocated in support of climate change actions was also gender responsive. One key assumption was that, as both Mexico and Bangladesh have established components of both GRB and climate change budgeting, we would be able to use publicly available budget data to calculate the “overlap” between the two—or the GR-CCB.
Our assumption about access to basic allocation data was too optimistic. While we were able to come up with some broad, indicative estimates of the GR-CCB of the ministries, not enough detailed data were available to support more accurate estimates. Through the attempt, though, we were able to identify gaps and offer recommendations on what is needed to move forward:
National leadership that clarifies mandates, roles, and responsibilities for various actors and supports transparency and consistency,
Training of key staff across sectors to ensure they understand, internalize, and incorporate the principles of gender equality and climate change,
Strong budget reporting methodologies that include data disaggregated by cross-cutting priorities, such as climate and gender, and by programs of work,
Deep multistakeholder engagement in planning, policy-making and oversight processes and
Adequate financial resources for these and other recommended activities.
While not arriving to the clear answers we hoped for, nonetheless this exploratory exercise can inform current discussions on the need to move beyond a partial and segmented integration of either gender or climate considerations to an integrated response on existing financial needs assessments, allocation and budgeting and expenditures practices. Only through this kind of integrated approach can the twin challenges of gender and climate be properly addressed.
*Dr. Sandra Guzmán, Grupo de Financiamiento Climático para América Latina y el Caribe; Tanjir Hossain, ActionAid Bangladesh; Delaine McCullough, International Budget Partnership; Sejal Patel, International Institute for Environment and Development (IIED); Liane Schalatek, Heinrich Böll Stiftung, Washington, DC; and Paul Steele, IIED.
In the maelstrom of COVID-19, unsustainable debt, climate change and catastrophic biodiversity loss threaten a sustained and sustainable recovery from the impacts of the pandemic. The International Institute for Environment and Development (IIED) has released a new report on a new form of debt swaps that could provide developing countries with an opportunity for a green post-COVID-19 recovery that would also help reduce poverty.
A global pandemic in the midst of a triple crisis
Developing country debt reached over US$8 trillion in 2019. On average developing countries spent over 10 percent of their government revenues on debt repayments in 2018, and for several least developed and middle-income countries the amount rose to 20 percent. Money that is crucial for addressing the climate and biodiversity emergencies that are bearing down on already struggling countries, as well as for providing for improved education, infrastructure, and health.
In “Tackling the triple crisis: using debt swaps to address debt, climate and nature loss post-COVID-19” IIED shows that using large-scale debt swaps as part of post-COVID recovery measures would help address the pressures from crippling debt and the climate and biodiversity crises. COVID-19’s economic fallout means less of the finance needed to address poverty and the impact of climate change and biodiversity loss will be available, pushing millions more women, children, and men into poverty.
By exchanging an existing debt contract for one that writes off debt or reduces the debt’s original value by, for example, having repayments made in the debtor country’s currency or charging lower interest rates, a developing country’s overall external debt could be reduced.
The money saved would be used to invest in poverty-reducing climate resilience programs, climate emissions mitigation, or biodiversity protection initiatives.
To date, debt swaps have been limited to a few small-scale projects in which the money has been managed in trust funds by international NGOs. IIED’s “Tackling the triple crisis” shows that by creditors channeling the money direct to developing country governments’ budgets specifically for financing such action as reforestation or researching or planting climate resilient crops, debt swaps can be used on a large scale.
It also means more money will be available for these issues than under earlier project-based versions and be more cost effective. By having the money channeled through governments’ financial systems, it increases their accountability to their citizens and commitment to the environmental programs.
Large-scale debt swaps for climate and nature will also benefit public and private lenders as debt will be invested productively to increase sustainable economic growth and so reduce the need for further debt write-offs. They will also help creditors to meet their pledges to improve environmental and social standards.
Such debt for climate and nature swaps will also help achieve the key objectives of increased biodiversity and climate finance set by next year’s UN biodiversity conference being held in China and the UN climate summit in the United Kingdom.
The report calls on the international community to work with debtors to establish a technical working group, under guidance of an international body such as the World Bank. The working group’s purpose would be to develop a comprehensive and coordinated climate and nature program swaps initiative over the next three years to address the crisis of debt, climate change and biodiversity loss.
Climate change threatens the natural systems that our lives and economies depend on, so it is simultaneously an environmental, economic, and developmental issue. But it is also an equity issue. If you’re poor, female, or otherwise marginalized, the risk of losing your already limited assets, livelihood, and potentially your life is heightened by climate change. Failure to address this extra vulnerability as we tackle climate change will deepen existing poverty and inequality.
The global community must reduce the emissions that cause global warming (mitigation) and protect vulnerable people, communities, and sectors from extreme weather events; help them recover; and build resilience to unavoidable climatic changes (adaptation). An adequate response will require massive investments of public and private money, with estimates topping hundreds of billions of dollars per year.
It’s clear that climate change will be one of the greatest public finance challenges for the foreseeable future. Governments will play a substantial role in both mitigation and adaptation. Some of this will be through regulations and other policies, but most actions will be through public finance systems, either through revenue policies that indirectly influence investor and individual behavior or direct spending on infrastructure, programs, and services.
Governments don’t make these decisions in a vacuum, and those opposing effective climate change action, particularly on mitigation, are politically very powerful. The coal and oil industries employ lots of people, provide relatively cheap energy, and pump massive amounts of money into political campaigns, all ensuring their influence. Effective civil society engagement in climate-related budgeting is critical to countering this influence and avoiding the fiscal impacts of climate disasters and misguided investments. Civil society organizations (CSOs) and others outside government have an essential role through effectively advocating for and monitoring budget policies that both address climate change impacts and build the resilience of those who are poor and marginalized — and stopping those that don’t.
Given the massive amount of financial resources that will be mobilized to respond, climate change may turn out to be our greatest opportunity to develop sustainable, equitable, and resilient societies. The road leading to this vision, however, will not be a straight one.
Climate finance accountability: the practical and the political
Most efforts to respond to climate change will have winners and losers. Who will win or lose will be determined largely by how actions are designed, financed, and implemented.
A tale of two “carbon taxes”
Last fall hundreds of gilets jaunes (or yellow vests) protesters hit the streets of Paris and other French cities in massive demonstrations against a “carbon tax.” This fuel tax increase was a government effort to use fiscal policy to encourage people and businesses to cut their consumption, reducing France’s emissions. However, the government had failed to recognize and address the negative impact the energy tax hike would have on those already struggling. As the opposition grew, the government was forced to drop the increase.
Carbon taxes have proven effective in reducing emissions, but they are regressive, often forcing poor and low-income people to choose between energy and other essentials. This isn’t a “developed world” phenomenon, fuel tax increases have led to recent widespread protests in such countries as Kenya, Nigeria, and India. Though these increases were not related to climate, the resulting protests provide an important lesson for those planning to use fiscal policy to address climate change.
There’s another approach. At the same time as demonstrations in France, the Canadian government enacted a carbon tax with little opposition. The Citizens Climate Lobby had proposed a “revenue neutral” carbon tax that returns nearly all of the proceeds back to individuals, offsetting the potential negative impact of the tax. Their proposal was reflected in the design of the enacted tax.
The message for government is clear: failing to understand the equity component of climate change —and to engage citizens and civil society in decisions on climate actions — can lead to not only poor choices but also political upheaval.
The nuts-and-bolts of climate finance accountability
Climate-related public finance policy making, execution, and audit takes place within national and subnational climate change and development bodies; line, planning, and finance ministries; legislative sector and public accounts committees; the supreme audit institution; and state, provincial, and/or local government units. All these are potential spaces through which CSOs, directly or through strategic relationships, can influence policy choices, monitor whether public money for climate action is spent according to plans and has the intended impact, and hold the government to account when it falls short.
We’re already starting to see a growing number of promising cases of how civil society, government, and others are engaging in policy processes to strengthen climate finance accountability.
In Bangladesh — where the government generally resists civil society input, particularly on public finance — a broad coalition of environmental think tanks and advocates, social justice groups, and the Citizens Budget Movement was able to get the ear of the government on its response to the proposed 2018-19 climate budget. The government expressed interest in several of their recommendations, including one on a joint government-civil society task force on climate finance accountability.
Following the bright lights: combining the practical and political
These examples demonstrate the potential for and value of effective co-governance in climate finance, bringing in a range of civil society and international actors, including those with technical skills, legitimacy with communities and the government, and the relationships that can facilitate engagement.
Still, this is a new field, and most of the examples are nascent, experimental, and localized. How might this field evolve in ways that support co-governance at scale across countries and at all levels of government?
One recent example demonstrates the kind of decisive, significant breakthroughs that can emerge from a co-governance model. In January 2019 Germany’s Exit Coal Commission approved a proposal to end coal-fired energy production by 2038. As in most countries, coal is politically powerful, provides lots of jobs, and generates relatively cheap energy. Shutting it down will not be easy or painless. Thus the proposal includes €40 billion to compensate affected workers, companies, regions, and consumers. While the civil society environmental groups on the commission would have liked a more aggressive timeline for the phase out, all but one approved the package. This was very strategic. The proposal’s compensation package is seen as essential to counteracting the growing popularity in coal-producing states of a populist party planning to run in upcoming regional elections on a platform opposing climate change action. When political realities trump (no pun intended) ideal climate action, it may be more expedient for CSOs to take the incremental step in the right direction rather than drawing a line in the stand and risking a more hostile political environment for continued progress.
The next task for civil society will be to monitor the disbursement of approved compensation to ensure that it reaches those most impacted.
The bigger fiscal picture
While addressing climate change will require significant public funds, it would be a mistake to assume that these would be “new” funds on top of current budgets for public goods and services. The harsh reality is that climate-driven increases in costs, e.g., a jump in cases of malaria, will likely be addressed through spending cuts for other needs. Governments could increase revenues, but they face political and economic limits to doing so. Also, some revenue policies that a government might employ in its climate response, like carbon taxes, can reduce the revenue base over time, putting even greater pressure on budgets and the need for difficult trade-offs. We can address climate change without increasing poverty and inequality, but we will need to work on multiple fronts concurrently (as flagged in this blog series.) We need to consider how to raise greater domestic resources in developing countries without increasing the burden on poor communities, how to change the prevailing public finance frame to place more emphasis on equity and inclusion and how to promote and support deeper and broader civil society engagement in decision making and oversight to counter the powerful corporate voices for the status quo. Climate finance is clearly a game changer, but can we change the nature of our game in response? Can we leverage climate finance to make serious inroads into poverty and inequality?
Climate change is arguably the world’s greatest development challenge—and it will also be one of the most significant public finance challenges countries will face for decades to come.
The estimated cost of moving to a low-carbon, climate-resilient world is upwards of hundreds of billions of dollars a year. While governments will shoulder a share of these costs, they will also need to effectively leverage private sector capital to cover much of the bill. The significant role of private sector finance in the response to climate change includes investing directly in low-carbon markets like renewable energy, developing climate-relevant projects in countries, and providing debt finance for governments to pursue low-emission, sustainable development.
Now, a recent study from the UN Environmental Program (UNEP) warns that the poor countries that are most vulnerable to climate change will pay more to borrow because of that vulnerability.
Climate change is hitting developing countries hardest because of both their geographical location and their limited capacity to respond. Avoiding potentially devastating loss of lives and blows to critical economic sectors requires urgent action, but these countries already struggle to meet their people’s needs and grow their economies.
It’s a double whammy—first, climate-vulnerable countries must spend more to address the impacts of global warming, and second it raises the cost of doing so. Climate-vulnerable countries will respond by using a combination of foreign assistance and domestic revenues, such as taxes. This mix often won’t cover the bill, so those governments that have access to international credit markets will likely seek to borrow the money needed to fill the gap.
But climate change-induced economic and political instability can increase the risk of default, especially in developing countries, so investors will demand higher interest rates to offset this risk. The UNEP study, conducted by the Imperial College Business School and SOAS University of London, finds that climate-vulnerable countries will pay an extra $1 of interest for every $10 because of this vulnerability.
Over the past decade, this additional interest amounted to an estimated $40 billion—money that could have been spent to build climate resilience, grow key economic sectors, educate children, or provide critical services to move people out of poverty. Defusing this threat to the development of climate-vulnerable countries will require action at both the country and international levels.
The UNEP study argued that the best way for climate-vulnerable countries to minimize higher borrowing costs is to reduce their climate change risk. To do so, governments will have to invest public resources effectively into actions to mitigate climate change and adapt to its impacts. An additional benefit from reducing climate risk is that it will make countries more attractive to other forms of private finance.
Evidence from around the world shows that governments are more likely to make and effectively implement better policy choices, including those related to climate action, when informed and engaged citizens and civil society organizations (CSOs) influence budget decisions and monitor spending on the ground. To foster such accountability, governments must provide full information about how they raise and spend public money and open their budget processes to the public—and citizens and their organizations need to get involved.
Take Nepal, for example. Climate change threatens this country’s main economic sector and its food security. Last year, Freedom Forum, a local CSO, used publicly available information to track funds for an irrigation scheme intended to help farmers adapt to drier conditions. The good news—they found that the funds were reaching farmers and increasing production. But they also identified problems in how funds were distributed, which the government needs to resolve to improve and effectively expand the program. At a minimum, the tracking generated useful information that could ultimately lead to a more climate-resilient agricultural sector. It is now up to the government to act on the information, and for Freedom Forum and others to use it to keep the pressure on.
Opening budgets also can have an independent effect on government borrowing costs. In a 2012 analysis the International Monetary Fund found that fiscal transparency can lead to improved credibility and performance.
The International Budget Partnership’s (IBP) Open Budget Survey 2017, which covered 115 countries in its global assessment of budget transparency, participation and oversight, unfortunately finds that most of the climate-vulnerable countries in the UNEP study have weak budget systems—some amongst the weakest in the world.
But taking on both systemic governance reform and effective climate action—and footing the bill—are huge asks for these countries, especially as they have little to do with causing climate change. Developed countries, whose carbon-fueled growth and consumption drives global warming, have recognized their responsibility to provide financial and other support to developing countries for climate action. They have made a collective commitment to provide $100 billion a year in climate finance by 2020, which is enshrined in the Paris Climate Agreement. It is imperative for industrialized countries to fulfill this commitment, to reduce both developing countries’ climate vulnerability and their need to borrow.
Donors and other international actors must also provide capacity-building and other support to governments to improve how they manage public resources for building low-carbon, resilient societies, as well as to domestic CSOs to enable them to play effective accountability roles. For instance, in the Nepal case, in addition to working with the government on improving its budgeting, the UN Development Program supported the Freedom Forum’s budget-tracking initiative. Similarly, IBP has long provided support to governments and its civil society research partners in understanding and improving budget accountability through the Open Budget Survey.
This isn’t just about reducing borrowing costs for poor countries or increasing private sector investment. Effective government action on climate change is essential to creating an equitable and sustainable world. Given that inadequate, poorly designed, or poorly implemented investments could squander these opportunities, everyone needs to take up the challenge.