Environmental Governance and Greening Fiscal Policy: Government Accountability for Environmental Stewardship (Palgrave Studies in Impact Finance) 3030837955, 9783030837952

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PALGRAVE STUDIES IN GREEN FINANCE

Environmental Governance and Greening Fiscal Policy Government Accountability for Environmental Stewardship Murray Petrie

Palgrave Studies in Impact Finance

Palgrave Studies in Green Finance

Series Editors Helen Chiappini, Dipartimento di Economia Aziendale, D’Annunzio University of Chieti–Pescar, Pescara, Pescara, Italy Mario La Torre, Facolta di Economia, Universita La Sapienza, Roma, Roma, Italy

This subseries explores studies on green finance, specifically with regards to green investments, business models, roles of different actors in the green finance market, new regulatory and disclosure trends, green assets risks and performance alongside emerging areas including climate risk and green fintech with both theoretical and empirical approaches. Palgrave Studies in Green Finance represents the first international series dedicated to such a topic, meeting the growing interest of scholars, policy makers, regulators, and students in green finance.

More information about this subseries at https://link.springer.com/bookseries/16502

Murray Petrie

Environmental Governance and Greening Fiscal Policy Government Accountability for Environmental Stewardship

Murray Petrie Victoria University of Wellington Wellington, New Zealand

ISSN 2662-5105 ISSN 2662-5113 (electronic) Palgrave Studies in Impact Finance ISSN 2662-7388 ISSN 2662-7396 (electronic) Palgrave Studies in Green Finance ISBN 978-3-030-83795-2 ISBN 978-3-030-83796-9 (eBook) https://doi.org/10.1007/978-3-030-83796-9 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover illustration: crossbrain66 This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

To Juanita, Marie, and Danielle

Acknowledgments

This book grew from my work over the last two decades on holding governments to account for their management of the public finances, my mounting alarm over the pace of environmental degradation, and a growing awareness of the critically important connections between the two. I have received an abundance of support. I want to single out and thank Jonathan Boston, who has provided exceptional inputs at all stages, from initial work on developing the accountability framework through to detailed chapter by chapter review of the book. His contribution has been invaluable and is hugely appreciated. I would also like to thank Andrew Blazey for his support and engagement in ongoing discussion and debate over the last few years. Numerous others have been generous with their time and wisdom and provided helpful comments on chapter drafts. They are named in footnotes at the start of each chapter. Particular thanks are due to Richard Allen, Ferdinand Balfoort, Stuart Brodie, Jim Brumby, Nickolai Denisov, Shelley Fischer, Fabien Gonguet, Juan Pablo Guerrero, Tim Irwin, Jason Jabbour, Jason Lakin, Delaine McCullough, Lorena Rivero del Paso, Michelle Pawson, Vivek Ramkumar, Paolo de Renzio, Eivind Tandberg, and Claude Wendling. Helpful inputs were provided by colleagues at the Institute of Governance and Policy Studies at a seminar in 2017 and by attendees at a

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ACKNOWLEDGMENTS

School of Government seminar in 2018, both at Victoria University of Wellington. Many others have contributed to my thinking on public financial management and government accountability over the years, including Bill Allan, Ian Ball, Ronnie Downes, Lesley Fisher, Manal Fouad, Adrian Fozzard, Jason Harris, Richard Hemming, Richard Hughes, Kai Kaiser, Sanjeev Khagram, Jay-Hyung Kim, Warren Krafchik, Alex Matheson, Sailendra Pattanayak, Nicola Smithers, Suzanne Snively, Helen Sutch, Ken Warren, and David Webber. I have been inspired by interactions with dozens of public officials and civil society activists in countries around the world. Earlier versions of some material in this book were published in an article in Policy Quarterly in 2018, on the website of the OECD Paris Collaborative on Green Budgeting in 2019, in blogs posted by the Global Initiative for Fiscal Transparency and by the International Monetary Fund’s Public Financial Management Blog in 2019, and in a podcast hosted by the International Budget Partnership in the same year. As always, the remaining errors and impracticalities are mine. Recognition of the key role that must be played by national governments in environmental stewardship evolved from my PhD thesis on state sovereignty and jurisdiction in a globalizing world, and my thanks go again to my supervisor, Gary Hawke. I would also like to thank Tula Weis at Palgrave Macmillan for initiating the project and shepherding the book to completion, and Shreenidhi Natarajan for her excellent work on production. Finally, enormous thanks to my wife and daughters, Juanita, Marie, and Danielle, for their many substantive contributions, critical review, and unwavering support, encouragement, and patience. This book is dedicated to them.

Praise for Environmental Governance and Greening Fiscal Policy

“Compared to economic and social goals, governments have typically not emphasized the environment and biodiversity in their policy pronouncements. Petrie explains why this is the case and what can be done about it. His sharp analytical focus provides essential concrete advice for governments on how to lift the prominence of green issues through environmental reporting and target setting, greening fiscal policies, and mainstreaming the environment in the annual budget cycle. It’s an important call to action.” —Edward Olowo-Okere, Global Director, Governance, The World Bank “Petrie provides a clear articulation of the power of budgeting and how it can be applied to progress climate and environmental objectives.” —Jon Blondal, Head of Public Management and Budgeting, Organization for Economic Cooperation and Development, Paris “Governments’ inaction has put us and future generations in peril. In his wide-ranging and thoughtful book, Petrie demonstrates how this tide can be turned with new values frameworks and effective environmental governance. The time to take action is now. Start by reading this book.” —Jane Davidson, Author of #futuregen: Lessons from a Small Country “Climate change, lost biodiversity, and other environmental problems pose increasingly compelling challenges to the planet and thus to human ix

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well—being. We need innovative, comprehensive solutions that make environmental sustainability a priority and integrate it into the core of governmental responsibilities and capacities. Murray Petrie has set out an agenda for doing just that—for using budgetary, economic, and social policy as a path to living within the limits of the planet. He sets out a broad, creative agenda that brings environmental issues into the core of what it means to govern. I strongly recommend this book for anyone interested in future generations.” —Daniel J. Fiorino, Director, Center for Environmental Policy, School of Public Affairs, American University “In view of the growing alarm about environmental degradation and climate change and the blunt failure of governments to respond adequately, Petrie has a response as forceful, systematic and compelling, as it is simple and clear: it’s the budget! With exceptional expertise in fiscal transparency and how a multistakeholder approach can be used to address complex problems that need sustained commitments, Petrie offers here a series of innovative and pathbreaking solutions that involve use of the fiscal system to improve environmental outcomes. And unless governments bring the tools of fiscal policy and public spending to bear on this issue, time will run out and catastrophe will be inevitable.” —Juan Pablo Guerrero, Network Director, Global Initiative for Fiscal Transparency “This thought-provoking book meets the needs of governments, the media and citizens for better analysis and information on both the environmental impacts of fiscal policy and the fiscal impacts of environmental degradation. Its comprehensive framework will help policymakers present more visibly environmental outcome measures, risks, goals, and targets in government strategy and fiscal policy alongside the prevailing emphasis on economic goals, targets, and data.” —Richard Allen, Public Finance Advisor and Consultant, Co-Editor of The International Handbook of Public Financial Management “Behind governments’ many fine words and promises lies a massive failure to provide credible and effective institutions to address climate change and other deepening environmental emergencies. In this much-needed book, informed and informative, Petrie sets out, clearly and compellingly,

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institutional structures to support the development of the tax and other environmental policies needed to turn glib promises into reality.” —Michael Keen, Former Deputy Director, Fiscal Affairs Department, International Monetary Fund Founding Editor, International Tax and Public Finance “Murray Petrie’s timely and lucid book makes a vital conceptual and practical contribution to the urgent task of improving national-level environmental governance. It provides a robust and comprehensive guide for bringing environmental considerations into the heart of economic policy making, not least through the annual budget process. A must read for all economic and environmental policy advisers.” —Jonathan Boston, Author of ‘Governing for the Future: Designing Democratic Institutions for a Better Tomorrow.’ Professor, Victoria University of Wellington, New Zealand “How government taxation and spending impacts on the environment is becoming front and center to the future livelihoods of the world’s poorest. This is the clearest guide for civil society activists to transparency and accountability of governments for environmental stewardship.” —Vivek Ramkumar, Senior Director of Policy, International Budget Partnership

Contents

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Introduction: The Twin Environmental Crises and Wishful Thinking 1 Setting the Scene 2 Theory of Change 3 The Roles of Government, Markets, and Civil Society 4 Overview of the Book Appendix 1: Simplified High-Level Theory of Change References Reporting on the State of the Environment 1 Introduction 2 The Framework for National State of the Environment Reporting 3 Country Practices in Environmental Reporting 4 Weaknesses and Proposals for Reform References Mainstreaming Environmental Stewardship in Government Strategy and Policy 1 Incorporating Environmental Targets in Overall Government Strategy: Developing a Dashboard of Key Environmental, Economic, and Social Indicators

1 2 7 9 15 16 18 21 22 24 27 29 39 43

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Comparative Policy Governance: The Importance of Requirements to Set Policy Goals and Targets for Environmental Outcomes 3 Integrating Environmental Objectives and Targets in Fiscal Strategy and the Annual Budget References 4

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The Evolution of Green Budgeting 1 Introduction 2 Definition of Terms 3 Fiscal Policies and the Environment: Two-Way Interactions 4 The Evolution of Climate Budgeting and Green Budgeting References Environmental Governance and the Greening of Fiscal Policy 1 Introduction 2 A Comprehensive Framework for Environmental Governance and the Greening of Fiscal Policy 3 Implementing the Greening of Fiscal Policy References The Role of Civil Society in Promoting Government Accountability for Environmental Stewardship 1 Introduction 2 Role of Civil Society in Promoting Government Accountability 3 International Norms on Access to Information and Public Participation 4 Potential New Civil Society Environmental Accountability Instruments References

48 55 58 61 62 63 67 76 102 109 110 111 118 138 143 144 145 147 149 162

CONTENTS

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The Way Forward 1 New Forms of Governance 2 Key Arguments 3 Ten Key Takeaways References

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167 167 171 173 176

Glossary

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Index

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About the Author

Murray Petrie is an independent consultant, civil society activist, and researcher. For the last 25 years, he has been an active member of the International Monetary Fund’s Panel of Fiscal Experts, focusing on fiscal transparency, fiscal risk management, and recently on the interface between fiscal management and the environment. He has also consulted for the World Bank on public investment management and is a member of the OECD Expert Group on Green Budgeting. He has taken part in dozens of technical cooperation missions to developing, middle income, and advanced countries. Prior to consulting Petrie worked for the New Zealand Treasury for a decade on financial management and policy in the social sector, during which time he served as the New Zealand representative on the Executive Board of the International Monetary Fund. Petrie advised the International Budget Partnership on the design of the Open Budget Survey (OBS) and conducted the first four OBS Surveys of New Zealand. For a number of years he was Lead Technical Advisor for the Global Initiative for Fiscal Transparency (GIFT), a multistakeholder network of governments, civil society organizations, and international financial institutions. Petrie helped establish the New Zealand Chapter of Transparency International (TINZ) and between 1999 and 2013 worked in a variety of executive and board roles. He was made a Life Member of TINZ in 2019.

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Petrie has an M.A. (Hons.) in Economics, a Master of Public Administration from Harvard, and a Ph.D. in Public Policy from Victoria University of Wellington, where he is a Senior Research Associate at the Institute of Governance and Policy Studies. He has published widely on public financial management, governance, transparency and accountability.

Acronyms

C CBA CBT CPLC CSO DPSIR EC EEA EGI EIA EPA EPI EQO ETS EU G20 GCF GEO GFC GHG GIFT HLEG IBP IEA IEA IMF

Celsius Cost–Benefit Analysis Climate Budget Tagging Carbon Pricing Leadership Coalition Civil Society Organisation Drivers, Pressures, State, Impact, Response European Commission European Environment Agency Environmental Governance Index Environmental Impact Assessment Environmental Protection Authority (or Agency) Environmental Performance Index Environmental Quality Objective Emissions Trading Scheme European Union Group of 20 (largest economies) Green Climate Fund Global Environment Outlook Global Financial Crisis Greenhouse Gases Global Initiative for Fiscal Transparency High-Level Expert Group International Budget Partnership Integrated Environmental Assessment International Energy Agency International Monetary Fund xix

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IPBES IPCC IUCN M&E NDC NGO OBS OECD PEFA PER PFM PIMA PIMA CC PPP R&D SAI SDGs SEEA SOER TI UN UNDP UNDRR UNECE UNFCCC WEF WRI

Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services Intergovernmental Panel on Climate Change International Union for Conservation of Nature Monitoring and Evaluation Nationally Determined Contribution Non-Government Organisation Open Budget Survey Organisation for Economic Cooperation and Development Public Expenditure and Financial Accountability Public Expenditure Review Public Financial Management Public Investment Management Assessment Public Investment Management Assessment Climate Change Public Private Partnership Research and Development Supreme Audit Institution Sustainable Development Goals UN System of Environmental-Economic Accounting State of Environment Report Transparency International United Nations United Nations Development Program United Nations Office for Disaster Risk Reduction United Nations Economic Commission for Europe United Nations Framework Convention on Climate Change World Economic Forum World Resources Institute

List of Figures

Chapter 1 Fig. 1 Fig. 2

Key actors in promoting environmental sustainability High level theory of change

10 17

Chapter 2 Fig. 1

The DPSIR framework for reporting on environmental issues

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Chapter 4 Fig. 1 Fig. 2 Fig. 3

Climate budgeting, green budgeting, and green fiscal policy Fiscal policies and the environment: two-way interactions Climate relevance of COVID-19 fiscal response measures of G20 countries

65 72 100

Chapter 5 Fig. 1 Fig. 2

Comprehensive Framework for Environmental Governance and Green Fiscal Policy Matrix of mitigation and adaptation impacts of public infrastructure

113 129

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List of Tables

Chapter 3 Table 1

Comparative policy governance in fiscal, monetary, and environmental policy

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Chapter 4 Table 1

Selected country examples of green budgeting practices by stage of fiscal policy cycle

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List of Boxes

Chapter 2 Box 1

Summary of Proposals to Strengthen National State of Environment Reporting

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Chapter 3 Box 1 Box 2

Stiglitz-Sen-Fitoussi Commission 2009: Key messages Environmental target setting and progress reporting: leading country practices

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Chapter 4 Box 1 Box Box Box Box Box

2 3 4 5 6

Climate budgeting, green budgeting, and green fiscal policy: some definitions Biodiversity and ecosystem services The EU taxonomy of sustainable environmental outcomes The OECD’s Framework for Green Budgeting Country examples of climate budgeting Green budgeting in France

63 67 68 83 87 92

Chapter 5 Box 1 Box 2

Principles of green fiscal policy Cross-government coordination mechanisms to support the greening of fiscal policy

119 124

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LIST OF BOXES

Chapter 6 Box 1 Box 2

A Green Guide to the Budget: Indicative Outline Environmental Governance Index: possible variables for inclusion

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Chapter 7 Box 1

Ten Key Takeaways: how to make governments more accountable for environmental stewardship

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CHAPTER 1

Introduction: The Twin Environmental Crises and Wishful Thinking

Abstract Current approaches to environmental stewardship are demonstrably failing given existential threats of climate change and biodiversity loss. This book addresses the urgent question: how can governments be made more accountable for their environmental stewardship? It proposes three inter-related areas for action: (i) national State of the Environment reporting; (ii) expanded environmental target setting, integration in a dashboard of key national indicators, and reporting; and (iii) using a government’s most important policy statement and its most powerful strategy and policy integration instrument—fiscal policy and the annual budget cycle—to mainstream environmental goals, progressively eliminate harmful tax and expenditures policies, put a price on pollution, promote sustainable development, and provide environmental public goods. The Introduction sets out a high-level theory of change, discusses the roles of government, markets, and civil society, and presents an overview of the book. Keywords Environmental stewardship · Environmental reporting · Environmental targets · Mainstreaming · Externalities

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 M. Petrie, Environmental Governance and Greening Fiscal Policy, Palgrave Studies in Impact Finance, https://doi.org/10.1007/978-3-030-83796-9_1

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Setting the Scene

It is widely acknowledged that current approaches to environmental stewardship are demonstrably failing. We are facing not one but two existential threats to the future of life on our planet: climate change and loss of biodiversity (Attenborough, 2020; Dasgupta, 2021; McKinsey and World Economic Forum, 2021; OECD, 2020; United Nations Environment Program 2019; United Nations IPBES, 2019). While myopically protecting the over-consumption of natural capital and imposing increasingly negative effects on current generations, especially the poor, we are leaving a legacy of staggering cost and risk for the generations that will follow. The United Nations Environment Program (UNEP) 2018 Global Environment Outlook (GEO 6) provides evidence that without a fundamental redirection most environmental domains will continue to degrade, threatening the economic and social progress achieved to date and the fate of multiple species (UNEP, 2019). Since 1970 populations of mammals, birds, reptiles, amphibians, and fish have declined on average by 68% (World Wildlife Fund, 2020), and the world has already entered its sixth mass extinction event in the past 500 million years, with one million plant and animal species now threatened with extinction (Diaz et al., 2019). Biodiversity and ecosystems are being depleted and degraded faster than at any other point in human history. Environmental tipping points and climate change feedback loops are already occurring that were previously barely even contemplated, for example arctic permafrost fires and fires in Amazon wetlands.1 Over half the world’s global domestic product is moderately or highly dependent on biodiversity (OECD, 2020, p. 2). While the focus of public debate and policy making globally has predominantly been on climate change it is increasingly recognized that ‘biodiversity loss and climate change are challenges of a similar magnitude and urgency and are fundamentally interlinked’ (OECD, 2020, p. 2). Globally, physical and human capital has been accumulated at the expense of natural capital—while global GDP per capita increased by more than 60% between 1992 and 2014, natural capital stocks per capita fell by nearly 40% (OECD, 2021, p. 6). Even in the increasingly unlikely event that the actions required to limit global warming to 2 degrees Celsius are taken, without other fundamental 1 https://phys.org/news/2020-09-arctic.html; age-brazil-amazon-pantanal-regions.html.

https://phys.org/news/2020-11-rav

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changes in the economy and society, the diverse drivers of environmental degradation will continue and constitute an existential threat. Many factors contribute to global environmental degradation, but one that has received relatively little attention is the lack of government transparency and accountability for environmental stewardship compared to other policy domains, and the systematically weak integration of environmental stewardship into overall government strategy and target setting. In 1987 the Brundtland Commission called for the major central economic agencies of governments to be made directly responsible for ensuring that their policies and budgets support ecologically sustainable development (UN, 1987, chapter 12, paragraph 26). There has, however, been precious little progress in that direction since. Drawing from the Brundtland 1987 definition of sustainable development, environmental stewardship is defined here broadly as the responsible use and protection of the natural environment through conservation and sustainable practices that meet the needs of the present without compromising the ability of future generations to meet their own needs (UN, 1987). This book sets out to answer the urgent question: how can governments be held more effectively to account for their environmental stewardship? It outlines three inter-related areas where action is urgently required to avert further rapid environmental degradation: 1. National ‘State of the Environment’ Reporting to regularly measure the state of the natural environment and highlight risks to environmental sustainability. 2. Environmental target setting and regular progress reporting, and the integration of these in government strategic planning and in a dashboard of key national indicators of social, environmental, and economic progress. 3. Using a government’s most important policy statement and its most powerful strategy and policy integration instrument—fiscal policy and the annual budget cycle—to mainstream environmental goals, to progressively eliminate environmentally harmful tax and expenditure policies, and to promote environmentally sustainable development.

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International initiatives such as the Paris Agreement on Climate Change, the Aichi Bio-diversity Targets, and the UN Sustainable Development Goals (SDGs) are important to galvanize coordinated action by disparate nations states—critically so for a pure global public good such as reduced Greenhouse Gas (GHG) emissions.2 However, in our current international system of sovereign nation states, the actions required to implement international agreements or to address trans-border environmental problems can only be taken by legislatures enacting and executives being held accountable for implementing domestic laws. That is, only nation states and the subnational governments within them have the recognized jurisdiction (‘sovereignty’) to take the actions within their borders necessary to reduce and reverse environmental degradation (with the partial exception of the European Union). Current arrangements for environmental stewardship are weak when judged against well-established core elements of management and governance in the public and private sectors: • Reliable measurement of the outcomes that matter to establish a baseline. • Outlooks and forecasts of outcomes under current policies. • The setting of goals and measurable targets for outputs and outcomes. • Regular independently verified reporting of progress to entities that exercise oversight. • Analysis of the effectiveness of strategies, policies, and practices in achieving progress toward goals. • Changes to policies and practices as necessary and holding managers to account for performance. In general, few of these elements feature in national environmental stewardship.

2 A pure global public good is both non-rivalrous (consumption of this good by anyone does not reduce the quantity available to others) and non-excludable (it is not possible to prevent anyone from consuming that good), and the good is available on a global basis. Reductions in GHGs are a pure global public good in that a reduction in emissions benefits everyone and no-one can be excluded from the benefits.

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In the environmental domain, a recognized instrument for outcomes measurement is the national State of the Environment Report on physical environmental indicators.3 As elaborated in Chapter 2, national State of the Environment Reporting is not in place in many countries, while in countries that do publish regular reports there are significant deficiencies as well as opportunities to strengthen the contribution they make to environmental transparency and accountability for stewardship. The second area requiring urgent action is environmental target setting. Climate change aside, most governments do no more than set longer-term unquantified ‘feel good’ goals for the environment—such as ‘reversing loss of biodiversity,’ ‘or cleaning up waterways’—without the discipline that comes from being required to report regularly to the legislature on the intended path to goals with specific targets, interim milestones, progress, and proposed actions. ‘A goal without a plan is just a wish’—Antoine de Saint-Exupéry. Or a political compromise or a deceit.

The weak governance of environmental stewardship stands in stark contrast to the governance of fiscal and monetary policy. For instance, over the last thirty years, governments have increasingly been managing the public finances based on commitments in domestic law to publish goals, targets, and milestones and to report regularly on progress. The same is true for the way in which many countries now task independent central banks with the maintenance of price stability through statutory targets and regular reporting on monetary policy implementation and outcomes (see for instance Carney, 2021, pp. 333–334). Of course, environmental outcomes result from the complex interplay of natural processes, human activities, and central, regional, and local government actions. They cannot be managed in the same way that a government can manage its finances—although the size and frequency of exogenous shocks to the public finances mean that this difference in ‘manageability’ should not be overestimated, as illustrated by the dramatic 3 Note that basing environmental reporting on physical, non-monetary indicators is

fully consistent with the conclusions reached by the Commission on the Measurement of Economic Performance and Social Progress which recommended that environmental sustainability should be measured by using quantitative (non-monetary) indicators showing changes in environmental stocks that are important for future human well-being. These issues are discussed further in Chapter 3.

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fiscal impacts of the 2008–2009 Global Financial Crisis (GFC) and the global COVID-19 pandemic. The implementationof monetary policy also involves the management of inflation in the context of a complex economic system. There is nevertheless an urgent need to apply to national environmental stewardship a broadly comparable underlying framework of recognized outcomes measurement and reporting, transparency of goals and targets, and ex-post accountability. Prompted by international climate change treaties, this approach is increasingly being applied by governments to GHG emissions following the UK’s pioneering Climate Change Act 2008, with its statutory requirements for five yearly carbon budgets, an independent watchdog advising on actions required to meet the targets, and comprehensive reporting (UK, 2008). This general approach is required across all key environmental domains—similar to the approach in Sweden to setting environmental quality objectives as described in Chapter 3—drawing on baseline data in national State of the Environment Reports to set targets for a small set of the most critical environmental indicators (Chapter 2). Environmental goals and targets must then be integrated in overall government strategy and the medium-term fiscal strategy process that drives the annual budget. While government regulation is critically important to environmental outcomes, there is no regulatory policy cycle or an instrument equivalent to the annual budget as a focus for coordinated cross-government policy action and prioritization. In countries with multi-year national planning frameworks such as National Development Plans, the public investment projects that are typically a key component of such plans must be implemented in large part through annual budgets. Effective environmental regulation also requires budget allocations to fund regulatory agencies and for the production of environmental statistics and research. Further, fiscal and regulatory interventions can be close substitutes and increasingly need to be assessed alongside each other—for example the use of carbon taxes or cap-and-trade schemes and the need to design smart packages of fiscal and regulatory policies (discussed in Chapters 4 and 5). The annual budget is therefore typically a government’s single most important expression of its actual strategies and priorities, and its most

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powerful cross-sector policy integration tool.4 If environmental goals and targets are to mean anything, they need to be more effectively mainstreamed i.e., integrated in the annual budget cycle. Yet fiscal strategy setting around the world remains dominated by assessment of macroeconomic and fiscal statistics and associated risks. Information on environmental outcomes, goals, targets, and risks, and interactions between the environment and the economy need to be integrated in government strategy and decisions on the medium-term fiscal strategy. The third priority for urgent action is the progressive greening of fiscal policy and budgeting—the use of fiscal policy and the budget process to end environmentally damaging subsidies and to improve environmental outcomes. Fiscal policies—taxation and government spending—have major environmental impacts. Some of the impacts are positive—for example environmental protection expenditures, funding of environmental regulation, monitoring and reporting, and environmental Research and Development (R&D). Other environmental impacts are negative, such as those from tax and expenditure subsidies for fossil fuels or for subsidized water inwater-stressed contexts; and from public infrastructure projects such as new coal-fired power stations or motorways, that lock in environmentally damaging technologies and behaviors. In addition, the tax system is an important tool to ‘correct’ the prices of activities that generate unpriced social costs (externalities), such as the social costs of GHG emissions or of pollution.

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Theory of Change

Figure 2 in Appendix 1 illustrates the simplified high-level theory of change underlying the analysis and proposals put forward in this book. It is in the form of an outcome hierarchy (also referred to as an intervention logic or logical framework). It identifies the key initiatives and policy shifts, the broad intended chain of outcomes, and some of the main assumptions. It is not intended to be a complete and detailed intervention logic of the type developed for a specific program, but rather a 4 ‘The budget is the single most important policy document of governments, where policy objectives are reconciled and implemented in concrete terms’ OECD Best Practices for Budget Transparency, 2002.

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high-level summary of the broad theory of change to make explicit the assumed causal logic. As illustrated by Fig. 2, strengthening incentives on governments to be better stewards of the natural environment involves a range of channels of influence that correspond to leverage points in systems of political economy (Meadows, 1999). They include high leverage points, such as changing the goals of government policy, integrating environmental stewardship into the annual budget cycle, and linking environmental reporting and accountability as feasible to the electoral cycle, e.g., setting the timing of national State of the Environment reports in relation to the timing of national elections (Chapter 2). These high leverage points interact with and are supported by a range of lower-level leverage points in a mutually supporting framework that has the potential to change the trajectory of environmental stewardship decisively toward more sustainable development. Pressures and influences on governments, and opportunities for them to pursue more environmentally sustainable development include: • The increasing existence of win–win solutions rather than tradeoffs between the environment and economic and social goals. For example, spending on renewables can generate more jobs and economic stimulus than spending on ‘dirty’ activities; building more resilient and greener infrastructure now is much cheaper than repairing or retrofitting it later; solar electricity is now ‘some of the cheapest electricity in history….’ (International Energy Agency, 2020). • The existence of co-benefits of environmental policies, e.g., replacing a coal-fired power station with solar energy will reduce deaths from air pollution in the local community as well as cut GHG emissions. • The important role of public R&D in the development of new technologies that catalyze private sector investment, e.g., Germany’s public subsidies for renewable electricity generation helped jumpstart the global revolution in renewable energy. • The increasing cost and risk of inaction on reversing environmental degradation. Even in 2006 the Stern Review concluded that the benefits of strong, early action on climate change considerably outweighed the costs (Stern, 2006). • Increased awareness of fiscal risks for governments from environmental degradation, e.g., the increased incidence and severity of

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natural disasters; and of pandemics related to loss of biodiversity (OECD, 2020, p. 2). • The increasing recognition of the inequities of climate change and environmental degradation, both in terms of who causes it and who is most impacted by it (Gupta et al., 2019). • Greater transparency of environmental risks and of their potential economic and financial impacts strengthens incentives to mitigate environmental risks through changes in risk premia on government bonds. • Opportunities to ‘frame’5 environmental initiatives in ways that can help build majority political coalitions for difficult policy changes, e.g., presenting win–win options; highlighting the increasing costs of inaction; earmarking revenues from new or increased environmental taxes to specific spending programs, including compensation for those most negatively affected.

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The Roles of Government, Markets, and Civil Society

Three key actors or sectors determine a society’s development path: government, markets, and civil society. Each has a distinctive role to play. Governments determine the broad rules of the game: they tax, provide public goods and services, regulate, and redistribute income and opportunities. Privately owned companies operating in markets allocate resources to produce goods and services demanded by consumers and investors, generating employment, wealth, and consumer surplus. Civil society organizations and individual citizens produce non-market outputs and directly and indirectly influence the decisions of governments and businesses by voting, through their consumption and investment decisions, and by investigating, monitoring, and reporting government and business activities and engaging in active public questioning, media debate, and advocacy. Figure 1 illustrates some of the roles played by these three key actors in promoting environmental sustainability. The influence of each actor 5 The pioneering work of Kahneman and Tversky has shown that individuals’ choices vary systematically in response to how a decision is ‘framed’ or presented to them. See Kahneman, 2011. See also Partnership for Market Readiness and Carbon Pricing Leadership Coalition, 2018.

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is highest nearest the corner of the triangle representing that actor and diminishes with distance along the axis from the corner. The focus of Fig. 1, reflecting the focus of this book, is on the role of government. This is because of the critical roles that only government can play in environmental stewardship: taxing environmental externalities; taxing to finance the production of environmental public goods; and implementing and enforcing environmental regulations.

Fig. 1 Key actors in promoting environmental sustainability6

6 The design of Fig. 2 draws from charts in Bowles and Carlin, 2021, pp. 46–49.

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Within the government sector, the focus in turn is on central government, again because of the crucial roles played by central governments in environmental management: decision-making on instruments to tax or price externalities such as GHGs across the national territory; provision of many environmental public goods; authority to enter international environmental agreements and commitments; ownership of large public corporations with significant environmental impacts; and varying degrees of environmental regulatory authority. In unitary states, the central government may also have a high degree of authority over environmental policies and instruments over the whole territory. In other states including in federal systems, on the other hand, subnational governments may have significant authority, particularly with respect to environmental regulation and monitoring. The relative role of central and subnational governments in promoting environmental sustainability is a large and important topic that warrants in-depth analysis but, apart from a short discussion in Chapter 4 on instruments used by central governments to influence environmental management by subnational governments, is outside the scope of this book. Taking the government-markets channel first, the positioning along the horizontal axis illustrates the extent to which government is involved in the decision-making autonomy of business and the operation of markets. The most intrusive is state ownership of commercial entities i.e., public non-financial and financial corporations. The next step is government regulation of private companies, e.g., to mandate the use of specific production technologies.7 The least intrusive intervention is setting a key price through, for example, imposing a carbon tax and leaving businesses to determine their production technologies and levels of output. Tradeable permit schemes, such as emissions trading schemes are a hybrid of regulatory and tax approaches, in which the government sets a volume of allowable emissions, and the market determines the carbon price through trading (discussed in Chapters 4 and 5). In the opposite direction, markets can influence government environmental policies through the terms on which they invest in government bonds and the private sector can influence government policies through engagement and consultation.

7 Other regulatory mechanisms to promote environmental sustainability include corporate reporting, accounting and auditing standards, regulation of insurance, and legal settings relating to corporate liability for environmental damage.

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Similarly, the positioning along the government-civil society axis reflects the degree of influence individuals and civil society have over governments. Collectively, individuals have the greatest ability to hold a government to account for its environmental stewardship and to influence the policies of the next government through voting in elections. Less influential mechanisms include investigative journalism and media reporting, social advocacy campaigns, engaging with government agencies and legislatures in deliberation and debate on policy design and/or implementation, and taking part in public consultation exercises. The positioning of environmental public goods in Fig. 1 reflects their important role for all actors. Environmental public goods include environmental monitoring and reporting; environmental protection expenditures; environmental regulation; government environmental R&D; and government support for private sector environmental R&D. 3.1

Role of the Private Sector

The private sector is the critical transmission mechanism between government fiscal and regulatory policies and environmental outcomes. Given the magnitude of the economic transformations required if countries are to meet even their current international climate change commitments, and if the catastrophic loss of biodiversity is to be halted and reversed, private sector behavior must change dramatically. There is simply not enough that the public sector can do, in terms of mitigating its own direct environmental footprint, to achieve anything like the required changes in GHG emissions and biodiversity impacts. In most countries, the economic system remains primarily one of private ownership, with financial profitability and return on private capital the key metrics and drivers of business decisions. This means that governments’ fiscal and regulatory policies are the key instruments to achieving global and national environmental goals. For instance, with respect to climate change, the key parameter influencing the environmental impacts of business is the ‘price’ of GHG emissions in the economy. Businesses, consumers, and governments are currently failing to incorporate the global externality of global warming in their decisions. Many corporates are adopting strategies to cut emissions and to invest in nature to offset emissions, and there are calls for more to do so (McKinsey and Company and World Economic Forum, 2021). There are however limits to what can be achieved by these voluntary approaches, including the current lack

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of agreed metrics and standards for carbon accounting and disclosure of environmental impacts (Pucker, 2021), and more fundamentally the competitive disadvantage of those adhering to higher standards compared to their competitors who choose not to and profit by doing so. Only governments have the tools to change the cost of GHG emissions throughout an economy to bring about the transformational changes needed at the required speed. Under current economic arrangements, most private businesses will remain primarily profit driven. Only by impacting on the bottom line of business through steep increases in the price of GHG emissions and/or by directing private production practices through regulation and enforcement can the required scale and pace of cuts in GHG emissions be achieved. It is important to note that while regulation is a critically important tool for environmental stewardship, this book covers regulation only in three respects: (1) the need for environmental monitoring and reporting, and environmental R&D as critical prerequisites both for sound environmental regulation and for green fiscal policies; (2) the need to consider the use of tools that are hybrids of fiscal and regulatory instruments (such as emissions trading schemes) and to design smart packages of fiscal and regulatory policies; (3) the need for monitoring and evaluation of the effectiveness of government environmental interventions including regulatory interventions. The processes for setting environmental regulations themselves and the quality of environmental regulation, however, is a vast and important topic that is outside the scope of this book. 3.2

Role of Civil Society

It is increasingly recognized that citizens and Civil Society Organisations (CSOs) are important agents of good governance and sustainable development, alongside markets and the state. While they face severe political and capacity challenges compared to the resources of governments and private vested interests, they remain an important force for social and political change. As discussed in Chapter 6, the theory of change combines a wide range of spaces and entry points for citizen participation, from democratic spaces, institutionalized political spaces, and public consultation through to civil society-initiated activities (Gaventa, 2005). A key issue is the extent to which voters prioritize environmental sustainability. This will be influenced by the extent to which they have sufficient trusted information on environmental outcomes, and on a

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government’s performance and intentions with respect to environmental goals and their impact on and weighting against economic and social goals. This highlights the importance of national environmental reporting (Chapter 2); of citizens and oversight institutions being provided with comprehensive information on the greening of fiscal policy (Chapters 4 and 5); and the need for CSOs, the media, and individuals to proactively engage in monitoring and advocacy and to develop new tools to promote environmental sustainability (Chapter 6). Note that while Fig. 1 and the theory of change imply a democratic political system, any government that sees a reduction in environmental degradation as being in its interest or in the national interest, or that is concerned about retaining legitimacy in the eyes of its citizens, may be receptive to some extent to the need to improve environmental performance—as for instance the Chinese government has taken some actions to reduce air pollution, has announced targets for GHG emissions, and uses environmental goals and targets in its Development Plans (Kostka & Zhang, 2018). 3.3

International Influences

The UN Framework Convention on Climate Change (UNFCCC), and the 2015 Paris Agreement on Climate Change create strong incentives for developing and middle-income countries to seek international climate finance for adaptation and mitigation activities, and developed countries are motivated to provide such financing, particularly where mitigation costs are lower overseas. This creates a powerful channel for the greening of fiscal policies (Chapters 4 and 5). The Paris Agreement, with its requirements for Nationally Determined Contributions (NDCs) and regular reporting, provides a natural link to fiscal policy and carbon pricing. While the impacts of domestic carbon prices on the competitiveness of exporters complicate significant increases in carbon prices, it is possible that large leading countries could exert leverage by imposing border tax adjustments on the exports from countries that do not have an economically significant carbon price (as the EU has indicated it intends to do, and as the US administration indicated its intention to do in March 2021). An agreed international carbon price floor among just a small number of the largest emitters has also been proposed (IMF, 2021). Development agencies and official international financial institutions are important sources of technical advice and capacity development

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for the greening of fiscal policies, e.g., the World Bank, the regional multilateral development banks, the UNDP, and the IMF.8 Further potential sources include international joint government and civil society collaborations such as the Open Government Partnership. At the regional level, the EU is promoting green budgeting among its 27 member states. EU member countries that have introduced or plan to introduce green budgeting practices indicate the most common motivation was complying with international commitments, followed by promoting environmentally responsive decision-making and complying with national commitments (European Commission, 2020, p. 43). The increasing number of countries that are issuing sovereign green bonds (Chapter 4) opens an additional channel of influence. There is some evidence that a country’s vulnerability to climate change has a significant impact on government bond spreads and credit ratings for emerging markets and developing countries (Cevik & Jalles, 2021).

4

Overview of the Book

Chapter 2 describes frameworks for national reporting on the state of the environment and describes country practices in environmental reporting. It then identifies weaknesses in current practices and proposes measures to strengthen national environmental reporting as a key starting point in promoting more effective accountability for environmental stewardship. Chapter 3 discusses the incorporation of environmental targets in government strategy through development of a dashboard of critically important physical environmental indicators rather than by assigning monetary values to elements not incorporated in GDP to produce an augmented measure of GDP. The chapter compares arrangements for the governance of environmental policy against other policy domains, identifying (climate change mitigation aside) a lack of goals and targets for environmental stewardship in comparison to other functions of government such as fiscal and monetary policy. Chapter 4 introduces the rapidly evolving concept and practice of ‘green budgeting,’ an umbrella term referring to a range of approaches 8 An example is provided by a Joint Statement on Green Recovery in Nepal issued by the government and thirteen international development partners in December 2020. Government of Nepal—International Development Partners Joint Statement on Green Recovery in Nepal, Kathmandu, 12 December 2020.

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that incorporate environmental issues in government budgeting and public finance. The chapter defines key terms, discusses the two-way interactions between fiscal policies and the environment, and describes the evolution of climate budgeting and green budgeting in three sub-sections: the development of guidance on green budgeting; country practices in climate budgeting and green budgeting; and how green COVID-19 pandemic responses have been. Chapter 5 puts forward a comprehensive framework for more effective environmental governance and the greening of fiscal policy. The framework incorporates elements introduced in Chapter 2 on environmental reporting, in Chapter 3 on integrating environmental goals in government strategy, and in Chapter 4 on green budgeting. A set of principles is put forward for green fiscal policy, preconditions are discussed, and the chapter contains an extensive discussion of entry points for countries at different levels of development to implement the greening of fiscal policy. Chapter 6 explores the role of civil society in promoting more effective government accountability for environmental stewardship. This is based on transparency of information, direct engagement of the public in the development and implementation of relevant policies, and proactive civil society monitoring of environmental outcomes and stewardship performance. Two potential new instruments are put forward that CSOs and the media could use to exert more leverage over the quality of governments’ environmental stewardship, a civil society-produced Green Guide to the Budget, and an Environmental Governance Index. The concluding Chapter 7 summarizes the main arguments in the book. It brings together ten key actions needed to hold governments to account more effectively for their stewardship of the natural environment and to put societies on a path to environmental sustainability.

Appendix 1: Simplified High-Level Theory of Change Figure 2 runs from bottom—actions and influences at the country level— to the top—the long-term outcome (goal) of sustainable economic, social, and environmental development. Intermediate steps represent increasing levels of results and reflect the passage of time. For simplicity Fig. 2 is drawn in a linear fashion: elements at a lower level in one country will lead on to elements at a higher level. However, in practice results are not expected to be linear. In fact, some elements at higher levels are already in place in some countries without all the lower-level steps necessarily being in place.

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Fig. 2 High level theory of change

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References Attenborough, D. (2020). A life on our planet. Witness Books. Bowles, S., & Carlin, W. (2021, Spring). Rethinking economics. In Finance and development. International Monetary Fund. Carney, M. (2021). Value(s): Building a better world for All. William Collins. Cevik, S., & Jalles, J. (2021). Why climate change vulnerability is bad for sovereign credit ratings. Commission on the Measurement of Economic Performance and Social Progress. (2009). Dasgupta. (2021, February). Final Report —The Economics of Biodiversity: The Dasgupta Review. HM Treasury. Díaz, S., Settele, J., Brondízio, E., Ngo, H., Guèze, M., Agard, J., Arneth, A., Balvanera, P., Brauman, K., Butchart, S., Chan, K., Garibaldi, L., Ichii, K., Liu, J., Subrmanian, S., Midgley, G., Miloslavich, P., Molnár, Z., Obura, D., … & Zayas, C. (2019). Summary for policymakers of the global assessment report on biodiversity and ecosystem services of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services, IPBES. https://www.ipbes.net/system/tdf/ipbes_7_10_add-1-_adv ance_0.pdf?file=1&type=node&id=35245. European Commission, Report on Public Finances in EMU 2020. Gaventa, J. (2005). Reflections on the uses of the power cube, approach for analyzing the spaces, places and dynamics of civil society participation and engagement. Prepared for Assessing Civil Society Participation as Supported In-Country by Cordaid, Hivos, Novib and Plan Netherlands 1999–2004, The Netherlands: MFP Breed Netwerk. Grantham Research Institute on Climate Change and the Environment: Climate Change Laws of the World. https://climate-laws.org/. Gupta, J., Scholtens, J., Perch, L., Dankelman, I., Seager, J., Sander, F., StanleyJones, M., & Kempf, I. (2019, June 25). Re-imagining the driver-pressurestate-impact-response framework from an equity and inclusive development perspective. Sustainability Science. https://doi.org/10.1007/s11625-01900708-6. International Energy Agency. (2020, November). Renewables 2020. International Monetary Fund. (2021, April 23). IMF chief urges G20 to adopt carbon price floor to reach climate goals. https://www.reuters.com/business/ environment/imf-chief-urges-g20-adopt-carbon-price-floor-reach-climategoals-2021-04-22/ Kahneman, D. (2011). Thinking, fast and slow. Allen Lane. Kostka, G., & Zhang, C. (2018). Tightening the grip: Environmental governance under Xi Jinping. Environmental Politics, 27 , 769–781. https://doi.org/10. 1080/09644016.2018.1491116

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McKinsey and World Economic Forum. (2021, January 25). Why investing in nature is key to climate mitigation. https://www.mckinsey.com/business-fun ctions/sustainability/our-insights/why-investing-in-nature-is-key-to-climatemitigation Meadows, D. (1999). Leverage points: places to intervene in a system. Sustainability Institute. OECD. (2002). Best practices for budget transparency, 2002. https://www.oecd. org/governance/budgeting/Best%20Practices%20Budget%20Transparency% 20-%20complete%20with%20cover%20page.pdf OECD. (2020, September 28). Biodiversity and the economic response to COVID19: Ensuring a green and resilient recovery. https://read.oecd-ilibrary.org/ view/?ref=136_136726-x5msnju6xg&title=Biodiversity-and-the-economicresponse-to-COVID-19-Ensuring-a-green-and-resilient-recovery OECD. (2021). Biodiversity, natural capital, and the economy: A policy guide for finance, economic and environment ministers. Report prepared by the OECD for the G7 Presidency of the United Kingdom. Partnership for Market Readiness and Carbon Pricing Leadership Coalition. (2018). Guide to communicating Carbon pricing. World Bank. Pucker, K. (2021, May–June). Overselling sustainability reporting. Harvard Business Review. Stern review. (2006, October). The economics of climate change. United Kingdom. (2008). Climate change act 2008. https://www.legislation. gov.uk/ukpga/2008/27/contents. United Nations. (1987). Our common future. The World Commission on Environment and Development United Nations Environment Program. (2019, March 4). Global environment outlook 6. https://www.unenvironment.org/global-environment-outlook United Nations Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES). (2005). Millennium Ecosystem Assessment. https://ipbes.net/about. United Nations Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES). (2019, May 6). Global assessment report on biodiversity and ecosystem services of the Intergovernmental Science Policy Platform on Biodiversity and Ecosystem Services. World Wildlife Fund. (2020). Living planet report. https://livingplanet.panda. org/en-US/what-is-the-living-planet-index.

CHAPTER 2

Reporting on the State of the Environment

Abstract Recognized international frameworks for reporting on the state of the environment are outlined, including the Drivers-PressuresState-Impact-Response (DPSIR) model. It is argued that national-level environmental reporting is the critical level for accountability given state sovereignty over environmental policy. Country practices in national environmental reporting are described. Weaknesses in the DPSIR model and in country practices are identified. Proposals are put forward to strengthen national state of environment reporting, including the incorporation of forward-looking information on risks and tipping points with respect to the most critically important indicators, strengthening technical

Nickolai Denisov provided valuable feedback and inputs on earlier drafts of this chapter. Helpful comments were also received from Jonathan Boston and Jason Jabbour. I am grateful to Ralph Chapman for first alerting me to the role of national state of the environment reporting when he led the work on environmental governance for the 2013 National Integrity System Assessment conducted by Transparency International New Zealand

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 M. Petrie, Environmental Governance and Greening Fiscal Policy, Palgrave Studies in Impact Finance, https://doi.org/10.1007/978-3-030-83796-9_2

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independence from the government of the day, a requirement for government to respond to each report, aligning the timing of reports as feasible with the national electoral cycle, and investments in data monitoring, reporting and capacity development. Keywords Environmental reporting · DPSIR · Planetary boundaries · Environmental risks · Strengthening environmental reporting

1

Introduction

A core element of management and governance in any domain is reliable measurement and reporting of the outcomes that matter. With respect to environmental stewardship, the relevant outcomes cover the full range of physical environmental outcomes, from water and air quality to the level of threat to the survival of different species, data on ecosystem services, natural resources, pollution, and climate change. Reporting on the state of the environment can be conducted at different scales, ranging from global, regional, national, or subnational/local level. Environmental assessments have been part of the landscape following Resolution 2997 of the 1972 UN Conference on the Human Environment in Stockholm that stated, in part, that UNEP should keep the global environment under review (UNEP, 2019b, p. 9). This chapter focuses on environmental reporting at the level of the nation state. One might question why the relevant scope of the key accountability report on environmental outcomes should be national. There has been considerable attention to the concept of planetary environmental boundaries (Rockström et al., 2009). These boundaries describe nine interconnected environmental categories, each with thresholds of allowable human impact that if transgressed, indicate unacceptable levels of degradation. They include climate change, biodiversity loss, biochemical flows, land system change, and freshwater use. In the current international system, however, the nation state remains the overwhelmingly dominant point of leverage with respect to environmental governance—including the subnational governments within each state among whom national competences for environmental management are divided. Nation states have been willing to cede only limited jurisdiction (‘sovereignty’) over environmental management to the international

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level (whether transnational, regional, or global)—the main exception being the member states of the EU.1 This is true even for climate change, where (again aside for the EU, which is a signatory to the Paris Agreement alongside its member states) the governance framework remains one of treaties and emissions reduction commitments between nation states despite the global pure public good externality at the heart of climate change policy and the urgent and unavoidable need for international cooperation and coordination. From the perspective of accountability for environmental stewardship, therefore, the national State of Environment Report (SOER) should be viewed as the core instrument for reporting of environmental outcomes. The Planetary Boundary authors acknowledge the key role of the nation state. In a 2015 supplement, the authors added a layer of regional level boundaries to the planetary boundaries and have stated that ‘there are strong arguments for an integrated approach coupling boundary definitions at regional and global levels with development goals to enable the application of “PB” [planetary boundary] thinking at levels (nations, basins, and regions) where policy action most commonly occurs.’ Over the last decade, exercises have downscaled the planetary boundary framework to the national level for Finland, Germany, the Netherlands, Sweden, and New Zealand. These exercises quantify a country’s contribution to boundary transgressions and whether it exceeds its fair share of the safe operating space, allow cross-country comparisons, and inform national government approaches to environmental stewardship. Hereafter the term SOER will be used to refer to a national state of the environment report. The term SOER will also be used to refer to an indicator based, data-driven expert assessment, in contrast to a desktop assessment conducted by one or more experts based on a review of available data, or an assessment based on the analysis of views of experts (UNEP, 2019b, pp. 29–30). This chapter will: • Outline the internationally recognized framework for environmental reporting.

1 For a short description of the EU’s competence and functions with respect to environmental policies in its member states see European Parliament (2020).

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• Discuss the critical role of environmental reporting at the national level. • Briefly describe country practices. • Identify some weaknesses in the practice of and arrangements for national environmental reporting. • Propose measures to strengthen national environmental reporting as a key starting point in promoting more effective accountability for environmental stewardship.

2 The Framework for National State of the Environment Reporting Two broad categories of environmental reports have been identified: indicator-based reports and Integrated Environmental Assessments (EEA, 2019). Indicator-based reports generally apply a Drivers-Pressures-StateImpacts-Responses (DPSIR) framework to the assessment of environmental indicators. Integrated Environmental Assessments (IEAs) analyze environmental themes and challenges and may assess approaches to sustainable transition. Both types of reports are analytical reports that go beyond a compilation of statistics to present an assessment of the environmental situation and the cause-and-effect relationships affecting it. Reflecting that, the DPSIR framework is also often recommended for undertaking Integrated Environmental Assessments (UNEP, 2019b, p. 47), making it a key internationally recognized framework for state of the environment reporting that is widely applied in practice, both in indicator-based reports and in IEAs. ‘The DPSIR framework has since been adopted as the analytical framework of choice for environmental assessment due to its capability to establish cause effect relationships, as well as its adaptability’ (UNEP, 2019b, p. 110). The DPSIR model was introduced in 1995 by the UN Commission on Sustainable Development.2 The framework was developed by the National Institute of Public Health and Environment of Bilthoven, 2 Related but different frameworks had been advocated by the OECD (PSR, devel-

oped first by Statistics Canada), and World Bank (DSR)—see Rump (1996). See also Carr et al. (2007, pp. 544–546). Alternative conceptual approaches to environmental reporting included an ecosystem approach (spatial framework), information hierarchy (spatial and thematic aggregation), policy cycle (stages of decision-making), and combinations of the above (see EEA, 1999a). There may be times when complementary frameworks to DPSIR

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Netherlands (Kristensen, 2004, cited in UNEP, 2019b, p. 47). According to this systems analysis view, human activities or drivers (underlying natural and human-caused forces or needs, e.g., population change and economic activity) exert pressures on the environment, e.g., resource use, emissions, that lead to changes in the state of the environment that affect its ability to provide services and goods to society, e.g., changes in water quality or the number of species against a specified benchmark. These changes result in impacts on human welfare and on ecosystems that may elicit societal responses from government and non-government actors (e.g., policy changes) and informal responses (e.g., behavioral changes). Responses (adaptation, mitigation) act on the driving forces, the pressures, or on the state of the environment, or on impacts. Figure 1 presents the framework in diagrammatic form.

Response

Drivers

Pressures

Fig. 1

Impact

State

The DPSIR framework for reporting on environmental issues

are more appropriate—see UNEP (2019b, p. 47). For example, the Opportunities Framework, as used in African Environmental Outlook 2, focuses on potential opportunities for reducing poverty and promoting sustainable livelihoods. The DPSIR framework has also at times been modified for specific analytical purposes, e.g., DPSWR with a bias towards human welfare impact. See UNEP (2019b, pp. 110–111).

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The DPSIR framework was first applied by the European Environmental Agency (EEA) in 1995 in its assessment of Europe’s environment (EEA, 1995).3 The EEA also promoted the use of the DPSIR framework among its member states (Smeets & Weterings, 1999). The United Nations Economic Commission for Europe Convention on Access to Information, Public Participation in Decision-Making and Access to Justice in Environmental Matters 1998 (the Aarhus Convention) stipulated in Article 5.4 that: ‘Each Party shall, at regular intervals not exceeding three or four years, publish and disseminate a national report on the state of the environment, including information on the quality of the environment and information on pressures on the environment’ (European Commission, 1998). In the same year the OECD Council, motivated in part to facilitate international cross-country comparison of environmental performance, adopted a Recommendation that member countries ‘promote adequate dissemination of environmental information (e.g., periodic reports on the state of the environment and its changes over time, environmental indicators publication)’ (OECD, 1998). The same Recommendation also promoted the establishment of indicators of progress concerning the implementation of environmental policies and the systematic comparison of results against environmental policy objectives and international commitments. The focus subsequently has been on the completion of periodic OECD reviews of environmental policies and performance in each member county (which commenced in 1991); the OECD is on its third cycle of country performance reviews (OECD, n.d.). There has been no Recommendation on or initiative by the OECD since 1998 to promote national state of environment reporting. It should be noted that the DPSIR framework is not without its critics. Gupta et al. have argued that in applying the DPSIR framework, social equity issues tend to come as an afterthought, whereas there is increasing recognition of the inequities of environmental degradation— both in terms of who causes it and who is most impacted by it (Gupta et al., 2019). They provide extensive evidence of inequity at all stages of the DPSIR analysis, from the uneven distribution of income and wealth (drivers), the fact that the richest 10% emit 66% of the GHGs (pressures), 3 The EEA has published state of the environment reports in member countries in 1995, 1999, 2005, 2010, 2015 and 2020. Some of the earlier reports were pan-European covering both EEA member states and countries outside the EEA.

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some impacts are felt more by women and children (e.g., household air pollution), through to the costs of inaction on environmental degradation being borne most by the poorest while the profits from the status quo go to investors (response). Gupta et al. argue that equity and environmental justice perspectives should be incorporated throughout the DPSIR framework.4 UNEP’s Global Gender and Environment Outlook 2016 illustrates how the environment affects women and men differently due to gender inequality: women in sub-Saharan Africa and Asia are most often responsible for water collection and are more likely to die in natural disasters. The Report notes that gender-disaggregated data are scarce across all environmental domains and suggests conducting national-level ‘state of gender and the environment’ assessments to establish a baseline (UNEP, 2016, pp. 207–209). It is perhaps an open question to what extent an SOER should be expanded in the way suggested by Gupta et al. as part of the core environmental reporting exercise. This could require a major expansion of the scope, cost, and time frame and in the breadth of the technical expertise required, which could potentially reduce the focus on the core scientific analysis of the state of and trends in the environment and outlook. UNEP’s 2019 IEA Guidelines discuss the issue in a short section that addresses only some of the critique (UNEP, 2019b, pp. 96–97). One alternative would be to incorporate the equity dimension fully as part of the analysis of what the government’s response should be to an SOER, which would take place subsequent to the SOER and could involve the relevant environmental and social policy agencies of government, and wide public engagement on the issues.

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Country Practices in Environmental Reporting

While there were apparently one or two earlier reports, the impetus for SOERs increased after the adoption of Agenda 21 at the 1992 UN Conference on Environment and Development in Rio de Janeiro.5 4 See also Carr et al. (2007), who argue that the DPSIR typology entails an unexamined and unacknowledged hierarchy of actors that mean it cannot address the impact of aggregated, informal responses on the drivers and pressures. They argue this could be addressed by applying the framework to local scale initiatives. 5 EEA 1999a cites earlier milestones in publishing SOERs by the USA and Japan in the 1970s.

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Chapter 40 of Agenda 21 called for improved information for decisionmaking, although it did not refer explicitly to SOERs. By the late 1990s several hundred state of environment reports had been produced covering all areas of the world and on various geographical scales, from municipal to national and regional (Rump, 1996). The initial burst of interest in environmental reporting in the 1990s has been described as a ‘formative and dynamic phase’ (Kristensen, 2004). Five major uses of SOERs were identified in the 1990s: (a) public awareness; (b) education; (c) policy development; (d) performance assessments, and (e) scientific benchmarking. More recently an increasing emphasis has been placed on policy impact: an SOER should promote and lead to changes in policies and behaviors by government and non-government actors that in turn result in improved environmental outcomes (UNEP, 2019b, pp. 20–25, 88). Interest in SOERs has been sustained in the 33 member countries of the EEA and the six countries cooperating with the EEA (Albania, BosniaHerzegovina, Kosovo, Montenegro, North Macedonia, and Serbia). In addition, a further six countries in the EU’s Eastern neighborhood (Belarus, Moldova, Ukraine, Armenia, Georgia, and Azerbaijan) have for some time been publishing regular SOERs, often with international support (from UNEP and UNDP) (EEA, 2020), while countries in Central Asia (e.g., Mongolia, Kazakhstan, Tajikistan) have also published regular SOERs. Beyond Europe, other OECD countries publish SOERs, including Australia, Canada, New Zealand, and Turkey. In the United States of America, the Environmental Protection Agency (EPA) published a Report on the Environment in 2008 (U.S. EPA, 2008) and has since updated the indicators on a rolling basis as new data becomes available (U.S. EPA, n.d.). A number of middle-income countries and developing countries also publish (or have published) a national SOER; for example, Uganda (2005), Afghanistan (2007 and 2012), Lesotho (1997, 2002), South Africa (2006), Iran (2006), India (2009), Belize (2010), South Sudan (2018), and the Occupied Palestinian Territories (2020).6

6 Some of these are retrievable on the UNEP Document Repository, https://wedocs. unep.org. Palestine report available at https://www.unep.org/resources/report/state-enviro nment-and-outlook-report-occupied-palestinian-territory-2020. See also Zoï Environment Network 1998, 2019.

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But the interest appears to have waned somewhat in the 2000s, perhaps due in part to resource and capacity constraints. For example, South Africa has not published an SOER since 2006, although there has recently been a revival of interest in the instrument in that country (South Africa Department of Environmental Affairs, 2019). There has been some increase in activity in recent years, however, as evidenced by the publication of SOERs in central Asia. SOERs contain a large number of physical outcome indicators across all environmental domains. They also include indicators of drivers, pressures, and impacts. The data is captured mainly by national statistical systems (e.g., statistics on drivers and pressures) and by national, regional, and local environmental monitoring systems (e.g., data on state indicators and impacts), supplemented by remote sensing (e.g., satellite) systems. There may also be databases and information available from outside government through universities, industry, and non-governmental organizations. With respect to periodicity, the most common practice is to publish SOERs every 4–5 years, although country practices range widely, e.g., the Netherlands (annual report from 1995 to 2010, bi-annual thereafter), Afghanistan (every two years for urban areas and every five years for rural areas), and Russia, Ukraine, and Kazakhstan (annual reports).

4

Weaknesses and Proposals for Reform

There are a number of features of SOERs that warrant discussion from the perspective of strengthening government accountability for environmental outcomes. These are discussed in turn: • • • • • •

The DPSIR framework is largely backward looking. SOERs do not incorporate equity and environmental justice issues. The need for technical independence from government. SOERs may fail to highlight the areas of most concern. Governments are not required to respond to an SOER. Reports exhibit gaps in the data and/or in its analysis of varying severity. • Capacity gaps. • Potential link to the electoral cycle.

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4.1

The DPSIR Framework is Largely Backward Looking

The indicators measure past trends and often indicate qualitatively whether the trend is stable, declining, or improving. The reader may be invited to imagine whether the trend will continue. Yet analyzing where the state of environment may be heading should be a core function of an SOER. UNECE has recommended that reports should contain forecasts of changes over the forthcoming period (UNECE, 2017a), while UNEP has noted the need to develop scenarios for ‘business as usual’ vis a vis nationally determined targets for the 2030 Sustainability Agenda (UNEP, 2019b). A 2017 survey of users of SOERs found that their weaknesses included lack of targets and of information on possible developments (UNECE, 2017a). A number of SOERs include environmental outlooks and broad scenarios. This is not formally part of the DPSIR framework although it is covered in the IEA Guidelines. Scenarios tend to be based on megatrends and identify broad plausible future scenarios that may incorporate some allowance for policy changes. The techniques used are extrapolation and projection of trends and backcasting. The analysis may be largely qualitative. Few if any SOERs contain forecasts at the individual indicator level, although Australian SOERs are required to contain information about the resilience of the environment and the residual risks that threaten it in addition to an overall outlook for the environment. SOERs in the Netherlands have since 2003 included reporting on distance to policy targets using a traffic light approach and from 2010 have also emphasized the state of environment policy. Other EEA members similarly contain information on current prospects of meeting policy objectives and/or targets, e.g., the Ireland SOER 2020 (Ireland Environmental Protection Agency, 2020). Arguably SOERs should include—in addition to broad outlooks, scenarios, and traffic light signals of whether targets are broadly on course to being met—more detailed forward-looking data on short to mediumterm risks, resilience, and potential tipping points with respect to at least the most critically important indicators and environmental bottom lines. As the influential 2009 Stiglitz-Sen-Fitoussi Commission noted with respect to indicators to measure social, economic, and environmental progress: ‘In particular there is a need for a clear indicator of our proximity to dangerous levels of environmental damage’ (Stiglitz et al., 2009).

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The High-Level Expert Group that followed the 2009 Commission similarly called for increased attention to environmental risks and vulnerability in order to properly assess environmental sustainability, focusing on those risks pushing environmental systems closest to boundaries (De Smedt et al., 2018, Chapter 9, pp. 21–28). Forecasting of environmental variables is difficult technically. It is established only in some fields, for example with respect to natural resources, e.g., fisheries management in countries that use a quota system based on total allowable catches set on a sustainable basis. It has also become established since the 1990s in the field of climate change projections (such as projections of GHG emissions, temperature, and precipitation). Expanding projections and forecasting of environmental variables to new domains would however require significant investment of resources and effort—as also called for by De Smedt et al. (2018, pp. 27–28). This is surely warranted by the critical threats posed by environmental degradation. It is worth recalling that there was no concept of GDP let alone measurement of it until the disaster of the 1930s Great Depression prompted urgent and sustained worldwide investments in GDP measurement and then forecasting that continues today. Explicitly strengthening the SOER reporting framework’s treatment of environmental risks would also be similar conceptually to how international fiscal sector and financial sector standards respectively were strengthened following the GFC and have led to increased investment in the analysis and management of risk in these domains over the past decade.7 Similarly, the Task Force on Climate-Related Financial Disclosures emphasized risk management as one of the four core elements of its recommended disclosures: ‘One of the Task Force’s key recommended disclosures focuses on the resilience of an organisation’s strategy, taking into consideration different climate-related

7 For instance, the international fiscal transparency agenda has evolved over the last 20 years to place much more importance on forward-looking information on fiscal risks relative to backward-looking fiscal reporting (IMF, 2018; Petrie, 2013, Pillar III: Fiscal Risk Analysis and Management). Fiscal forecasting has moved progressively from static mid-point forecasts of the main fiscal variables, to sensitivity analysis of fiscal aggregates to key parameters taken one at a time, to forecasting of full alternative macro-fiscal scenarios, and probabilistic forecasts of key fiscal aggregates. A similar evolution has taken place in the field of financial sector supervision, with Bank for International Settlement standards placing much greater emphasis on risk identification, measurement, and management after the 2008 Global Financial Crisis (Bank for International Settlements, n.d.).

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scenarios…’ (Task Force on Climate-Related Financial Disclosures, 2017, p. v). While forward-looking risk and resilience could be built into the existing DPSIR framework (which in principle is time neutral), one option would be to formally extend the framework to ‘DPSIRR,’ where the additional second last R refers to environmental risks. This would emphasize the crucial missing aspect of these forward-looking elements, which are of central importance to understanding the likely future state of the environment and designing and adopting policies to improve environmental outcomes.8 More effective identification and measurement of environmental risks should help to promote earlier mitigation and provide detail on environmental risks that can be brought to bear alongside the wealth of information on economic and fiscal risks—which would facilitate explicit consideration of policy priorities and trade-offs across domains in the setting of government strategy and medium-term fiscal strategy, as discussed in Chapters 2–4. As noted by De Smedt et al., ‘some reforms may simultaneously improve average economic performance but reduce “risk-performance”’ (2018, p. 28). In the absence of data on environmental forecasts and risks, environmental stewardship is more likely to remain subservient to policy goals that have hard data on risks, e.g., economic risks to GDP growth and risks to the fiscal deficit and public debt, all of which are presented in increasingly sophisticated scenarios and probabilistic forecasts. Given the perilous state of the environment globally and the urgent need to slow down and reverse environmental degradation, incorporating risk analysis into environmental reporting is both urgent and overdue. 4.2

Independence

It is important that the data and analysis in SOERs are seen to be of high integrity and scientifically based if they are to contribute to informed public debate. This suggests the need to put in place institutional arrangements that distance the production and publication of an SOER from the government of the day. This can be achieved through a range of 8 For instance, the planetary boundaries framework has incorporated risk by placing the planetary boundaries at levels well before the estimated biophysical thresholds as part of an early warning approach (Rockström et al., 2009).

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mechanisms, from assigning environmental reporting to an independent government agency, assigning a role to the National Statistics Office given the statutory independence those offices typically enjoy in professional statistical matters or assigning the function to a non-government entity (as is the case in Australia).9 An alternative or additional approach is to assign an independent body the function of commenting on each SOER, as is the case in New Zealand where the Parliamentary Commissioner for the Environment, an Officer of Parliament, is invited by statute to comment on each SOER (Parliamentary Commissioner for the Environment, 2019). 4.3

SOERs May Fail to Highlight the Areas of Most Concern

A third issue of concern with respect to SOERs is that they often fail to highlight the areas of critical concern among a large number of environmental indicators (EEA, 1999; UNECE, 2017a). There is a recognized need to focus on the small number of critically important indicators. The conclusion of the EEA in 1999 remains relevant today: ‘…it is easy to become overloaded with data and to miss the key messages …Therefore it is important to focus the report on priority issues for which the available information is synthesised.’ Or in the words of the High-Level Group that followed up on the Stiglitz-Sen-Fitoussi Commission: ‘…the imperative to focus on a small number of top-level indicators - a tension that can only be solved through prioritisation of the UN goals and targets at the national level.’ 4.4

Governments Are Not Required to Respond to an SOER

In no country is the government of the day required to respond to an SOER to indicate what it is doing and will do to avert further environmental degradation. SOERs may be largely ignored or quickly forgotten. Experience has been that many SOERs see ‘results and information …downloaded to a passive audience’ (UNEP, 2019b, p. 20). The previously cited 2017 survey of users of SOERs found that their weaknesses included limited policy connection and impact (UNECE, 2017a). 9 In Australia, the Federal Government commissions an independent review of the state of the environment every five years as required under the Environment Protection and Biodiversity Conservation Act 1999. Department of the Environment and Energy, 2016.

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UNEP has identified lessons learned from the GEO process. The first of these is the need to better integrate environmental considerations into national strategies rather than stand-alone reports (UNEP, 2019b, p. 10). The 2019 IEA Guidelines note that assessments have the most impact where the findings are not only well communicated but where a plan exists for acting on those findings. Yet the main common method referred to in the IEA Guidelines for assessing the influence of IEAs is to track the extent to which key findings are referred to in public speeches by policymakers (UNEP, 2019b, p. 52). This is a very initial and limited measure of policy impact, almost trivial in a results chain that culminates in improved environmental outcomes. ‘The challenge is to take proactive steps to ensure that an assessment does not sit on a bookshelf once it is done… Consider from the outset how the findings from the assessment might be used, and how the priorities identified can become the priorities of the government and country… Seeking better linkages between the findings of the report and formal decision-making process in government (e.g., departmental strategic plans, policy, priorities, budgets) may be the main objective’ (UNEP, 2019b, p. 22). The United Nations Economic Commission for Europe (UNECE) has recommended that the state environmental protection body should draft government instructions to the various ministries, departments, and regional administrative heads requiring them to take action in response to the proposals and recommendations in the report (UNECE, 2017b). However, the environmental protection agency or other environment sector agencies typically lack any authority or mandate to back such action and it is likely to have limited if any impact. In New Zealand, the Parliamentary Commissioner for the Environment recommended in 2019 that the country’s Environmental Reporting Act 2015 be amended to require the government to respond to each report.10 In the State of Victoria in Australia, the government is required to respond to any recommendations in the State’s state of environment report within 12 months.11

10 https://www.pce.parliament.nz/publications/focusing-aotearoa-new-zealand-s-env ironmental-reporting-system. See also Petrie (2018). 11 Cited in Parliamentary Commissioner for the Environment, New Zealand, 2019.

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Requiring the government to respond to each SOER would be an important and potentially powerful step in strengthening accountability for environmental stewardship. But governments also need to be mandated to state their top priority environmental goals, and to specify the strategies, targets, and milestones to achieving them, with regular reporting on progress. The subject of transparency of environmental goals, targets, and progress toward them is taken up in Chapter 3. With respect to connecting SOERs to government strategy and policies, as noted in the Introduction, the annual budget is typically a government’s single most important expression of its actual strategies and priorities, and potentially its most powerful cross-sector policy integration tool. Mainstreaming environmental goals and targets through incorporating them into fiscal strategy and the annual budget process and using fiscal policies to improve environmental outcomes is also taken up in Chapters 4 and 5. 4.5

Gaps in the Data and/or in Its Analysis of Varying Severity

A further issue of concern with respect to SOERs is that they invariably exhibit gaps in the data and/or in its analysis of varying severity (UNECE, 2017a; UNEP, 2016). This reflects the inevitable resource and capacity constraints even in advanced countries. The importance of national capacity for data collection and monitoring is recognized in SDG 17 on strengthening the means of implementing the SDGs, although there is no explicit reference there to environmental statistics. The proposals reflect the call in SDG 16 for accountable and transparent institutions that ensure public access to information and inclusive decision-making. National environmental monitoring and reporting is a prerequisite for measuring achievement of a number of the SDGs, many of which are high-level aggregate outcomes that must be measured by in-country environmental monitoring systems. 4.6

Capacity Gaps

Underlying the data gaps are capacity gaps. Some SOERs are prepared by external consultants funded by donors (e.g., Afghanistan, South Sudan). UNECE (2017a) noted that donors had funded many SOERs in Eastern

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Europe and that in the long run, it is inevitable that assessments made to advance national policies must be funded from state budgets. The framework for and practice of national environmental reporting warrants significantly more national and international attention than it has received over the last two decades. The SOER needs to be recognized as core infrastructure for the measurement, monitoring, and accountability for environmentally sustainable development. Reflecting this, in 2018, in Global Environment Outlook 6, UNEP called for improved national environmental monitoring and reporting systems using a combination of enhanced national data collection and better use of existing data, remote (satellite) observation systems, and citizen environmental monitoring (UNEP, 2019a). UNEP has a current project assessing country needs in environmental statistics collection and reporting. The previously cited 2017 survey of users of SOERs found they were viewed as about the only source of proper environmental information, their quality was good, and future demand for SOERs was strong (UNECE, 2017a). A new international effort is therefore warranted to expand and deepen national environmental reporting and to build the national capacity for environmental data collection as core national infrastructure for sustainable development. This might best be focused at least initially on the non-advanced countries among the 17 ‘mega-diverse countries,’ countries which have been identified as the most biodiversity-rich countries of the world.12 There is an important role for the UN system and multilateral and bilateral development agencies to finance national capacity development in environmental statistics and data collection as well as remote measurement systems. International organizations such as the World Bank, the IMF, and the OECD, international multistakeholder networks such as the Open Government Partnership,13 and civil society including environmental CSOs and experts are in a position to promote the development and diffusion of common international norms and country commitments on environmental reporting (see Chapter 6 for discussion of the role of civil society).

12 https://www.biodiversitya-z.org/content/megadiverse-countries. 13 The Open Government Partnership is already active in environmental governance

and policy, see for instance Open Government Partnership 2020.

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Potential Link to the Electoral Cycle

Finally, the timing of SOERs should be considered in relation to a country’s national electoral cycle, to contribute to public debate and deliberation, and to the ability of citizens to hold political parties, candidates, and governments to account for their intended and actual environmental stewardship. As noted in the Introduction, regular national elections are a systemic point of high leverage. Where feasible, it would therefore be desirable if each SOER is, in the normal course of events and to the extent practicable, published within a certain time between elections or prior to each national election to allow sufficient time for public debate and deliberation and the formation of political party platforms.14 So, for instance, a country with a four yearly presidential election in October might mandate that a national SOER be published mid-way between elections, or in the first quarter of each election year.15 This suggestion does not appear to have been made before. UNEP’s 2019 IEA Guidelines note the importance of linking findings in SOERs to the policy cycle, but do not refer to the electoral cycle. Overall, the weak governance of environmental stewardship stands in stark contrast to the governance of fiscal and monetary policy—as discussed further in the next chapter. The shortcomings in the accountability framework for national-level reporting on the environment should be addressed as an urgent priority. Box 1 contains a summary of the proposals put forward in this chapter to significantly strengthen the contribution of environmental reporting to stewardship of the environment. 14 This is conceptually similar to accountability for public financial management: the OECD Best Practices in Budget Transparency 2002 (element 1.6) stipulates that governments should publish a pre-election fiscal update report ‘to illuminate the general state of government finances immediately before an election. This fosters a more informed electorate and serves to stimulate public debate….Optimally, it should be released no later than two weeks prior to elections’ (OECD, 2002). The timing of a pre-election fiscal report so close to an election reflects the fact that there is an annual budget process, and the objective is to update the electorate for changes since the last budget was presented. SOERs are much less frequent than annual, and so the objective should be to align as far as possible the timing of a 3–5 yearly SOER with the normal electoral cycle in a country. 15 Of course, in those countries where SOERs are published at a higher frequency than that of national elections it would be possible to align the timing of only some of the reports with the electoral cycle.

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Box 1 Summary of Proposals to Strengthen National State of Environment Reporting16 1. Regular national environmental reporting should be introduced in countries that do not yet publish an SOER, and where environmental reporting is in place it should be progressively strengthened through investments in data collection (including gender-disaggregated data), monitoring, and reporting systems and technical capacity, reflecting different starting points, circumstances, priorities, and resource availability in individual countries. 2. SOERs should include forward-looking information on distance to targets, outlooks, and scenarios, and to the extent feasible also including information and data on nearer term risks, resilience, and potential tipping points with respect to the most critically important indicators and environmental bottom lines. To this end, the DPSIR framework could be formally extended to DPSIRR, where the additional R refers to environmental risks. 3. It is important that SOERs be produced on an independent basis from the government of the day to increase public confidence in the integrity of data and scientific judgments in them. 4. A legislative requirement for the government to respond to each SOER should be considered to ensure that reports receive attention and that they impact on environmental policies. A mandatory response could include government stating its top priority environmental goals, strategies, targets, policies, and milestones, together with a requirement to report regularly on progress. 5. As feasible an SOER should be is published in the normal course of events within a specified time prior to each national election. 6. The international community should provide additional technical and financial support to developing and middle-income countries for the production of SOERs, potentially focusing on mega-diverse countries.

16 These are based on proposals originally developed with respect to environmental reporting in New Zealand. See Petrie (2018). See also blogs and podcast (Petrie, 2019a; 2019b; 2019c).

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References Bank for International Settlements. (n.d.). Basle III: International regulatory framework for banks. https://www.bis.org/bcbs/basel3.htm Carr, E., Wingard, P., Yorty, S., Thompson, M., Jensen, N., & Roberson, J. (2007). Applying DPSIR to sustainable development. International Journal of Sustainable Development and World Ecology, 14(6), 543–555. Department of the Environment and Energy. (2016). Australia State of Environment 2016. https://soe.environment.gov.au/ De Smedt, M., Giovannini, E., & Radermacher, V. (2018). Measuring sustainability. In For good measure: Advancing research on well-being metrics beyond GDP, Chapter 9. European Commission. (1998, June 25). Convention on access to information, public participation in decision-making and access to justice in environmental matters. https://ec.europa.eu/environment/aarhus/index.htm European Environment Agency. (1995). Europe’s environment: The Dobris assessment. European Environmental Agency. European Environment Agency. (1999a). A checklist for state of the environment reporting (Prepared by Peter Kristensen, Anderson, L., and Denisov, N. Technical Report No 15). European Environment Agency. (1999b). State of the environment reporting: Institutional and legal arrangements in Europe (Prepared by L. Anderson, Wyatt, B, Denisov, N and Kristensen, P. Technical report No 26). European Environment Agency. (2015). Sweden country briefing—The European environment—State and outlook 2015. https://www.eea.europa.eu/soer2015/countries/sweden European Environment Agency. (2019, December 3). Information and knowledge for a sustainable environment. https://www.eea.europa.eu/themes/sus tainability-transitions/state-of-the-environment-reporting/information-andknowledge-for-a European Environment Agency. (2020). State of the environment reporting in Europe: United in diversity. https://www.eea.europa.eu/themes/sustai nability-transitions/state-of-the-environment-reporting/state-of-the-enviro nment-reporting. European Parliament. (2020, November). Environment policy: General principles and basic framework. https://www.europarl.europa.eu/factsheets/en/sheet/ 71/environment-policy-general-principles-and-basic-framework Gupta, J., Scholtens, J., Perch, L., Dankelman, I., Seager, J., Sander, F., StanleyJones, M., & Kempf, I. (2019, June 25). Re-imagining the driver-pressurestate-impact-response framework from an equity and inclusive development perspective. Sustainability Science. https://doi.org/10.1007/s11625-01900708-6 International Monetary Fund. (2018). Fiscal transparency handbook.

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Ireland Environmental Protection Agency. (2020). Ireland’s environment—An integrated assessment 2020. https://www.epa.ie/irelandsenvironment/stateo ftheenvironmentreport/ Kristensen, P. (2004). The DPSIR framework, Paper presented at the 27–29 September 2004 workshop on a comprehensive/detailed assessment of the vulnerability of water resources to environmental change in Africa using river basin approach. UNEP, UNEP Headquarters, Nairobi, Kenya. OECD. (1998). Recommendation of the Council on Environmental Information, OECD/LEGAL/0296. OECD. (2002). Best practices in budget transparency. OECD. (2014). OECD environmental performance reviews: Sweden. OECD. OECD. (n.d.). https://www.oecd.org/environment/country-reviews/aboutenv-country-reviews.htm Open Government Partnership. (2020, August 31). A guide to open government and the Coronavirus: Green transitions—Climate and environment. Open Government Partnership. https://www.opengovpartnership.org/doc uments/a-guide-to-open-government-and-the-coronavirus-green-transitionsclimate-and-environment/. Parliamentary Commissioner for the Environment. (2019). Focusing Aotearoa New Zealand’s Environmental Reporting System. Petrie, M. (2013). Managing fiscal risk. In The international handbook of public financial management (pp. 590–618). Chapter 28. Palgrave Macmillan. Petrie, M. (2018, May). Reversing the degradation of New Zealand’s environment through greater government transparency and accountability. Policy Quarterly, 14(2) https://ojs.victoria.ac.nz/pq/article/view/5092. Petrie, M. (2019a). Environmental outcomes and fiscal policy in NZ: Need for increased transparency and accountability. Presentation to the OECD Green Budgeting Experts Group Meeting, Paris, 29 April 2019. http://www.oecd.org/environment/green-budgeting/paris-collabora tive-meetings-and-events.htm Petrie, M. (2019b, July 17). Averting environmental catastrophe: What would real accountability for environmental stewardship look like? And why it has a lot to do with fiscal policy. Blog on the Global Initiative for Fiscal Transparency web site. http://www.fiscaltransparency.net/blog_open_public.php? IdToOpen=7130. Petrie, M. (2019c, July 25). Better stewardship can avert environmental catastrophe. Blog posted on the IMF’s Public Financial Management Blog. Rockstrom, J., Steffen, W., Noone, K., Persson, A., Chapin III, F.S., Lambin, E., Lenton, T. M., Scheffer, M., Folke, C., Schellnhuber, H. J., & Nykvist, B. (2009). Planetary boundaries: Exploring the safe operating space for humanity. Ecology and Society, 14, 32.

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Rump. (1996). State of the environment reporting: Source book of methods and approaches (Report from Division of Environment Information and Assessment). United Nations Environment Programme (UNEP/DEIA), Nairobi. Smeets, E., & Weterings, R. (1999). Environmental indicators: Typology and overview (Technical report No 25), TNO Centre for Strategy, Technology and Policy, The Netherlands. South Africa Department of Environmental Affairs. (2019). https://www.enviro nment.gov.za/events/department_activities/stateofenvironmentreporting_inf ormationagesession2019 Stiglitz, J., Fitoussi, J.-P., Durand, M. (2018). For good measure, advancing research on well-being metrics beyond GDP. Stiglitz, J., Sen, A., & Fitoussi, J. (2009). Report by the commission on the measurement of economic performance and progress, 2009 (CMEPSP). Task Force on Climate-Related Financial Disclosures. (2017, June). Recommendations of the task force on climate-related financial disclosures. United Nations Economic Commission for Europe. (1998, June 25). Convention on access to information, public participation in decision-making and access to justice in environmental matters. https://ec.europa.eu/environment/aarhus/ index.htm United Nations Economic Commission for Europe. (2017a). Effectiveness and relevance of recent environmental assessments for policy-making and public information in the Eastern Partnership region. https://zoinet.org/product/ effectiveness-and-relevance-of-recent-environmental-assessments-for-policymaking-and-public-information-in-the-eastern-partnership-region/ United Nations Economic Commission for Europe. (2017b). Setting strategic goals and objectives for the Working Group on Environmental Monitoring and Assessment. ECE Working Group on Environmental Monitoring and Assessment. United Nations Environment Program. (2016). Global gender and environment outlook. UN Environment. United Nations Environment Program. (2019a, March 4). Global environment outlook 6. https://www.unep.org/resources/global-environment-outlook-6 United Nations Environment Program. (2019b). Guidelines for conducting Integrated environmental assessments. https://www.unep.org/resources/report/ guidelines-conducting-integrated-environmental-assessments U.S. Environmental Protection Agency (EPA). (2008). EPA’s 2008 report on the environment. National Center for Environmental Assessment, Washington, DC; EPA/600/R-07/045F. U.S. Environmental Protection Agency (EPA). (n.d.). Report on the environment: About the ROE. https://www.epa.gov/report-environment/about-roe

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Zoï Environment Network. (1998). Cookbook for state of the environment reporting on the internet. https://zoinet.org/product/cookbook-for-state-ofthe-environment-reporting-on-the-internet/ Zoï Environment Network. (2019). Reporting on the state of the environment in Afghanistan. https://zoinet.org/product/reporting-on-the-state-ofthe-environment-in-afghanistan-workshop-report-4-6-march-2019-kabul/

CHAPTER 3

Mainstreaming Environmental Stewardship in Government Strategy and Policy

Abstract GDP growth remains unduly dominant in the highest-level statements of government strategy and policy objectives although there is increasing recognition of the need to incorporate key physical environmental outcomes in a dashboard of core indicators of social and economic progress. Comparing environmental governance with that of fiscal and monetary policy reveals a lack of requirements to set and report against time-bound environmental targets for key parameters (climate change aside). Furthermore, if environmental goals and targets are to have an impact, they need to be incorporated in government strategy and in the government’s most powerful cross-sector policy integration tool: fiscal policy and the annual budget cycle. Keywords Limitations of GDP · Key national indicators · Target transparency · Comparative policy governance · Environmental mainstreaming

Helpful comments have been received on this chapter from Jonathan Boston. The chapter draws from Petrie 2018 © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 M. Petrie, Environmental Governance and Greening Fiscal Policy, Palgrave Studies in Impact Finance, https://doi.org/10.1007/978-3-030-83796-9_3

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This chapter moves from environmental reporting to the mainstreaming of environmental goals in overall government strategy. It covers: i. Incorporating environmental targets in government strategy: developing a dashboard of key indicators. ii. Comparative policy governance: the lack of requirements to set policy goals and targets for environmental stewardship (climate change mitigation aside) in comparison to other functions of government such as fiscal and monetary policy. iii. The need to integrate environmental goals and targets in overall government strategy and in fiscal strategy and the annual budget cycle.

1 Incorporating Environmental Targets in Overall Government Strategy: Developing a Dashboard of Key Environmental, Economic, and Social Indicators ‘Choices between promoting GDP and protecting the environment may be false choices, once environmental degradation is appropriately included in our measure of economic performance’ (Report by the Commission on the Measurement of Economic Performance and Progress, 2009, Executive Summary, paragraph 3). The limitations of GDP as a single measure of economic and social progress and sustainability have been increasingly recognized in recent decades. In their influential 2009 report, the Commission on the Measurement of Economic Performance and Progress—also referred to as the Stiglitz-Sen-Fitoussi Commission—concluded that we should move away from over-reliance on GDP when assessing a country’s health, toward a broader dashboard of indicators that would also reflect the distribution of well-being and its sustainability—Box 1. Yet GDP growth remains unduly dominant in the highest-level statements of government strategy and policy objectives (Raworth, 2017, chapters 1 and 7). The central message of the Stiglitz-Sen-Fitoussi Commission was that what we measure affects what we do; if we don’t measure something, it becomes neglected, as if the problem didn’t exist. This has been the case with environmental degradation, and reinforces the

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necessity to improve the measurement, monitoring, and reporting of environmental outcomes and their integration in government strategy, policy, and enforcement. Box 1 Stiglitz-Sen-Fitoussi Commission 2009: Key messages.1 There is no simple way of representing every aspect of well-being in a single number in the way GDP describes market economic output. This has led to GDP being used as a proxy for both economic welfare (i.e., people’s command over commodities) and general welfare (which also depends on people’s attributes and non-market activities). GDP was not designed for this task. We need to move ‘Beyond GDP’ when assessing a country’s health and complement GDP with a broader dashboard of indicators whose elements should be interpretable as variations of some underlying ‘stocks’ that reflect the distribution of well-being in society and its sustainability across its social, economic, and environmental dimensions. The challenge is to make the dashboard small enough to be easily comprehensible, but large enough to summarize what we care about the most. A monetary index of sustainability has its place in such a dashboard but, under the current state of the art, it should remain essentially focused on economic aspects of sustainability. The environmental aspects of sustainability deserve a separate follow-up based on a well-chosen set of physical indicators. ‘In particular there is a need for a clear indicator of our proximity to dangerous levels of environmental damage (such as associated with climate change or the depletion of fishing stocks).’

There are two main potential approaches to incorporating the environment in broader measures of economic and social performance: • assign monetary values to elements not incorporated in GDP to produce an augmented measure or measures of GDP or of national wealth; or

1 Drawn from the Commission’s report and from the 2018 HLEG’s summary of the main message in the report (High-Level Expert Group, 2018, Executive Summary).

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• focus on physical (non-monetary) indicators of environmental outcomes and include them in a dashboard of key environmental, social, and economic indicators.2 The two approaches are not mutually exclusive, and in fact the second (physical volume measures) is a precondition for monetary valuation. There is certainly scope to monetize some environmental stocks and flows, such as the value of natural resources traded in markets (e.g. forests, fish, and sub-soil assets such as oil, gas, and minerals), and this is the approach adopted in the UN’s System of Environmental–Economic Accounting (SEEA), which integrates economic and environmental data to provide a more comprehensive and multipurpose view of the interrelationships between the economy and the environment and the stocks of and changes in stocks of environmental assets (United Nations et al., 2014). In the follow-up to the Stiglitz-Sen-Fitoussi report, a High-Level Expert Group (HLEG) recommended in 2018 that: ‘Better measures of sustainability are needed. This requires developing full balance sheets for various institutional sectors, covering all their assets and liabilities, measuring the rents implicit in asset valuations, as well as improved metrics of human and environmental capital and of the vulnerability and resilience of systems’ (HLEG, 2018, Recommendation 9). A companion report to the HLEG report acknowledged that there are severe limitations to the validity and legitimacy of valuing natural resources for which there is no market, such as the value of endangered species, the value of ecosystem services, or the value of public goods such as national parks (De Smedt et al., 2018, Chapter 9, p. 20). Consistent with the conclusions of the Stiglitz-Sen-Fitoussi Commission and the HLEG, priority attention should therefore be devoted to developing adequate measures of physical environmental outcomes and to incorporating them in a dashboard of key national indicators. Putting estimates of monetary value on many environmental stocks and flows will always involve debatable judgments, limiting their value in measuring 2 What INTOSAI (2019, p. 7) has defined as ‘key national indicators,’ a ‘...set of indicators used by the government in order to set objectives, monitor progress and evaluate goals attainment as well as to measure the performance of the government activities, programmes, policies, operations or undertakings, as well as the direct and indirect impacts of public policies and programmes.’

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progress and shaping policy design. The resulting ‘noisy’ debate over monetary valuation will likely cloud and could weaken accountability rather than strengthen it—some will contest even the idea that an attempt should be made to place a monetary value on nature (Monbiot, 2018). Focusing on physical outcome indicators on the other hand has potential to clarify and strengthen the ability to hold governments accountable for their stewardship of the environment. A study of the use and impact of non-GDP indicators of social progress concluded that for such indicators to have more impact they must be reliable, policy-relevant, reported regularly, and enjoy public credibility (Boston, 2017, Chapter 11; Whitby et al., 2014). This again points to the importance of regular, independent national state of the environment reporting of physical environmental indicators. In the period since the 2009 Stiglitz-Sen-Fitoussi Commission report, there have been a number of developments internationally in compiling broader measures of economic, social, and environmental progress. The OECD’s Better Life Initiative measures 15 dimensions including natural capital and has assessed wellbeing in 37 OECD countries and 4 partner countries in five reports between 2010 and 2020 (OECD, n.d.). The most notable international development since 2009 has been at the UN: ‘the Paris COP21 climate agreement and the UN 2030 Agenda (with its 17 Sustainable Development Goals, SDGs) demonstrate the extent to which the Stiglitz-Sen-Fitoussi report’s call to go “beyond GDP” when assessing progress has influenced the international policy agenda. At the same time, the SDG’s 169 targets and 231 unique indicators illustrate the difficulties in balancing completeness and clarity. The HLEG recommends using a more limited dashboard of indicators that countries can design to suit their own priorities’ (HLEG, 2018, Foreword). This is consistent with the argument put forward in Chapter 2: that environmental indicators should come from a bottom-up process determined at the level of the nation state, specifically from a process of subnational and national environmental reporting and prioritization. The Stiglitz-Sen-Fitoussi Commission and the subsequent HLEG devoted considerably more attention to social indicators than to environmental; and they focused on the role of statistical offices rather than on the collection and monitoring of environmental data and statistics. For example, of the 12 recommendations of the HLEG only one

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referred to environmental issues and that recommendation covered both environmental and social sustainability. The goal of the 2009 Commission Report and the 2018 follow-up was also a more limited one: ‘The aim remains the same – help to develop the means to describe progress and, in this way, to contribute to better policies’ (HLEG, 2018, Executive Summary). The goal of this book, on the other hand, is to make governments more accountable for environmental stewardship. This includes the goal of appropriate measurement of environmental outcomes but adds to it the need for governments to publish and report progress against policy targets for environmental outcomes, and to link environmental goals to government strategy and fiscal policy.

2 Comparative Policy Governance: The Importance of Requirements to Set Policy Goals and Targets for Environmental Outcomes ‘What also matters is to anchor these indicators in the policy process, in ways that survive the vagaries of electoral cycles’ (HLEG, 2018, Executive Summary). The HLEG referred to the need to incorporate social and environmental indicators across the policy cycle, from identifying priorities for action, through policy analysis, allocating resources, implementation, monitoring, and auditing results. The approach advocated here is to elevate this a step further by introducing a requirement that the government set and report against priority environmental goals and targets. As noted in the Introduction, changing the overall goals of government policy is a high leverage point in any system of political economy (Meadows, 1999). It is therefore important to move beyond environmental reporting to consider the wider framework for environmental governance, including transparency of goals and targets and reporting against them. Weaknesses are readily apparent when comparing environmental governance against the governance of other core functions of government, notably fiscal policy, and monetary policy (Carney, 2021, pp. 333–334; Petrie, 2018, pp. 34–36). The exercise also points to some potential levers to strengthen accountability for environmental stewardship.

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Table 1 policy

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Comparative policy governance in fiscal, monetary, and environmental

1 stage in policy cycle

2 policy governance parameter

3 fiscal policy good practices

4 monetary policy good practices

5 common environmental governance practices

6 Swedish environmental governance

Ex ante elements

Legislated outcome targets Targets required Milestones required Independent monitoring reports

Yesa

Yes

No

[Yes]b

Yes

Yes

No

Some

Yes

Yes

No

Some

Yes

Yes

Yes

Alignment with electoral cycle Independent commentary Mandated government response

No (yes in some)d

No

Yesc (National State of Environment Reports) No

No

Yes

Yes

Yes

Yes

Yes

No

No

Yes

Ex post elements

Drawing from Table 1 in Petrie (2018). a This includes countries where there is a legislative requirement to announce fiscal targets, and countries with, in addition, the actual fiscal targets (numerical fiscal rules) set in legislation b Targets are set by Parliament, but not in the form of legislation c Not all national state of the environment reports are published under assured conditions of independence d In Australia and New Zealand publication of a Pre-election Economic and Fiscal Update immediately prior to a general election is required by law. Such a practice is stipulated in the OECD Best Practices in Budget Transparency 2002 (practice 1.6)

Table 1 sets out some well-recognized elements of policy governance: ex ante target setting, ex post monitoring, and reporting.3 The rationale is that transparency of goals, targets, and reporting reduces policymakers’ discretion to ignore environmental outcomes and promotes the pursuit 3 See for instance International Organisation of Supreme Audit Institutions (INTOSAI) 2019 for an illustration of these elements in the context of auditing government key national indicators.

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of policies to enhance environmental outcomes. Table 1 shows how these elements are reflected in increasingly common governance frameworks for fiscal policy, and for monetary policy, in comparison to environmental governance. Table 1 also illustrates comparative policy governance across these features with respect to environmental governance—outside the climate change mitigation domain—in most countries (column 5) and in Sweden (column 6), which is a recognized leader in environmental transparency and accountability. Note that the UK Environment Bill 2020 would require governments to set legally binding targets for air quality, water, biodiversity, and resource efficiency and waste reduction, put in place five yearly plans, and report on progress toward achieving targets every year. Box 2 describes some leading country practices in environmental target setting and progress reporting. Compared to arrangements for fiscal and monetary policy, Table 1 shows that there is a lack of requirements for ex ante transparency of environmental objectives and milestones and reporting against them— aside from climate change. While an increasing number of governments have bound themselves in law to a very high degree of transparency and accountability in other domains, they have generally not done so with respect to environmental stewardship. A recent change in the social policy domain also illustrates these principles and connects them to the government’s budget. In New Zealand, the Child Poverty Reduction Act 2018 requires the government of the day to set and report annually against long-term (10-year) and intermediate (3-year) targets on a defined set of child poverty measures, and to report each Budget day on progress toward the targets and how the Budget will reduce child poverty (New Zealand government, n.d.). For instance, with respect to transparency of fiscal policy targets, over the last thirty years, governments have increasingly managed the public finances based on commitments in domestic law to publish objectives, targets, and milestones, and to report regularly on progress. In the late 1980s/early 1990s when these governance innovations first appeared, they represented best international practice, but over the following 30 years it is fair to say they are now just good international practice: by 2019 more than 90 countries were using fiscal rules, including a wide range of advanced, emerging markets, and developing countries. Note that a fiscal rule is defined as a rule imposing a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates such as the

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central government fiscal deficit or public debt. As such, a fiscal rule goes well beyond a requirement for governments to state an explicit policy target, by requiring in addition that governments specify an enduring numerical value for the target (typically in legislation). There are in addition countries where legislation requires government to routinely publish and report against fiscal policy targets without the numerical value of the targets specified in legislation (New Zealand and Australia exemplify this approach). It is this latter form of transparency—a requirement to state and report against targets, without the actual targets necessarily being specified in the law—that is being advocated here. Box 2 Environmental target setting and progress reporting: leading country practices Sweden is recognized as a pioneer in transparency of national environmental objectives, targets, and progress reports (OECD, 2014). In 1999 Sweden created a system of environmental quality objectives (EQOs) which are set by Parliament, but which do not have legal status. Sweden has environmental objectives of three different kinds: a generational goal, milestone targets, and quality objectives. The generational goal focuses environmental efforts on the recovery of ecosystems, conserving biodiversity and the natural and cultural environment, good human health, efficient materials cycles free from dangerous substances, sustainable use of natural resources, efficient energy use and patterns of consumption. There are 16 EQOs that describe the desired state of the environment, adopted by the government in 2012. These are supported by milestone targets that specify concrete actions toward achieving them. In 2010, the government appointed an All-Party Committee on Environmental Objectives (comprising parliamentarians, external stakeholder representatives, and experts) to advise how the EQOs can be achieved. The EQO system engages government agencies at all administrative levels, with implementation responsibilities often residing at the subnational level. The prospects for achieving the EQOs are assessed each year to inform the annual budget bill and the government’s annual progress report to Parliament. Sweden has also introduced a Green Budgeting Law that contains policy objectives (as well as some ‘green’ PFM practices). An in-depth evaluation of environmental action and the prospect of reaching the objectives is performed once every parliamentary term. The evaluation serves as a basis for government policy and priorities. The Swedish EPA prepares the overall reports to the Government,

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working with all the agencies with responsibilities within the environmental objectives system. Other countries to take steps in this direction include the Netherlands where the national state of the environment report contains an evaluation of the degree to which short-term quantitative environmental targets set by the Cabinet are projected to be achieved through current policy (EEA, n.d.), and England where there is regular reporting on progress against 24 indicators from the government’s Biodiversity Strategy.4 More generally, in Wales, the Government of Wales Act 1998 placed a duty on the National Assembly to have a scheme setting out how it will promote sustainable development in the exercise of its functions. This culminated in the Well-being of Future Generations (Wales) Act 2015, which places a duty on all public bodies to carry out sustainable economic, social, environmental, and cultural development, including publishing a wellbeing statement, an annual progress report, and a public response to any recommendations made to them by the independent Future Generations Commissioner (Davidson, 2020; Welsh Government, n.d.). Finally, the UK Environment Bill 2020 would require UK governments to set legally binding long-term targets for air quality, water, biodiversity, and resource efficiency and waste reduction, put in place five yearly Environmental Improvement Plans which set out the intended steps to improve the environment and report on progress toward achieving targets every year. A new Office for Environmental Protection would hold the government to account for progress toward achieving targets and every year can recommend how it can make better progress, to which government must respond.5 In 2021 the government tabled an amendment to the Bill to require a new legally binding target on species abundance in England for 2030.6

With respect to monetary policy, again since the innovation first appeared at the end of the 1980s, central banks in many countries now estimate and make public a target inflation rate and then use monetary policy tools such as interest rates to attempt to achieve the target, accompanied by regular

4 See for instance https://assets.publishing.service.gov.uk/government/uploads/sys tem/uploads/attachment_data/file/850376/England_biodiversity_indicators_2019_rev2. pdf. 5 https://www.gov.uk/government/publications/environment-bill-2020. 6 HM Treasury (2021).

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reporting on performance.7 As of 2016, 36 countries were operating a full inflation targeting regime, including advanced, emerging market, and developing economies and from every continent (Agénor & Pereira da Silva, 2019). A number of other central banks commit to the goal of low inflation but have not announced explicit inflation targets or pursue other announced policy goals such as employment promotion in addition to an inflation target. Regulation is the final major policy instrument of government—and a key instrument for environmental stewardship. The 2012 Recommendation of the Council of the OECD on Regulatory Policy and Governance sets out guidance on the principles, mechanisms, and institutions required to improve the effectiveness of regulatory frameworks in achieving better social, environmental, and economic outcomes (OECD, 2012). The recommendations include committing at the highest political level to an explicit whole-of-government policy for regulation, with clear articulation of regulatory policy goals and strategies to ensure that the economic, social, and environmental benefits justify the costs. ‘Governments should issue a formal and binding policy statement underpinning regulatory reform including guidelines for the use of regulatory policy tools and procedures’ (Recommendation 1.4). It is clear then, that transparency of policy objectives and strategies is well-established internationally both in principle and in practice across all the core policy instruments of government: fiscal policy, regulation, and monetary policy. There is also some evidence that the use of announced policy targets together with regular reporting and associated institutional features is associated with improved performance.8 Of course, environmental outcomes result from the complex interplay of natural processes, human activities, and central, regional, and local government actions. They cannot be managed in quite the same way that a government can manage its finances—although the size and frequency of exogenous shocks to the public finances mean that this difference in 7 ‘Inflation targeting is now the most common framework in major EMEs [Emerging Market Economies], catching up with the prevailing practice in advanced economies.’ Bank for International Settlements (2019). See also Jahan, 2018. 8 ‘well-designed [fiscal] rules are indeed effective in constraining excessive deficits.’ Eyraud et al., (2018, p. 4); ‘…the adoption of an IT [Inflation targeting] regime in MICs [Middle Income Countries] has led to lower average inflation rates and reduced inflation volatility compared to a control group of non-IT countries’ Agénor and Pereira da Silva (2019, p. 41).

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‘manageability’ should not be overestimated, as further illustrated by the dramatic fiscal impacts of the GFC and the global COVID pandemic. Nevertheless, recognition that transparency of objectives and targets has an important role to play in the environmental domain comes from the international approach to climate change. There the international community has agreed on a framework of a global outcome target (1.5– 2.0 °C warming) combined with national commitments to limit GHG emissions and a regime of measurement, monitoring, and reporting of country performance. It is also an approach adopted by the EU through environmental directives requiring member states to achieve a certain result or target (e.g., an air quality standard), leave them free to choose how to do so, but require reporting on the measures implemented and progress made (EC, n.d.). In the private sector, the Task Force on Climate-Related Financial Disclosures included metrics and targets as one of its four core disclosure elements, indicating that organizations should consider reporting on time frames over which the targets apply and the key performance indicators used to assess progress (Task Force on Climate-Related Financial Disclosures, 2017, pp. 22–23). There is an urgent need, at the national level, to apply to all environmental domains a broadly comparable underlying framework of recognized and independently verified outcomes measurement and reporting, mandatory transparency of goals and targets, and ex post reporting and accountability. Note that the approach being proposed here for environmental governance does not require that specific policy targets are enshrined in law. This approach amounts to legislating for a particular view of how the trade-offs should be made between environmental and other policy objectives. The approach recommended is a legislative requirement that government set targets and report against them. The selection of the actual targets themselves, e.g., a specific minimum level of air or water quality, can either be included in the legislation, or it can be left to the government of the day to determine through regular political processes. This choice requires assessment of the trade-offs between policy commitment and flexibility, a choice familiar from the literatures on monetary policy and on fiscal policy.9

9 See for instance Kydland and Prestcott (1977) and Eyraud et al., op. cit. (2018).

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In the case of climate change, the long time horizons involved and the need to reduce policy uncertainty for private sector investment argue for quantitative targets to be included in legislation, as is the case in a growing number of countries following the UK’s pioneering Climate Change Act 2008. In addition, independent technical advice to government on the interim pathway to the targets is desirable, such as that being provided by a number of Climate Change Commissions, exemplified by the UK Climate Change Committee.10 However, the setting of and reporting against policy targets for other environmental domains does not necessarily require independent institutions of the type that feature in climate change policy, monetary policy (independent central banks), regulatory policy (independent regulatory agencies), or that increasingly feature in fiscal policy (e.g., independent fiscal institutions). The framework of target setting could, initially at least, be implemented through normal policy advice provided by environment ministries, ideally drawing on independent advisory councils—although fully independent institutions are likely to be desirable. Note that independence in the preparation of environmental statistics and national State of Environment reports is an important requirement, as discussed in Chapter 2, and may be most easily met by institutions formally separate from a government ministry or department or with statutory protection of the relevant functions. This general approach of transparency of targets and reporting is required across all environmental domains, drawing on baseline data in national State of the Environment Reports, with governments mandated to set time-bound targets for the most critical environmental indicators in each country.

3 Integrating Environmental Objectives and Targets in Fiscal Strategy and the Annual Budget The need to mainstream environmental objectives and policies in governments’ high-level strategies has long been recognized. As noted in the Integrated Environmental Assessment Guide, a key objective of a State of the Environment Report should be seeking better linkages between the

10 See for instance the Committee’s report of 21 June 2021 criticising the government for being too slow to introduce policies required to meet its mitigation and adaptation targets (Climate Change Committee, 2021).

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findings of the report and formal decision-making process in government such as budgets (UNEP, 2019, p. 22). Similarly, INTOSAI’s Guide on auditing key national indicators states that, in order to be an effective management tool, the Key National Indicators need to be incorporated into the strategic decision-making process (INTOSAI, 2019, paragraph 86). The OECD’s Framework for Green Budgeting puts forward a strong strategic framework as the first key building block: ‘It is particularly important that the government’s strategic priorities and objectives relating to the environment and climate are clearly set out so as to help inform fiscal planning. For example, national climate change or environmental strategies that set out relevant priorities and objectives. These strategies and plans help guide tax and spend decisions so that they can support the achievement of national objectives’ (OECD, n.d., Framework for Green Budgeting). While government regulation is critically important to environmental outcomes, there is no regulatory policy cycle across government or an instrument equivalent to the annual budget as a focus for regular, coordinated cross-government policy action and prioritization. The annual budget is typically a government’s single most important expression of its actual strategies and priorities (OECD, 2002, p. 7). It is at the same time its most powerful cross-sector policy integration tool, spanning as it does all areas of government. And in countries with multi-year national planning frameworks, these must be implemented in large part through annual budget allocations for the public investment projects that are generally the main focus of National Plans or National Development Strategies. There is also increasing complementarity and substitutability between regulatory and fiscal instruments—such as between carbon taxes and emissions trading schemes, and between regulatory standards and feebate schemes (as discussed in Chapter 4). Governments increasingly need to design smart packages of fiscal and regulatory instruments to address climate change and other environmental challenges. Finally, effective environmental regulation and enforcement require adequate budget allocations for regulatory agencies and for environmental monitoring, reporting, and research and development. Furthermore, fiscal policies—taxation and other revenue policies as well as government spending—have major environmental impacts. The environmental impacts of fiscal policies are both positive and negative, and both intended and unintended, as discussed in Chapter 4.

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If environmental goals and targets are to have an impact, therefore, they need to be more effectively mainstreamed i.e., incorporated first in key dashboard indicators of national progress alongside economic and social indicators, and then incorporated in the strategy process that drives or shapes fiscal policy and the annual budget. It cannot be left to the environment ministry and related agencies to try to promote improved environmental stewardship on their own. The interventions funded through their budgets and their regulatory reach are relatively limited in relation to the total potential positive and negative environmental impacts of government policy. The most powerful strategy and policy implementation tool available to government—the annual fiscal strategy and budget process—must be utilized. This means that the powerful central agencies of government, especially the ministry of finance, must be fully engaged in the mainstreaming of a government’s environmental stewardship objectives—as called for in the 1987 Brundtland Commission (UN, 1987, chapter 12, paragraph 26) and as discussed further in Chapters 4 and 5. More specifically, information on environmental outcomes and risks, and interactions between the environment, the economy, and social outcomes needs to be integrated in deliberations and decisions on the government’s overall strategy and its medium-term fiscal strategy. In principle, environmental outcomes and risks should be assessed alongside the economic, fiscal, and financial sector outcomes and risks that typically receive the lion’s share of the attention currently in fiscal and budget strategy reports. More effective identification, measurement, analysis, and reporting of environmental risks could help to promote earlier mitigation and provide detail on environmental risks that can be brought to bear alongside the wealth of information on economic, financial, and fiscal risks—which would facilitate explicit consideration of policy priorities, complementarities, and trade-offs across domains in the setting of government policies, especially medium-term fiscal strategy. Yet fiscal strategy setting around the world remains overwhelmingly dominated by assessment of macroeconomic and fiscal statistics and associated risks, with increasing attention also to key social indicators (UN, 2019, Chapter 3). Environmental outcomes and risks, and interactions between the environment and the economy generally have received limited if any attention among government’s top priority objectives in

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budget documents, which typically focus on economic growth, social policy objectives, and fiscal policy outcomes, targets, and risks. This is starting to change, however. Some countries have begun to incorporate environmental goals and indicators in their fiscal strategy statements and in their budget processes. Chapter 4 discusses this emerging and crucially important field referred to as green budgeting, including budgeting focused on climate change, in more detail.

References Agénor, P.-R., & Pereira da Silva, L. A. (2019, February). Integrated inflation targeting: Another perspective from the developing world. Bank for International Settlements. Bank for International Settlements. (2019, June 30). Monetary policy frameworks in EMEs: inflation targeting, the exchange rate and financial stability (BIS Annual Economic Report). Boston, J. (2017). Governing for the future: Designing democratic institutions for a better tomorrow. Emerald Publishing Limited. Carney, M. (2021). Value(s): Building a better world for all. William Collins. Climate Change Committee. (2021). Time is running out for realistic climate commitments. https://www.theccc.org.uk/2021/06/24/time-is-run ning-out-for-realistic-climate-commitments/ Davidson, J. (2020). #futuregen lessons from a small country. Chelsea Green Publishing. De Smedt, M., Giovannini, E., & Radermacher, W. (2018). Measuring sustainability. In For good measure: Advancing research on well-being metrics beyond GDP, OECD 2018, Chapter 9. European Commission. (n.d.). EU guide to environmental directives. https://ec. europa.eu/environment/nature/natura2000/platform/news/eu_guide_env ironmental_directives.htm European Environment Agency. (n.d.). State of the environment reporting in Europe: United in diversity. https://www.eea.europa.eu/themes/sustainab ility-transitions/state-of-the-environment-reporting/ Eyraud, L., Debrun, X., Hodge, A., Lledó, V., & Pattillo, C. (2018). IMF staff discussion note SDN18/04, second-generation fiscal rules: Balancing simplicity, flexibility, and enforceability. High-Level Expert Group on the Measurement of Economic Performance and Social Progress. (2018). From beyond GDP: Measuring what counts for economic and social performance. http://www.oecd.org/publications/forgood-measure-9789264307278-

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HM Treasury. (2021, June 14). The economics of biodiversity: The Dasgupta review—Government response. https://www.gov.uk/government/publicati ons/the-economics-of-biodiversity-the-dasgupta-review-government-response International Organisation of Supreme Audit Institutions. (2019, June 28). Guidance on audit of the development and use of key national indicators. INTOSAI GUID 5290. https://www.issai.org/wp-content/uploads/2019/ 09/GUID-5290-Guidance-on-audit-of-Key-National-Indicators.pdf Jahan, S. (2018, June 1). Inflation targeting: Holding the line. Finance and development, back to basics. International Monetary Fund. https://www.imf. org/external/pubs/ft/fandd/basics/72-inflation-targeting.htm Kydland, F., & Prescott, E. (1977, June). Rules rather than discretion: The inconsistency of optimal plans. The Journal of Political Economy, 85(3), 473–492. Meadows, D. (1999). Leverage points: Places to intervene in a system. Sustainability Institute. Monbiot, G. (2018, May 15). The UK government wants to put a price on nature—But that will destroy it. The Guardian. New Zealand Government. (n.d.). Child poverty reduction and wellbeing legislation. https://dpmc.govt.nz/our-programmes/reducing-child-poverty/childpoverty-reduction-and-wellbeing-legislation OECD. (2002). Best practices in budget transparency. https://www.oecd.org/ gov/budgeting/Best%20Practices%20Budget%20Transparency%20-%20comp lete%20with%20cover%20page.pdf OECD. (2012). Recommendation of the council of the OECD on regulatory policy and governance. https://www.oecd.org/governance/regulatorypolicy/2012-recommendation.htm OECD. (2014). Environmental performance reviews: Sweden 2014. http://www. oecd.org/env/country-reviews/oecd-environmental-performance-reviewssweden-2014-9789264213715-en.htm OECD. (n.d.). Better life initiative. http://www.oecd.org/statistics/better-lifeinitiative.htm OECD. (n.d.). Framework for Green budgeting. http://www.oecd.org/enviro nment/green-budgeting/OECD-Green-Budgeting-Framework-Highlights. pdf OECD. (n.d.). Paris collaborative on Green budgeting. https://www.oecd.org/ environment/green-budgeting/ Petrie, M. (2018, May). Reversing the degradation of New Zealand’s environment through greater government transparency and accountability. Policy Quarterly, 32–39. Raworth, K. (2017). Doughnut economics: Seven ways to think like a 21st-century economist. Random House.

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Report by the Commission on the Measurement of Economic Performance and Progress. (2009). http://library.bsl.org.au/jspui/bitstream/1/1267/1/Mea surement_of_economic_performance_and_social_progress.pdf Stiglitz, J., Fitoussi, J.-P., & Durand, M., (Eds.). (2018). For good measure: Advancing research on well-being metrics beyond GDP. OECD 2018. Task Force on Climate-Related Financial Disclosures. (2017, June). Final Report. United Nations. (1987). The World Commission on Environment and Development. Our Common Future. United Nations. (2019). World Public Sector Report. https://www.un.org/dev elopment/desa/publications/world-public-sector-report-2019.html United Nations Environment Program. (2019). Guidelines for conducting Integrated environmental assessments. https://www.unep.org/resources/report/ guidelines-conducting-integrated-environmental-assessments United Nations, the European Commission, the Food and Agriculture Organization, the Organisation for Economic Co-operation and Development, the International Monetary Fund, and the World Bank Group. (2014). System of environmental-economic accounting 2012—Central framework. https://uns tats.un.org/unsd/envaccounting/seeaRev/SEEA_CF_Final_en.pdf Welsh Government. (n.d.). Well-being of Future Generations (Wales) Act 2015: The essentials. https://www.futuregenerations.wales/wp-content/upl oads/2017/02/150623-guide-to-the-fg-act-en.pdf Whitby, A. (WFC) et al. (2014). ‘BRAINPOoL Project Final Report: Beyond GDP—From Measurement to Politics and Policy’ BRAINPOoL deliverable 5.2, A collaborative programme funded by the European Union’s Seventh Programme for research, technological development and demonstration under grant agreement No. 283024. WFC (World Future Council), 31 March 2014.

CHAPTER 4

The Evolution of Green Budgeting

Abstract The terms climate budgeting, green budgeting, and green fiscal policy are defined and illustrated, together with key environmental concepts and taxonomies. The two-way interactions between fiscal policies and the natural environment are described—the impacts on all environmental domains of taxation and spending, and the fiscal costs and risks from environmental degradation. Some quantitative evidence of environmental and fiscal impacts is cited. The evolution over the last decade of climate budgeting and green budgeting is described together with the associated development of technical guidance on these important practices. A wide range of developing, middle income, and advanced country practices are described including the latest cutting-edge practices. The chapter concludes with assessments of how green the initial COVID-19 pandemic responses by major countries have been.

Helpful comments have been received on this chapter from Richard Allen, Andrew Blazey, Stuart Brodie, Jim Brumby, Jonathan Boston, Fabien Gonguet, Juan Pablo Guerrero, Tim Irwin, Michelle Pawson, Lorena Rivero del Paso, Paolo de Renzio, Ozlem Aydin Sakrak, Eivind Tandberg, and Claude Wendling. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 M. Petrie, Environmental Governance and Greening Fiscal Policy, Palgrave Studies in Impact Finance, https://doi.org/10.1007/978-3-030-83796-9_4

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Keywords Climate change adaptation · Climate change mitigation · Budget tagging · Green budgeting · Green fiscal policy · Green COVID response

1

Introduction

It has been suggested that the term ‘green budgeting’ has its origins in the 1987 report of the Brundtland Commission which recommended that: …the major central economic and sectoral agencies of governments should now be made directly responsible and fully accountable for ensuring that their policies, programmes, and budgets support development that is ecologically as well as economically sustainable. Where resources and data permit, an annual report and an audit of changes in environmental quality and in the stock of the nation’s environmental resource assets are needed to complement the traditional annual fiscal budget and economic development plan. (United Nations, 1987, Chapter 12, paragraphs 26 and 27).

In 1987 this was a far-sighted call indeed. There was, however, little progress in accountability for the environmental impacts of fiscal policies and budgets for the following thirty years. In fact, historically there has been little guidance on how governments should identify, analyze, manage, and report the environmental impacts of their fiscal policies. But from around 2010 there has been growing interest and practice in the interfaces between fiscal policies and the environment, which has burgeoned in the last few years. The interest was led initially by increasing concern over climate change and the interactions in both directions between climate change and fiscal policies. More recently comprehensive approaches have emerged that consider all environmental domains, not just climate change. This chapter discusses the evolving concept and practice of ‘green budgeting.’ and is structured as follows: Section 2 defines the key terms of climate budgeting, green budgeting, and green fiscal policy.

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Section 3 discusses the two-way interactions between fiscal policies and the environment. Section 4 describes the evolution of climate budgeting and green budgeting, in three subsections: Subsection 4.1: the development of guidance on green budgeting. Subsection 4.2: country practices in climate budgeting and green budgeting. Subsection 4.3: how green have COVID-19 pandemic responses been?

2

Definition of Terms

At this relatively early stage in its evolution, the term green budgeting suffers from a lack of clarity as a variety of related terms are being used that are not always clearly defined or differentiated from each other. These include climate budgeting, green budgeting, and green fiscal policy. Box 1 outlines the definitions in common usage and attempts to provide some clarification. Box 1 Climate budgeting, green budgeting, and green fiscal policy: some definitions Climate budgeting: starting in the early 2010s some developing and middle-income countries in the Asia Pacific region started to tag (separately identify) and track (monitor and report) their government expenditures that are related to climate change adaptation and mitigation (Box 4 contains details). An important motivation was to package public investment projects for external financing. To date none of these countries has identified climate-related expenditures that are environmentally harmful. Climate budgeting does not deal with environmental issues outside climate change—e.g., biodiversity loss, other forms of environmental degradation—and should therefore be seen as a subset of green budgeting. Green budgeting: in the last few years a term increasingly used to describe a wide range of activities related to the interface between fiscal policies and the environment not limited to climate change. Green budgeting may refer only to the expenditure side of the budget, and the focus may be all expenditures or a subset such as spending on public investment projects. With very few exceptions, green budgeting to date has focused

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only on the positive impacts on the environment—France being the main exception (Box 6). In some countries, it has been associated with the issuance of green sovereign bonds. Green budgeting may also refer to the use of the budget process and the budget cycle to ensure more attention to the impacts of government spending on the environment and the implications ofenvironmental degradation for fiscal sustainability. Green budgeting may extend further to include tax policy and hybrid tax and regulatory instruments such as emissions trading schemes. From 2017 the leading comprehensive definition of green budgeting is that advanced by the OECD:green budgeting is the use of the tools of budgetary governance to help drive improvements in the alignment of national expenditure and revenue processes with climate and other environmental goals (see Box 4). The OECD’s definition incorporates all the elements described above. Given the wide scope of the definition, including tax policy and macro-fiscal policies, it could be more accurate to define it as green fiscal policy, to distinguish it more clearly from a narrower focus on public expenditure and the budget process. Green fiscal policy: the term used in this book to refer to the interface between the full range of fiscal policy instruments and parameters and all environmental domains. This definition aligns with the OECD’s comprehensive definition of green budgeting but as outlined in Chapter 5 also includes elements designed to increase government accountability for environmental stewardship—national State of the Environment reporting and the wider use by governments of environmental outcome targets and their incorporation in fiscal strategy. Both this and the OECD definition are broader than that of the Green Fiscal Policy Network: green fiscal policy is the use of fiscal and budgetary tools to address environmental challenges (Green Fiscal Policy network, n.d.). In practice, the focus of the network is micro-fiscal policy—the design of tax and expenditure policies to improve environmental outcomes.

Figure 1 presents a visualization of the terms and the relationships between them Climate budgeting is not green budgeting—it is a subset of it. While the two threats (climate change and wider environmental degradation) are closely related and interact, it is helpful and more accurate if the term green budgeting is reserved for the interface between fiscal policies and all environmental domains—while recognizing that in small island countries the term ‘blue budgeting’ is also used and is equally comprehensive and appropriate.

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Green Fiscal Policy and Green Budgeting Fiscal strategy Hybrid tax/regulation Green Tax and Expenditure Reviews

Green Budgeting: Revenues & expenditures Impacts of taxes Green taxes

Green Budgeting: Expenditures All environmental domains Positive & (sometimes) negative spending Green bonds

Climate Budgeting Tagging positive spending International climate financing

Fig. 1 Climate budgeting, green budgeting, and green fiscal policy

Four contextual points should be made: 1. The terms green budgeting and green fiscal policy should not be seen as an attempt to prioritize environmental objectives over social and economic objectives. The aim of green budgeting/green fiscal policy should be to ensure that environmental objectives and considerations are fully and transparently incorporated in collective decision-making in a way that has not been the case. This will, however, require significant government investments in environmental monitoring and reporting, policy analysis, and evaluation

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to provide the information required. Somewhat similar arguments can be made with respect to social goals. Economic goals such as GDP growth, inflation, public debt, and the fiscal balance have for too long been dominant in the discourse and data governing budget decisions. Both social and environmental goals and information require more systematic emphasis in fiscal strategy and policy analysis and in the criteria used in decision-making. The focus on environmental goals here is not to deny the need for a greater focus also on social outcomes and social equity. But tractability and the desire to go into detail with respect to environmental considerations necessitate a focus just on the environmental dimension—although environmental sustainability and social equity, and environmental degradation and social inequity often overlap (OECD, 2021a). 2. Relatedly, the terms ‘green’ and ‘greening’ might be viewed as ideologically loaded and therefore unhelpful. A more accurate term might be ‘integrated budgeting’ or ‘integrated fiscal policy,’ to suggest that all goals—social, environmental, economic—are incorporated in fiscal policy. However, the label ‘green’ is being widely used and understood to suggest a greater environmental focus in society and public policy as well as specifically with respect to public finance and it appears the label may be here to stay. 3. The term green budgeting is potentially misleading from a public finance perspective. It might be misinterpreted as referring just to the expenditures appropriated by the legislature in the annual budget. Or it might be understood as a limited exercise where the environment-related expenditures in a budget are tagged and reported separately in a type of parallel ‘paper’ exercise that may or may not be connected to actual decision-making (which has at times been the case in the early stages of climate budgeting). For this reason, the term ‘green fiscal policy’ may be preferred to green budgeting when referring to the interface between the full range of fiscal policy instruments and parameters and all environmental domains. This chapter describes the evolution and applications of green budgeting, while Chapter 5 puts forward a comprehensive framework for green fiscal policy. 4. ‘The environment’ does not refer to the environmental sector, as just one of the sectors in the functional classification of expenditures in statistics and budgets. The environment refers to all elements of natural capital stocks and flows that underpin the functioning of

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the whole of society and the economy. The natural environment provides non-renewable and renewable natural resources (ecosystem goods) and helps to produce food, clean water, regulate climate, and control disease (ecosystem services)—see Box 2.

Box 2 Biodiversity and ecosystem services The Millennium Ecosystem Assessment (IPBES 2005) put forward the following definitions of key terms1 : Biodiversity: the variability among living organisms. It includes diversity within and among species and diversity within and among ecosystems. Biodiversity is the source of many ecosystem goods, such as food and genetic resources, and changes in biodiversity can influence the supply of ecosystem services. Ecosystem: a dynamic complex of plant, animal, and microorganism communities and the nonliving environment, interacting as a functional unit. Humans are an integral part of ecosystems. Ecosystem services: the benefits people obtain from ecosystems. These include: provisioning services such as food and water. regulating services such as flood control and disease control. cultural services such as spiritual, recreational, and cultural benefits. supporting services such as nutrient cycling, that maintain the conditions for life on Earth.

3

Fiscal Policies and the Environment: Two-Way Interactions

The channels through which fiscal policies interact with the environment operate in both directions: fiscal policies impact on the natural environment, and environmental outcomes and developments impact on the public finances. A comprehensive approach is required to capture all elements and both directions of influence. This is similar to the emerging 1 Note that IPBES recognizes that many ecosystem services fit into more than one of the four categories. For example, food is both a provisioning service and a cultural service in many cultures.

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concept of double materiality in the business sector: institutions should disclose how their financial activities depend on climate and biodiversity, as well as how their financial activities impact on climate and biodiversity (BSR, 2021). With respect to classifying impacts on the environment, the EC has recently introduced a comprehensive taxonomy of sustainable environmental outcomes (European Commission, 2020). The taxonomy is intended to provide governments, businesses, and consumers with a common understanding of what economic activities can unambiguously be considered environmentally sustainable. It is also intended to avoid green washing. It is accompanied by detailed technical guidance (European Union Technical Expert Group on Sustainable finance, 2020). Box 3 describes the EU taxonomy. Box 3 The EU taxonomy of sustainable environmental outcomes The world’s first-ever ‘green list’ classification system (or taxonomy) for sustainable economic activities was adopted by European co-legislators as a regulation in December 2019. The taxonomy sets out six environmental objectives: 1. 2. 3. 4. 5. 6.

Climate Change Mitigation. Climate Change Adaptation. Sustainable Use and Protection of Water and Marine Resources. Transition to a Circular Economy. Pollution Prevention and Control. Protection and Restoration of Biodiversity and Ecosystems.

There are four requirements that economic activities must comply with to be considered environmentally sustainable: 1. They provide a substantial contribution to at least one of the six environmental objectives listed above. 2. No significant harm is caused to any of the other environmental objectives. 3. Compliance with robust and science-based technical screening criteria. 4. Compliance with minimum social and governance safeguards. Three different types of environmentally sustainable economic activities are recognized:

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• Green activities: activities that in and of themselves contribute substantially to one of the six environmental objectives without having a significant negative impact on any other environmental objective. • Transition activities : climate change mitigation activities for which there are no technologically and economically feasible low-carbon alternatives, but that support the transition to a climate-neutral economy consistent with a pathway to limit the temperature increase to 1.5 degrees Celsius above preindustrial levels. Power generation activities from solid fossil fuels are explicitly ineligible. • Enabling activities: activities that enable other activities to make a substantial contribution to one or more of the objectives, and where that activity: – does not lead to lock-in of assets that undermine long-term environmental goals, considering the economic lifetime of those assets. – has a substantial positive environmental impact on the basis of lifecycle considerations. The initiative includes technical screening criteria for 70 climate change mitigation and 68 climate change adaptation activities, including criteria for ‘substantial contribution’ to climate change mitigation and adaptation, and for ‘do no significant harm’ for all other environmental objectives. The criteria are supported by a methodology section and excel tools to help users implement the taxonomy. The taxonomy does not yet cover nuclear power, natural gas generation, or agriculture.

While the taxonomy was originally developed for the financial sector to help attract capital flows toward sustainable investment, it can and has been applied by governments. Member States of the EU, the EU itself, and the relevant market actors in the EU are required to start complying with these requirements from December 2021, including through their reporting obligations with full implementation by the end of 2022. The taxonomy can provide a framework for the design and assessment of COVID-19 recovery measures. France has gone further and classified

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expenditures in its 2021 government budget using the EU taxonomy (Box 6).2 A similarly comprehensive view should be taken of fiscal policies. They encompass all elements of public finance: revenues (taxes, duties, resource royalties, fees, and charges); expenditures (public investment, current expenditures on programs, transfers, subsidies, grants3 ); government guarantees, government-provided insurance, tax expenditures,4 government lending to or capital injections in public and private corporations, the management of assets and liabilities, and financing of the government’s cash flows. This includes areas that often escape scrutiny, including tax expenditures, export credits,5 off-budget and off balance sheet activities such as government guarantees, and public infrastructure projects implemented through Public Private Partnerships (PPPs). It also includes traditional areas of activity such as public procurement and new areas of activity such as sovereign green bonds.6 Finally, the scope of fiscal policies increasingly needs to incorporate hybrid instruments that are combinations of fiscal interventions and regulatory interventions or are substitutes for regulations. For instance, Emissions Trading Schemes (ETS) combine a regulatory constraint on

2 The EU also helped initiate the International Platform on Sustainable Finance (IPSF) which has established a working group to develop a Common Ground Taxonomy identifying the commonalities between the range of existing taxonomies. The aim is to develop a unique common reference point for the definition of investments that are considered environmentally sustainable, reducing transactions costs, and facilitating cross-border green capital flows (IPSF, 2020, p. 28). 3 Including government support for private sector environmental R&D (transitional support for new green technologies, including government incentives for R&D on lowcarbon/carbon storage/carbon capture technologies; support for early-stage private sector adoption of such technologies. 4 Tax expenditures are concessions or exemptions from a normal tax structure that reduce government revenue and, because the government policy objectives could instead be achieved by a subsidy or other direct expenditure, the concession is regarded as equivalent to a budgeted expenditure. 5 Export credits are commercially motivated support linked to a country’s trade strategy and play an important role in financing infrastructure.. 6 Green bonds refer to bonds issued to raise money from investors to fund new and existing projects with climate change and/or environmental benefits, where the borrower agrees to use the proceeds only to finance eligible green projects and report on the use of proceeds of the bond for ‘green’ purposes. See World Bank (2015). On public procurement see UNEP (2017), Salazar Cota et al. (2018), and Shen and Faure (2020).

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the level of allowed emissions with a potential public revenue-raising mechanism. Feebate schemes use a combination of taxes and subsidies to tax one targeted behavior (e.g., purchase of high petrol consuming cars) and subsidize another (purchase of electric cars) and can be an alternative to fuel economy regulations.7 Government policy also needs to consider complex packages of regulatory and fiscal interventions, e.g., public spending on infrastructure and on R&D of new technologies combined with regulatory interventions (e.g., mandates on the share of renewable energy generation) to attract majority coalitions in government and the legislature (see for instance Shen and Faure, 2020). Figure 2 presents a stylized illustration of the main channels of interaction between the environment and fiscal policies. Environmental Impacts of Fiscal Policies There is an accumulating range of evidence on the quantum of environmental impacts from fiscal policies. For example, the OECD has assessed that between 2010 and 2015 direct government expenditure on subsidies to fossil fuels amounted to US$373–617 billion annually across 76 economies which collectively contribute 94% of global carbon emissions. In contrast, the amount those governments spent on biodiversity was only around one-tenth of that amount. In 2019 fossil fuel subsidies amounted to US$ 582 billion (OECD, 2020a). In the period 2016–2018 export credit agencies in G20 countries provided $40.1 billion in financing for fossil fuels and just $2.9 billion for clean energy (Oil Change International & Friends of the Earth U.S., 2020, p. 5). ‘There are currently around 1,200 individual government policies in place in OECD and Key Partner countries supporting fossil fuels’ (OECD, 2020c, p. 18). Even since the beginning of the pandemic, the G20 countries have committed at least US$ 382 billion to supporting different energy types, more than half of which is directed to fossil fuels (OECD, 2020a, p. 7). Agricultural support of the types that are potentially the most harmful to biodiversity was on average US$112 billion per year for the period 2017–2019 in OECD countries (OECD, 2020a, p. 15). IMF staff have estimated post-tax subsidies for fossil fuels, i.e., differences between actual consumer fuel prices and how much consumers 7 See discussion of feebates and comparison with taxes and regulations in one country (Belize) in IMF (2018b, pp. 25–28).

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Fiscal Policies

Natural Environment

Taxes, royalties, fees.

Climate Change Mitigation.

Expenditures (e.g., capital spending, subsidies, environmental public goods, infrastructure).

Climate Change Adaptation.

Government lending, investment. Off budget/off-balance sheet. Financing.

Sustainable Use/Protection of Water and Marine Resources. Transition to Circular Economy. Pollution Prevention/Control. Protection and Restoration of Biodiversity and Ecosystems.

Cap and trade instruments.

Fig. 2

Fiscal policies and the environment: two-way interactions

would pay if prices fully reflected supply costs plus the taxes needed to reflect environmental costs. At the global level, energy subsidies using this methodology are estimated at $4.7 trillion (6.3% of world GDP) in 2015 and $5.2 trillion (6.5% of GDP) in 2017. Country-level coal prices were typically well below half of their ‘fully efficient’ levels in 2015. China was by far the largest subsidizer in 2015 (at $1.4 trillion), followed by the United States ($649 billion), Russia ($551 billion), European Union ($289 billion), and India ($209 billion). By fuel, coal remains the largest source of subsidies (44 percent), followed by petroleum (41%), natural gas (10%), and electricity output (4%). ‘Efficient’ fossil fuel pricing in 2015 would have lowered global carbon emissions by 28 percent and fossil fuel

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air pollution deaths by 46%, and increased government revenue by 3.8 percent of GDP (Coady et al., 2019). It is also important to recognize the long-lived environmental impacts of public infrastructure projects. For instance, the typical lifespan of transportation infrastructure (ports, bridges) is 30–200 years and of power plants (coal-fired, gas-fired, nuclear) is 20–60 years. It has been estimated that around 60% of GHG emissions are hard-wired into existing public and private infrastructure (IPCC, 2014; NCE, 2016; cited in OECD, 2017c, p. 95). Looking ahead, in 2019 the IMF estimated the infrastructure investments required to meet the SDGs at US$0.5 trillion in 2030 for low-income developing countries—an average of 15% of their GDP— and US$2.1 trillion for emerging market economies—about 4% of their GDP (IMF, 2019a). The negative environmental impacts of this scale of investment are potentially huge. In addition, governments own public corporations such as oil and gas companies, coal mines, and energy producers. The Economist magazine has estimated that publicly listed companies that are majority-owned by governments emit GHGs equivalent to around 2.5bn tonnes of carbon dioxide from their operations each year, equivalent to around 4% of the world’s total emissions (June 22, 2020). In the other direction, formal carbon pricing schemes (carbon taxes and emissions trading systems) covered only about 22% of global emissions in 2019 (World Bank, 2020, p. 7). Containing global warming to 2 degrees C or less would require rapidly phasing in measures equivalent to a global tax of at least US$75 per ton by 2030, whereas the global average emissions price is only $3 per ton (Georgieva, 2021). Beyond climate change, the environmental impacts of fiscal policies range from the impacts of fiscal support in various forms for environmentally harmful activities associated with natural resource extraction, deforestation, fishing, agriculture, irrigation, and land use conversion and a range of other activities. On the other hand, governments spend significant resources on environmental protection, such as management of national parks and reserves, control of invasive species, and infrastructure that treats waste or protects habitats, and they invest in environmental R&D (directly and by subsidizing private sector R&D). Governments also collect revenues from environmental taxes including but not limited to carbon taxes. Governments raised more than US$45 billion from carbon pricing in 2019,

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almost half of which was dedicated to environmental or broader development projects while more than 40% went to the general government budget (World Bank, 2020, p. 7). Fiscal Impacts from the Environment Turning to the reverse direction of impact—impacts on the public finances fromenvironmental degradation—attention has mostly focused on the fiscal impacts of climate change. These can be categorized as: a. The fiscal costs of mitigating climate change. Mitigation generally involves additional up-front capital costs for infrastructure compared to a higher GHG alternative project, although life cycle costs in some cases may be similar or lower. The costs of power from wind and solar have dropped by 70% and 90% respectively over the last decade (The Economist , 20 February 2021), and renewable energy is now competitive with nonrenewable energy (although still subject to fluctuating supply constraints). The period of low oil prices made it harder for renewables to compete, but oil prices have recently risen. There are also potential fiscal costs from so-called transition risks related to the shift to a low-carbon economy e.g., the loss of value of a coal-fired power station as carbon prices increase, and costs from a country’s failure to meet its international commitments to reduce GHGs should the government need to buy carbon credits on the international market. b. The fiscal impacts of adapting to climate change due to the expected increase in the incidence and severity of climate-related natural disasters . This includes both ex ante costs such as constructing infrastructure to higher standards and building protective infrastructure, e.g., seawalls, and post-disaster relief and reconstruction. The additional up-front costs of building more resilient assets depend on the asset, the hazard, and the country, and could subsequently be offset by lower maintenance and repair costs—although the up-front increase in cost has to be financed in the meantime (Hallegatte et al., 2019, chapter 6). However, while there is a considerable literature on disasters and their economic and social impacts, less is known about the details of their fiscal impacts (Gamper et al., 2017). Based on a recent cross-country study the OECD concluded that the fiscal impacts of disasters (climate and non-climate-related) in many

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countries are driven by damage to government-owned assets such as infrastructure, and central government support to local governments affected by disasters (OECD/World Bank, 2019). A more macro-level study of 80 advanced and emerging economies found 65 disasters (including non-climate-related disasters such as earthquakes) occurred during the period 1990–2014 and estimated the average fiscal costs of 29 of these at 1.6% of GDP with a maximum fiscal cost of 6% of GDP (Bova et al., 2016). c. The loss of revenues currently collected from carbon-intensive sources, such as fuel taxes, as lower volumes of fossil fuels are sold than would be the case without climate mitigation policies (a type of transmission risk). d. The indirect fiscal impacts of climate change through its potential effects on long-term economic growth. These are difficult to estimate. Available quantitative estimates are relatively small, compared say to the fiscal effects of demographic changes. However, these estimates do not include many important risks due to lack of information and data, do not take into account possible sudden trigger points in the climate system, and they have been made for countries that are less exposed to climate change. ‘Taking these caveats into account, climate change is an important risk to the sustainability of public finances’ (Baur et al., 2021, p. 34). Beyond climate change, there are also significant fiscal costs and risks from loss of biodiversity, including the increased risk of pandemics due to environmental degradation. It has been estimated that biodiversity and ecosystem services provide benefits of USD125-140 trillion per year, more than one and a half times the size of global GDP (OECD, 2020c, p. 3). ‘Human destruction of biodiversity is one of the leading causes of infectious disease outbreaks…It also poses a significant risk to supply chains, business, and the global economy’ (OECD, 2020a, p. 3). The COVID-19 pandemic has imposed extraordinary losses of economic output, a slump in government revenues, and prompted global fiscal support of $14 trillion (IMF, 2021a). To the extent that environmental degradation has increased the risk of pandemics some of the economic, fiscal, and social costs of the pandemic can be attributed to environmental causes. Global public debt is estimated to reach 98 percent of GDP at the end of 2020, compared with the forecast of 84% for the same date based on projections in the IMF’s October 2019 Fiscal Monitor.

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Fiscal responses have been shaped by access to financing, with low-income countries having to adjust rather than borrow more to reduce the short to medium social and economic impacts. Other environmental risks that can create fiscal costs include pollution, e.g., the costs of cleaning up an oil spill that cannot be recouped from the private sector or from a government-owned facility; forest fires; site degradation associated with natural resource extraction or nuclear power production; pest infestation and animal diseases; and the storage or transportation of hazardous substances. Complex disasters are also a risk where one of the compounding elements is environmental, e.g., a climate-related disaster that triggers a nuclear accident. The 2020 Global Risks Report found, for the first time in the survey’s 10-year outlook, that the top five global risks in terms of likelihood are all environmental and include extreme weather events, failure of climate change mitigation and adaptation by governments and businesses, human-made environmental damage and disasters, including environmental crime, such as oil spills, and radioactive contamination, and major biodiversity loss and ecosystem collapse with irreversible consequences for the environment, resulting in severely depleted resources for humankind as well as industries (World Economic Forum, 2020).

4 The Evolution of Climate Budgeting and Green Budgeting 4.1

Development of Guidance

As noted, historically there has been little guidance on how governments should identify, analyze, manage, and report the environmental impacts of their fiscal policies. The main exception is the long-standing but narrow requirement for environmental impact assessments (EIAs) to be conducted for public (and private) investment projects following the Rio Declaration on Environment and Development 1992 (Principle 17). A related upstream instrument is a Strategic Environmental Assessment, which evaluates the environmental implications of a proposed policy, plan, or program and may be applied to sector decision-making and reform (World Bank, 2013). Cost–benefit analysis (CBA) to evaluate environmental impacts of public infrastructure projects has been used for some decades, although there are wide differences in the extent to which it

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has been used across countries and across sectors even among advanced countries (OECD, 2018b). Following the 1987 Brundtland Commission’s call for regular reporting of the impacts of government policies and budgets on environmental sustainability a few governments in Europe experimented with introduction of some green elements to budgeting from the late 1980s to the 2000s. This included Norway, the UK, and the Netherlands, but these proved to be largely presentational and were short-lived (Wilkinson et al., 2008, pp. 74–76). Following public outcry over the environmental damage of the Exxon Valdez oil spill in 1989 the Global Reporting Initiative was founded in 1997 to promote disclosure of the environmental impacts of corporations, and its first Guidelines were published in 2000. Governments, however, were still largely operating on the basis of cash accounting in the 1990s and only starting to move toward accrual accounting and a full financial balance sheet that had long been the norm in the private sector (most governments are still somewhere in this transition). This may have contributed to the lack of awareness of the need for disclosure of the nonfinancial impacts of fiscal policies. In fact, in 2012 when the Global Initiative for Fiscal Transparency (GIFT) promulgated, as one of its High Level Principles, that ‘Governments should communicate the objectives they are pursuing and the outputs they are producing with the resources entrusted to them, and endeavor to assess and disclose the anticipated and actual social, economic and environmental outcomes’ (italics not in original) this was still a novel concept with respect to environmental outcomes (and the term green budgeting was not used in that context).8 In 2012 there was little guidance on how governments should make the environmental impacts of

8 Principle 4 of the GIFT High Level Principles of Fiscal Transparency, Participation and Accountability. The High Level Principles were endorsed by the United Nations General Assembly in 2012 (UNGA Resolution 67/218). GIFT is a multistakeholder network that facilitates dialogue between its stewards and partners from governments, civil society organizations, international financial institutions, and other stakeholders to find and share solutions to challenges in fiscal transparency and direct public participation in the making and implementation of fiscal policies. See http://www.fiscaltransparency. net/. Disclosure: the author was Lead Technical Advisor to GIFT and helped draft the High-Level Principles.

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fiscal policies transparent and few governments were doing much in this regard.9 But from around 2010 there has been a growing interest and practice in green budgeting. The interest was led initially by increasing concern over climate change and the desire of developing and middle-income countries to attract international financing for their climate change mitigation and adaptation projects—through so-called ‘climate budgeting.’ Climate Change Climate change, and particularly the international initiatives and agreements to contain it, has been important in the evolution of green budgeting. The UNFCCC encourages international transfers from advanced countries needing to offset their carbon emissions to developing countries that have contributed little to historical emissions, to meet equity goals and to cut the global economic cost of reducing GHG emissions. In this context ‘climate budgeting’ appeared early in the 2010s. New systems are required to track climate-related expenditures because such expenditures cut across existing expenditure classification systems (World Bank 2014a, chapter 7)—in the same way that gender-related or povertyreducing expenditures are cross-cutting and require specially designed tagging systems if a country wants to identify all related spending. Climate budgeting was led by countries in the Asia Pacific region, with technical support from development agencies such as the UNDP and the World Bank. A diverse range of practices has emerged to track climate-related expenditures reflecting some differences in the classification methodologies used by countries and international organizations. Box 5 in Sect. 4.2 provides some details of country practices. There has been some criticism of climate budget tagging. It could result in expenditure bias, i.e., an undue focus on increasing the volume rather than the effectiveness of spending and using expenditure interventions rather than more effective instruments such as taxes and regulations (OECD, 2021b). At a conceptual level it has also been suggested that to 9 Aside from guidance on completion of Environmental Impact Assessments for public (and private) investment projects. See the explanation of GIFT High Level Principle 4 at the Expanded version of the Principles: http://www.fiscaltransparency.net/expandedversion/#tab-id-8 Disclosure: the author drafted the Expanded version of the High-Level Principles.

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be successful, the definitions and classifications of climate change expenditures must be consistent with statistical standards currently in use, such as the Government Finance Statistics Framework and the System of National Accounts (Inter-American Development Bank, 2021). As noted, an important motivation for climate expenditure tagging has been to package public investment projects for external financing, either by official international finance—e.g., multilateral development institutions, bilateral development agencies—or by private finance through the growing sovereign green bond market (bonds that raise money from investors to fund new and existing projects with climate change or environmental benefits). An important feature of climate change has been the focus on the outcomes of government actions—e.g., decreases or increases in GHG emissions measured against a baseline—rather than outputs— e.g., megawatts of electricity generated by renewable power stations. Outcomes-focused management is generally weak in all sectors of government for a variety of technical, capacity, and political economy reasons (OECD, 2018c). But the UNFCCC and especially the Paris Agreement, with emissions targets and reporting obligations, has resulted in governments having to estimate the GHG-impacts of selected public investment projects. Similarly, sovereign green bond requirements include reporting on the reductions in GHG emissions (and other environmental impacts) resulting from the activities funded by the bonds—see for instance the Irish Sovereign Green Bond report 2017/2018 (Government of Ireland, 2017/2018). The IPCC has laid the groundwork for this estimation and reporting by developing general guidance and good practice methodologies on the scientific methods for estimating emissions (and removals) of GHGs. The guidance also covers the relationship between emissions and global warming potential (IPCC, 2006, 2019). In 2014 the World Bank published the Climate Change Public Expenditure and Institutional Review Sourcebook, and a Policy Note on climate budget tagging (World Bank, 2014a, 2014b). The Sourcebook covered climate policy (including carbon pricing), expenditure planning, decisionmaking under uncertainty, disaster risk management, international public climate finance, and financial management and budget classification. The World Bank, together with the UNDP, has conducted CCPEIRrelated assessments in countries in Asia Pacific, including Bangladesh, Fiji, the Philippines, Nepal, Indonesia, and Vietnam, and the UNDP published a CPEIR Methodological Guidebook in 2015. The World

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Bank has also conducted significant work on building resilience to natural disasters including protecting the government’s financial position (Ghesquierre & Mahul, 2010) while the UN Office for Disaster Risk Reduction implements the Sendai Framework for Disaster Risk Reduction 2015–2030, which sets out priority action areas for disaster risk management (UNDRR, 2015). In 2015 the World Bank initiated the Carbon Pricing Leadership Coalition (CPLC), a voluntary grouping of governments, business, civil society, and academia intended to catalyze the implementation of carbon pricing (Carbon Pricing Leadership Coalition, n.d.). At the invitation of the CPLC, a High-Level Commission on Carbon Prices published a report intended to help spur successful implementation of the Paris Agreement (High-Level Commission on Carbon Prices, 2017). The report identified corridors of carbon prices that can be used to guide the design of carbon pricing instruments and other climate policies, regulations, and measures, concluding that the explicit carbon price level consistent with achieving the Paris temperature target is at least US$40–80/ton of CO2 by 2020 and US$50–100/ton of CO2 by 2030. The IMF has also paid a lot of attention to the interface between climate change and government taxation. Fund staff have advocated the use of revenue-raising carbon pricing—comprehensive carbon taxes or cap and trade systems with allowance auctions—as the most effective and efficient emissions control mechanisms available—with the provisos that the tax is well targeted on the social harm caused by carbon (e.g., it taxes the carbon content of different fuels) and the revenues raised are not ‘squandered’ by granting free allowance allocations in cap and trade systems (Parry et al., 2012, p. xi). Carbon taxes can be implemented administratively through integrating charges in existing fuel taxes or royalty regimes for extractive industries. Regulatory policies, such as mandates for fuel or energy efficiency, are viewed as less effective and impose excessive costs by restricting the ways in which businesses can act to reduce GHG emissions (although political economy arguments may support their use as the best feasible option). The second best are feebate schemes, which avoid large increases in energy prices. The Fund has made available a spreadsheet tool to incorporate externalities from fuel use to help countries evaluate progress toward their Paris mitigation commitments (IMF, 2019b). Fund staff have also calculated the revenue potential of different levels of carbon taxes, and how much of the revenues would be required to compensate

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targeted populations. For instance, a US$35 a ton tax in 2030 would typically raise revenues of 1–2% of GDP and would increase prices for coal, electricity, and gasoline by about 100, 25, and 10%, respectively. An upfront package of targeted assistance to vulnerable households, firms, and communities impacted by carbon taxes is likely to use only a relatively small portion of the revenues (Parry, 2019). On the expenditure side, the IMF is also developing the Public Investment Management Assessment (PIMA) Climate Change Module (PIMA CC) with a particular focus on the resilience and sustainability aspects. PIMA CC integrates climate change issues into the IMF’s PIMA framework to help strengthen governments’ capacity to address risks related to climate and natural disasters in public infrastructure investment (IMF, 2021b).10 Wider Environmental Goals In 2012, the UNDP and the European Commission launched The Biodiversity Finance Initiative (BIOFIN). Biodiversity finance is the practice of raising and managing capital and using financial incentives to support sustainable biodiversity management. ‘As growing experience from around the world suggests, the preservation of biodiversity can only be achieved by taking environmental issues into the heart of economic and financial decision-making, particularly into the public budgeting processes and within the wider financial sector (Sekhran, 2021).’ In 2018, a revised BIOFIN Workbook was published that provides guidance on measuring current biodiversity expenditures, estimating the finance needed to achieve a country’s biodiversity goals, and develop a biodiversity finance plan. The BIOFIN methodology is currently implemented in 36 countries (UNDP, 2018). In 2014, the Green Fiscal Policy Network was established by a partnership between UNEP, the IMF, and Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) to promote knowledge sharing and dialogue on green fiscal policies between governments, international organizations, industry, and civil society. The focus of the network is on the design of tax and expenditure policies to improve environmental outcomes. The network notes: ‘Green fiscal policy is on the rise: Nearly 80 countries included some form of fiscal instrument or market mechanism 10 Disclosure: the author is advising the IMF on the design of the PIMA CC Module.

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in their Nationally Determined Contribution (NDC) to the Paris Climate Agreement. Carbon taxes are in place or planned in 25 countries. G20 and APEC countries have committed to phase out inefficient fossil fuel subsidies. SDG 14 sets a target to eliminate harmful fisheries subsidies. Under the Convention on Biological Diversity countries have committed to reform incentives, including subsidies, harmful to biodiversity (Green Fiscal Policy Network, n.d.).’ Transparency The IMF has highlighted the need for transparency of the potential fiscal costs from the impacts of natural disasters, including the likely increased incidence of climate related disasters. The 2014 IMF Fiscal Transparency Code stipulates, in principle 3.2.7, that governments should analyze, publicly report, and manage the potential fiscal exposure to natural disasters and other major environmental risks—although in practice it has focused mainly on the fiscal risks from natural disasters, not other environmental risks.11 The IMF has also made available a tool to estimate the cost of the public investments in infrastructure required to achieve SDG targets by 2030 (IMF, 2019b). In 2014, the International Federation of Accountants and the Chartered Institute of Public Finance and Accounting issued an International Framework: Good Governance in the Public Sector to promote effective service delivery and accountability. Principle C stipulates that public sector entities should define outcomes in terms of sustainable economic, social, and environmental benefits (IFAC/CIPFA, 2014). Similarly, the OECD published a Budget Transparency Toolkit that included a topic on making the budget more participatory and inclusive by supporting participation. This includes publishing budget data in freely accessible open digital form (open data) to facilitate civil society analysis and participation, and (ideally) by publishing information on the multidimensional impacts of

11 For instance, while principle 3.2.7 refers to fiscal risks from ‘other major environmental risks,’ and the Fiscal Transparency Handbook refers to some of these—such as pollution, and site degradation associated with natural resource extraction—the specification of levels of performance under principle 3.2.7 refers only to natural disasters, and assessments of country practices have therefore been confined largely to just this source of environmental risks. IMF (2018a, pp. 127–128). Disclosure: the author contributed to the drafting of the IMF Fiscal Transparency Handbook as a consultant.

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fiscal policies, e.g., economic, social, and environmental impacts (OECD, 2017a, pp. 80–82, p. 86).12 The OECD Paris Collaborative on Green Budgeting In December 2017, the OECD launched the Paris Collaborative on Green Budgeting at the One Planet Summit, probably the highest visibility usage of the term green budgeting up to that time (Downes, 2018; OECD, 2017b). As defined by the OECD, green budgeting is the use of the budget process to help drive improvements in the alignment of fiscal policies with environmental goals, including the Aichi Biodiversity targets and environmentally related SDGs. The OECD’s objective is to establish agreed-upon definitions, common methods, guidelines, and tools to bring about sustainable public finance flows. Important to note here is that the OECD framework: • Explicitly covers how the budget as a whole impacts on the environment, covering both taxation and expenditures. • Includes all environmental domains. • Incorporates both negative and positive environmental impacts. • Provides for transparency of the impacts of the budget on the government’s international and domestic commitments to environmental goals. • Uses green budgeting to mainstream environmental policies through integration in governments’ core annual budget processes rather than setting up parallel processes. Box 4 outlines the main elements of the OECD’s green budgeting framework (OECD, n.d., 2018a). Box 4 The OECD’s Framework for Green Budgeting The OECD framework for green budgeting comprises a set of Principles for Green Budgeting, four key building blocks, and a set of components of green budget documents.

12 Disclosure: the author contributed to the drafting of the OECD Budget Transparency Toolkit as Lead Technical Advisor to GIFT.

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Key principles include: – the need for a comprehensive assessment of how the budget as a whole impacts on the environment—revenues and spending, positive and negative environmental impacts, co-benefits and side effects from other policies. – evidence-based decision-making on environmental and budgetary impacts. – coherence through the use of systematic and coordinated centralized mechanisms. – credibility through the involvement of impartial independent partner institutions. – transparency of the overall impacts of the budget on the government’s international and domestic commitments to environmental goals. – mainstreaming environmental policy through integration in the budget process. – fiscal sustainability to ensure environmental commitments are grounded in overall government priorities. – a whole of government approach through involving the ministry of finance in environmental policymaking. The four key mutually reinforcing building blocks of green budgeting are: i. a strong strategic framework: national climate change or environmental strategies that set out relevant priorities and goals to help guide tax and spending decisions. ii. tools for evidence generation and policy coherence: • Environmental impact assessments to accompany new budget measures • Ecosystem services pricing (including carbon pricing)—putting a price on environmental externalities, such as GHG emissions, often through taxes and emissions trading systems, to facilitate achievement of national environmental and climate goals • Green perspective to public expenditure reviews • Green perspective in performance setting iii. reporting to facilitate accountability and transparency: a Green Budgeting Statement accompanying the budget, to provide the Legislature and the public with an overall picture of how the budget is aligned with green objectives in any given budget year.

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iv. an enabling budgetary governance framework: links between strategic planning and budgeting, multi-annual budget envelopes, outcome and evidence-based budget processes, along with close engagement with legislatures and civil society. The OECD has suggested governments publish a ‘Green Budget Statement’ to be included in a single document or incorporated in existing budget documents, depending on what is appropriate in individual country settings. This should include cross-national benchmark indicators of progress. The OECD also recommends periodic (less than annual) supplementary reports: • A Green Budget Fiscal Sustainability Report incorporating prospective environmental impacts in long-term fiscal sustainability analysis. • A Green Balance Sheet, to report the value of natural assets and liabilities in the context of the government’s financial balance sheet. This would for instance make transparent stranded assets (e.g., the diminishing value of coal deposits owned by the public sector).

Coalition of Finance Ministers for Climate Action A Coalition of Finance Ministers for Climate Action was formed in 2019 to promote national climate action especially through fiscal policy and the use of public finance. ‘Finance Ministers hold the keys to accelerating climate action. They know most clearly the risks posed by climate change and recognize how taking action could unlock trillions in investments and create millions of jobs through 2030’ (Coalition of Finance Ministers for Climate Action, n.d.). As of April 2021 the Coalition comprised members from 60 countries representing approximately 63% of global GDP, supported by 17 Institutional Partners. The Coalition notes that finance ministries can play a key role with respect to carbon pricing mechanisms as they are typically best implemented as part of wider environmental tax reforms (while being mindful of the distributional impacts and using the revenues to support development objectives). Finance ministries also need to take climate change into account in macroeconomic policy, fiscal planning, budgeting,public investment management, and procurement practices; can help to mobilize private sources of climate

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finance; and can engage actively in the domestic preparation and implementation of NDCs submitted under the Paris Agreement on Climate Change. The Coalition’s Santiago Action Plan agreed in December 2019 includes work on mainstreaming climate change mitigation and adaptation and developing tools for green budgeting.13 Reflecting this, the multistakeholder Public Expenditure and Financial Accountability (PEFA) program—which is a framework for assessing and reporting on the strengths and weaknesses of a country’s public financial management (PFM) systems—is piloting a framework for assessing climate-responsive PFM (PEFA Climate) from July 2020 for 1 year (PEFA 2020). If implemented this would be a significant development, as the way in which PEFA defines levels of performance for each of the indicators would start to codify expected levels of practice for developing and middle-income countries in which PEFA assessments are applied. Summary To summarize, considerable work has been initiated on green budgeting at the international level over the last decade, prompted initially by climate change. There are diverse approaches and entry points, and a wide variety of country practices in climate budgeting and green budgeting has started to emerge, as discussed next. Initial work has begun on attempts to codify international good practices in transparent and effective public financial management in a world of climate change.

4.2

Country Practices in Climate Budgeting and Green Budgeting

As noted, climate budgeting has been important in the early development of green budgeting. Climate budgets are typically produced by exercises conducted parallel to the main government budget process and result in a supplementary ‘Climate Budget Report’ published at the time of the annual budget. Climate Budgets to date have been confined to tagging expenditures that are intended to be beneficial for the environment or that are financing adaptation to the effects of climate change—at 13 https://www.financeministersforclimate.org/sites/cape/files/inline-files/Santiago% 20Action%20Plan%20-COP25%20-%20final.pdf.

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least in part because they have generally been produced with the aim of attracting international flows of climate finance to support climate change adaptation and mitigation efforts. In some cases, a climate focus has been integrated in core budget processes (e.g., in the Philippines) or a start has been made on incorporating climate change in medium-term fiscal strategy (e.g., Bangladesh). Indonesia initiated a Mitigation Fiscal Framework in 2012 that analyzed the expected effectiveness and relative cost effectiveness of budget and off budget expenditures and tax subsidies in mitigating emissions, estimated likely remaining emissions gaps to the country’s 2020 target, and considered options for closing the emissions and financing gaps (Indonesia Ministry of Finance, 2012)—although this appears to have been a one-off exercise. Expenditures on environmentally harmful activities—such as subsidies for the fossil fuel industry or for land use change—have not been included in any of the so-called climate budgets, although the UNDP notes that a few countries have identified sectors with negative impact on climate change in policy documents and cite Bangladesh and Indonesia as examples. The UNDP has stated with respect to climate budget tagging that, methodological and political economy challenges notwithstanding, accounting for negative expenditure is inevitable if investment in climate change action is to be effective (UNDP, n.d, p. 25). The OECD makes a similar point (OECD, 2021b, Sect. 3). Box 5 briefly summarizes selected country examples of climate budgeting. Box 5 Country examples of climate budgeting14 Following the world’s first Climate Budget in Nepal in 2013, a number of countries have published Climate Budgets parallel to the main budget. They have done so using a variety of specially designed ‘expenditure tracking’ (or tagging) methodologies to identify climate-related expenditures. There are also variations in scope: Climate Budget Tagging (CBT) can cover the national climate change policy, which defines a number of priority sectors (e.g., in the Philippines), or encompass a wider range

14 Drawn mainly from UNDP, n.d. See also OECD 2021b for further examples.

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of central government activity (e.g., in Nepal and Pakistan). A few countries tag relevant transfers to public corporations (Ecuador, Pakistan, the Philippines) and some have rolled the system out to cover subnational governments, e.g., Indonesia. Examples of climate budgeting include: Nepal: a climate relevance index is assigned to a program based on the sum of budgets of its relevant activities as a proportion of the program’s total budget (highly relevant 60% plus, relevant 20–60%, neutral less than 20%). ‘The relatively simple method made it possible to roll out CBT to line ministries within a short period of time’ but at the risk of overstating highly relevant spending in practice, which led to piloting a new relevance and weighting methodology UNDP, (UNDP, undated, p. 29). MOF includes a Climate Budget in the Consolidated Financial Statements (by ministry/function/district), the Economic Survey Report, and as table in an annex to the annual Budget. ‘One reason for the lack of take up by civil society organizations in Nepal is that they doubt the reliability of the tags’ (International Budget Partnership and UNDP, 2018, p. 23). Bangladesh: A Climate Fiscal Framework was adopted in 2014 with UNDP assistance. Climate spending was first tagged in some ministries before later rolling out across all ministries; and budget allocations were published before subsequently adding reporting of actual expenditures at the end of the year. From 2018 a 4-digit climate change budget code segment has been added to the chart of accounts to enable routine budget analysis of government expenditure on projects/activities across the 6 themes and 44 programs of the Bangladesh Climate Change Strategic Action Plan. The 2018/2019 budget call circular contained a requirement for all Line Ministries to include a narrative report in their Ministry Medium Term Budget Frameworks on the impact of each of their medium-term objectives on climate change and to state the total climate relevant amount included in their budget for each of the next 3 years. Figures for climate change for the coming budget year are then elaborated in an annual climate budget report. Indonesia: Climate budget tagging started in 2016, integrated in national planning, budgeting, monitoring and evaluation, and reporting systems. Tagging is also linked to financing through a Climate Change Trust Fund and through issuance of green bonds from 2018. Government claims CBT has enabled better mapping of the green financing needs across sectors and expanded uptake of international climate financing.

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Moldova: CBT was designed to be part of the Monitoring and Evaluation framework for the climate change National Action Plan. Kenya: expenditures are tagged according to whether they are adaptation, mitigation, or enabling environment (climate awareness program and activity, training, or policy and capacity building). More than 25% of the funding must go to one or all the above categories and the outcome/output must be increased resilience, reduced emissions, or more awareness on climate change. CBT is integrated into budget codes and into the FMIS. The 2018–19 Budget Policy Statement submitted to parliament contained a technical annex on climate change. Pakistan: adopted a Climate Change Financing Framework (CCFF) in 2017 to help identify sources of finance and gaps in available and required financing. This paved the way for the establishment of a ‘Pakistan Climate Change Fund’ to finance climate change-related projects, and the development of public–corporate–civil society partnerships for financing and implementation of climate change adaptation and mitigation projects.

A small number of countries are using macroeconomic models that incorporate climate aspects to analyze the environmental impacts of fiscal policies, and the economic impacts of climate policies such as carbon taxes. Denmark is a leading example (OECD, 2021c). A related strand to climate budgeting has been the development of the sovereign green bond market. A small but growing number of countries have issued green bonds to finance climate and other environmental activities. To date Indonesia, Ireland, Fiji, France, Poland, Sweden, the Netherlands, Germany, Hungary, and Italy have issued green bonds. Spain, the UK, and Singapore are expected to issue inaugural green bonds later in 2021. As of September 2020, sixteen sovereigns had issued green bonds to finance green projects in governments’ budgets, exceeding USD 80 billion, although sovereign green bonds still account for only 0.1% of all government debt securities (OECD, 2020b). A few countries have linked their national budgets, for reporting purposes, to the UN SDGs, including the environment-related SDGs. In 2017, the Mexican government linked all the specific budget items that contribute to progress on the SDGs using a Results-based Management perspective, having previously in 2013 designed a structure to link budget programs to the National Development Plan. In 2020 Mexico became the

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first country to issue a Sovereign SDG bond, supported by the link of the SDGs to the budget (Rivero del Paso, 2021). In South Africa, the 2030 National Development Plan sets objectives for environmental sustainability and resilience, including the aim to establish a set of indicators, such as a target for the amount of land and oceans under protection, accompanied by publication of annual reports. Department of Environmental Affairs Annual Reports contain performance information by program, e.g., the program on biodiversity and conservation management reports on the percentage of land under conservation (Department of Environmental Affairs, 2019/2020). Some advanced countries have begun to incorporate environmental objectives and policies in fiscal policies and budgeting. These range from discussion of environmental policies in budget documents, through incorporating environmental well-being in budget decision-making, analyzing, and disclosing the environmental and economic effects of new policy proposals, through to reporting on the environmental impacts of the budget. In Norway, in response to a call from the Parliament, the 2016 budget contained a section on Sustainable Development and Green Growth which discussed the use of economic instruments including taxes to improve resource efficiency, Norway’s performance on climate change, the state of ecosystems, and management of renewable resources including selected cross-country comparisons. The Climate Change Act (2018) subsequently required the government to state in the annual budget the expected impact of the budget on GHG emissions and how Norway can achieve the climate targets set out in the Act. Norway introduced a tax on GHGs as early as 1991 and after several Green Tax Commissions and other climate policy reviews, more than 80% of GHG emissions are either covered by the GHG-tax (of about 50 Euro) or by the EU ETS (OECD, 2019). In Sweden, the Climate Change Act 2018 requires the Government’s policy efforts to be based on the long-term emission targets set by Parliament. The government must set the other emission reduction targets needed to achieve this long-term goal. The work must be conducted in a way that provides the conditions for climate policy and budgetary policy objectives to interact with each other. The government must submit an annual climate report to Parliament in the Budget Bill (Grantham Research Institute, n.d.).

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In Wales, the Government of Wales Act 1998 (which devolved authority from the UK) contained a provision that The National Assembly for Wales has a duty to have a scheme setting out how it will promote sustainable development in the exercise of its functions (Davidson, 2020). This culminated in the Well-being of Future Generations (Wales) Act 2015 which places a duty on all public bodies to pursue sustainable economic, social, environmental, and cultural development. This includes setting well-being objectives and taking all reasonable steps to meet those objectives. Each public body must publish and report against a Wellbeing Statement, respond publicly to any recommendations from the independent Commissioner for Future Generations, and be subject to audit by the Auditor General of Wales on whether they have acted in accordance with the sustainable development principle (Future Generations Commissioner for Wales, n.d., a). The Future Generations Commissioner reports to the National Assembly each year on the government’s draft budget: in 2019 this included an assessment of how budget decisions and allocations contribute to decarbonization (Future Generations Commissioner for Wales, n.d., b). Elsewhere in the UK, Scotland’s Climate Change Act 2009 requires the government to submit to Parliament an assessment of the impact of proposed expenditures on GHG emissions (Grantham Research Institute, n.d.) (see for instance Carbon Assessment of 202–21 Budget, Scottish Government). As noted in Chapter 3, the UK Environment Bill 2020 would require governments to set legally binding targets on air quality, water, biodiversity and resource efficiency and waste reduction, put in place five yearly Environmental Improvement Plans to improve the environment, and report on progress toward achieving targets every year.15 France has incrementally deepened the extent to which environmental issues are presented in annual budget documents. Initially three budget information documents were presented (on energy transition, climate change, and protection of nature), and the French debt management agency published information on expenditures eligible for financing by the French green bond. The Energy and Climate Law (2019) requires the government to report on the positive and negative impacts of the budget on climate change. In 2019 also a methodology was piloted ex

15 https://www.gov.uk/government/publications/environment-bill-2020.

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post on that year’s enacted State Budget. In the draft Budget for 2020 the Budget Minister announced that a complete Green Budget would be presented for 2021 and the 2021 budget included a ‘Report on the Environmental Impact of the State.’ Box 6 provides more detail (Lelong & Wendling, 2020; Roucher et al., 2019). Box 6 Green budgeting in France In April 2019, the French Ministers of Economy, Budget, and Environment requested a team from the General Inspectorate for Finance and the General Council for Ecology and Sustainable Development (two State inspection bodies) to conduct a stocktake of expenditure and revenue having a significant environmental impact, positive or negative. On the revenue side, the work was relatively straightforward as there is some consensus in France on what an ‘environmental tax’ means, and data is published annually on environmental taxes for France and other EU countries by the OECD and Eurostat. There is no such consensus on the expenditure side of the budget. The objectives of the exercise were to identify all types of expenditures (not just public investment or transfers); incorporate all environmental goals (not just climate change or biodiversity); and to identify both environmentally positive and negative expenditures (not just the former). The approach adopted was to use the taxonomy of sustainable environmental outcomes then being developed by the EU (see Box 1) and to focus on four policy areas where the environmental impact is most significant (territorial cohesion; agriculture, food, and fisheries; ecology and sustainable mobility; and research and higher education). The 2021 French national budget included for the first time a ‘Report on the Environmental Impact of the State.’ The report contains information both on the consistency of the budget with France’s international commitments (especially the Paris Agreement) and information on the full range of environmental domains. The scope is broad, covering the general budget, annex budgets and most special accounts, levies on revenues and capped earmarked taxes, and tax expenditures. The report rates these elements on a scale of −1 (unfavorable) to +3 (very favorable) with respect to each of the six environmental objectives in the EU sustainable economy taxonomy (Box 1). This results in three categories: i. Green expenses: expenditures that are favorable to the environment on at least one environmental axis without being unfavorable on

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another axis, e.g., spending on renewable energy, some official development assistance and the funds allocated to water agencies ii. Mixed expenses, which have a favorable impact on one or more environmental axes and an unfavorable impact on other environmental axes, e.g., expenses on infrastructure transport, especially rail iii. Unfavorable expenses: having an unfavorable impact on at least one environmental objective without having any offsetting favorable impact on another objective, e.g., tax expenditures on energy products and budgetary expenditures on air transport The Green Budget, which was presented as an Annex to the 2021 Budget Bill, found that, out of a total of e574.2 billion in budgetary expenditures and tax expenditures, e52.8 billion (9.2%) has an impact on the environment: – e38.1 billion is favorable on at least one environmental criterion – e4.7 billion is favorable on at least one criterion but has negative impacts on one or more other environmental criteria – e10 billion is unfavorable on at least one environmental criterion without having any favorable impact.

The 2019 Budget in New Zealand was presented as a ‘well-being budget’ in which a wider set of social, economic, environmental, and cultural indicators and objectives was integrated into budget decisionmaking (NZ Treasury, 2019). This new approach was institutionalized in 2020 through changes to the Public Finance Act which require that the Budget Policy Statement—tabled around 6 months before the start of the fiscal year—and the budget Fiscal Strategy Report must state the government’s well-being objectives and how they will, and have guided budget decisions.16 The 2019 budget has been described variously as introducing important new processes to incorporate noneconomic goals, on the one hand, and as being little different in substance to previous budgets (McCullough et al., 2020; Ball, 2019). Subsequently the pandemic resulted in the government suspending its planned 2020 Wellbeing Budget and its COVID response package has been criticized for containing limited ‘green’ elements (Boston, 2020). In December 2020, the government announced that the central government sector will be carbon neutral by 2025. All ministries, departments, and agencies will

16 See also Box 5.2 for further discussion of NZ’s well-being budgeting.

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be required to set gross emissions reduction targets, introduce a work plan for how they will reduce emissions, and measure, verify and report emissions annually. Fiscal Risks from the Environment Recalling that the interface between public finances and the environment runs in both directions, environmental degradation creates a range of fiscal costs and fiscal risks for governments. As noted in Sect. 4.1, attention to date has focused on the fiscal risks from natural disasters, including but not limited to those related to climate change. Countries that are particularly exposed to disasters have extended their reporting of the associated fiscal risks over time and of how they are mitigating them, e.g., the Philippines (Republic of the Philippines, n.d.). Adopting a broader perspective, the UK 2019 Fiscal Risks Report contained a chapter on the fiscal risks from climate change, using a framework originating with the Bank of England’s assessment of climaterelated risks to financial stability that divides the risks into two sources: physical risks related to extreme weather events and gradual global warming (incorporating mitigation and adaptation costs); and transition risks related to the shift to a low-carbon economy (Office of Budget Responsibility, 2019). Transition risks include the risk of loss of value of natural resource assets (e.g., coal and oil reserves) and infrastructure assets (e.g., coal-fired power stations) due to policy changes and technological changes. Transition risks also include loss of fiscal revenues from taxes currently levied on fossil fuels. Transition risk can be seen as entailing four high-level scenarios according to the strength of the mitigation policy response—are Paris Agreement targets met or not—and how smooth and foreseeable those actions are taken—is the transition orderly or disorderly (Office of Budget Responsibility, 2019, Box 9.3). The 2021 Fiscal risks report analyzed the economic and fiscal implications of alternative paths to meeting the government’s legislated goal to reduce GHG emissions to zero by 2050 (Office of Budget Responsibility 2021). As noted, there are also potential fiscal costs from a country’s failure to meet its international commitments to reduce GHGs and the government having to buy credits on the international market. For example, Ireland’s 2021 Budget Economic and Fiscal Outlook referred to the fiscal risks from failure to meet the State’s climate change and renewable energy targets as being risks of high likelihood and high impact (Government of Ireland, 2020, Table 20).

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The Role of Subnational Governments As noted in the Introduction, the focus of this book is on central government. Subnational governments also play an important role in environmental stewardship, particularly in environmental regulation, with the roles varying widely depending on constitutional arrangements in each country. In some unitary states, the central government may have a high degree of authority over environmental policies and instruments over the whole territory. In other countries including in federal systems, on the other hand, subnational governments may have significant authority, particularly with respect to environmental regulation. In this context there is a variety of instruments used by the central government to direct or influence the environmental performance of subnational governments, while subnational governments may also be able to influence national developments: • Directions to subnational governments to set GHG emission reduction targets, e.g., in Indonesia (Mutiaraa et al., 2019). • Performance agreements between central government and provinces that contain environmental performance objectives, as in China (Kostka & Zhang, 2018, p. 775). • A national framework for carbon pricing with minimum pricing standards for provinces to meet and the federal government has the power to apply its own carbon tax on those provinces that either fall short of the national standard or have not implemented their own system, e.g., in Canada (Parry, 2021). • Intergovernmental revenue sharing mechanisms that promote environmental objectives, e.g., in Brazil with respect to the extent of land reserved from development (Martinez-Vasquez, 2021). • Central government fiscal grants and transfers that promote environmental objectives, e.g., in India a variable in the equalization grant promotes forest conservation; in Portugal an ecological fiscal transfer encourages land conservation; in the UK performance-based grants used in Local Public Service Agreements encourage decarbonization and adaptation outcomes (Martinez-Vasquez, 2021). • Central government policy incentive schemes that promote innovative approaches for protecting the urban ecological environment, e.g., in China (Zhao, 2011, cited in Brehm & Svensson, 2020, p.112).

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• Contestable funds, e.g., the UK has launched a ‘green recovery challenge fund,’ designed to help charities and local authorities to protect and create jobs in tree planting, habitat restoration, and green space creation (Heritage Fund, n.d.). • Partnership agreements between central and subnational governments, e.g., the Partnership for Green Public Procurement between the Danish Ministry of the Environment and Danish municipalities and regions (OECD, 2019). • In some cases, national policy makers may take note of developments at the subnational level to encourage improved environmental governance at the national level, e.g., the city of Oslo’s climate budget prompted Norwegian parliamentarians to request a report from the Ministry of Finance on a climate budget for Norway (Government of Norway, 2017, 3.61).

Summary of Selected Country Practices Pulling the discussion of green budgeting practices together, Table 1 presents a summary of country practices organized by stage in the fiscal policy cycle. The country examples have been selected to illustrate practices from a wide range of developing, middle income, and advanced countries. The fact that a particular country is not referred to as an example of a particular practice should not be read as indicating it does not conduct that practice. Inclusion of a country practice in Table 1 does not indicate the practice has had an influence on decision-making let alone an impact on environmental outcomes—or indeed that the practice is necessarily desirable.17 It is too early in the evolution of green budgeting practices to say there is much evidence yet of influence or impact. Exercises like climate tagging or green budget tagging may help to raise awareness of the importance of climate change, a useful initial step on a results chain. 17 For instance, setting an expenditure floor for green spending is not necessarily a good practice as it may encourage public expenditures over other more effective environmental policy instruments or packages of instruments and may be associated with low quality spending. On the other hand, it may substitute for environmentally harmful spending and may be justified by political economy considerations.

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Table 1 Selected country examples of green budgeting practices by stage of fiscal policy cycle Stage in fiscal policy cycle National planning National Development Plan with environmental goals, targets Fiscal strategy Linked to environmental outcomes, climate change, SDGs Macroeconomic model incorporating climate aspects Green tax review Budget preparation Environmental impact assessments of infrastructure projects Climate change cost–benefit analysis Climate expenditure tagging Comprehensive green expenditure tagging Tagging of environmentally harmful expenditures Carbon pricing Earmarked carbon tax for green spending Green expenditure floor Application of green COVID response criteria Budget presentation Budget documents include environmental goals Mandatory disclosure of climate effects of new policies Advice to Parliament on budget’s impacts on sustainability

Selected country examples

China, Indonesia, Ireland, Nepal

Finland, Indonesia, NZ, Peru, Sweden Denmark Norway Numerous countries Thailand, UK Bangladesh, Kenya, Nepal France France 31 countries18 Costa Rica19 European Union Canada, France

Mexico, Norway France, Norway, Scotland Wales

(continued) 18 Coalition of Finance Ministers. https://www.financeministersforclimate.org/

Site visited 24 March 2021. 19 Costa Rica imposed a 5% carbon tax on carbon emissions from fossil fuels to

generate revenue to pay landowners to refrain from clear-cutting on their land and to plan trees instead. 2018 BIOFIN Workbook, p. vi. South Africa has used biodiversity tax incentives (South Africa Department of Forestry, Fisheries and the Environment).

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Table 1

(continued)

Stage in fiscal policy cycle

Selected country examples

Performance budgeting in environment sector Fiscal risk statements incorporate environmental risks Budget financing Green bonds/SDG bonds Budget implementation Green procurement

Italy, South Africa

Monitoring , evaluation, audit Performance indicators (green SDGs) Climate expenditure auditing Auditing, independent assessment of environmental effects Fiscal reporting In-year reporting of climate spending Performance reporting in environment sector Reporting to green bond holders Public participation in green fiscal policy Public engagement on carbon tax Public engagement on climate change adaptation spending

Philippines, UK

Fiji, Indonesia, Ireland, Poland, Mexico China, Japan, South Korea, Netherlands20 Mexico, Moldova, Nepal Bangladesh Canada,21 New Zealand22

Mexico Italy, South Africa Fiji, Indonesia, Ireland, Poland Canada, South Africa23 Fiji

Budget tagging may also facilitate better identification of green financing needs and attract international financing (although there is still the problem of additionality and fungibility—an investor will not know whether the activity would have been financed anyway, and while 20 The policy direction was given by the House of Commons in 2010 that public procurement be 100% sustainable by 2015. https://www.oecd.org/gov/ethics/gpp-pro curement-Netherlands.pdf. 21 The Auditor General Act (Sect. 7(2) (f) mandates the Auditor General report to Parliament any cases in which ‘money has been expended without due regard to the environmental effects of those expenditures in the context of sustainable development.’. 22 The Office of Parliamentary Commissioner for the Environment, an independent body with the same status as the Auditor General, has a mandate to provide Parliament with independent reports and advice on environmental issues and to oversee the government’s environmental stewardship. https://www.pce.parliament.nz/ 23 Partnership for Market Readiness (2018, p. 68).

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they may have some assurance that the proceeds of a green bond are used to promote environmental sustainability they will have no influence over the environmental impacts of that government’s tax policies or of other public expenditures). Climate budget tagging could (yet) also be associated with green washing given the typical focus on positive environmental impacts only. The challenge is to leverage the range of different approaches to green budgeting to impact on fiscal and budget decision-making in ways that most cost-effectively reduce negative environmental impacts and promote sustainability. This is discussed in Chapter 5. In 2020 the COVID-19 pandemic provided a major opportunity for governments to ensure their crisis response measures were ‘green.’ How well have they done so far?

4.3

How Green Have COVID-19 Pandemic Responses Been?

The fiscal stimulus provided in response to the pandemic provided and still provides a major opportunity to reset the relationship between fiscal policy and the environment. Governments have the opportunity to transform their economies by embracing climate-resilient and low-carbon investments and to slow down and begin to reverse environmental degradation. This is particularly the case for advanced economies because in general they have greater ability to borrow to finance fiscal stimulus. On the other hand, spending on high GHG-emitting activities and poorly designed policies may shape the climate and damage the environment for decades. If countries invest in high emitting infrastructure now it locks in higher GHG emissions, promotes maladaptation by the private sector, and reduces the time available and steepens the curve (and costs) of the adjustments required to achieve a given national GHG target. This is particularly important given the huge scale of infrastructure investments required to meet the SDGs. There is also scope for environmental taxation to be expanded as part of the pandemic recovery. Additional green taxes can help to finance recovery spending while at the same time discourage harmful activities. The OECD has argued that a green COVID recovery is a win–win strategy if governments step up actions for a green and inclusive recovery, speed the transition to a low-emissions economy, track progress through pertinent, comparable, and timely data, and leverage finance to invest in the green recovery (OECD, 2020c). The World Wildlife Fund has argued that revisions to NDCs under the Paris Agreement on Climate Change

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need to be integrated into COVID recovery planning (World Wildlife Fund, 2020). IMF analysis of the Group of Twenty countries published in October 2020 found that little of the initial spending had been ‘green’ or climate positive (IMF, 2020).France allocated almost 1% of GDP to green measures, but this was still only around 5% of France’s total COVID response spending, reflecting the massive size of the response packages and that much of it was on urgent expenditures in the health sector and financial support to households. Green measures were mostly incentives for energy-efficient vehicles (China, France, Italy) and loans and grants for cleaning inactive oil wells in Canada, modernizing commercial vehicles in Germany, and building climate-resilient infrastructure in Japan. Nine countries had no climate-friendly measures at all while thirteen countries introduced climate-negative measures such as reductions or waivers of environment-related taxes or charges, unconditional bailouts of emissions-intensive industries or companies, and increased subsidies of fossil fuel infrastructure. Figure 3 shows the climate relevance of COVID-19 fiscal response measures for the G20 countries. 1.60 Climate negative with conditionality 1.40 Climate negative

Percent of GDP

1.20

Climate positive

1.00 0.80 0.60 0.40 0.20 0.00 FRA DEU CHN GBR JPN ITA USA ESP KOR CAN IDN AUS ARG IND MEX ZAF TUR SAU RUS BRA

Fig. 3 Climate relevance of COVID-19 fiscal response measures of G20 countries24

24 Data from IMF 2020.

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It has been claimed that France’s relatively better performance in greening its initial pandemic response is an illustration of the impact of its new approach to green budgeting (Lelong & Wendling, 2020)—see Box 6. In Canada, the government made corporate bailouts conditional on producing annual reports that state the company’s climate investments, plans to reduce their environmental footprint, and how their operations support Canada’s Paris Agreement commitments (Open Government Partnership, 2020). Following the 2008–2009 GFC China, the United States, South Korea, and Japan spent the most on green stimulus but all of them have pledged less in response to COVID-19 to date. On the other hand, the EU, Germany, and France are planning to spend considerably more on green stimulus now than they did in 2008–2009. While the absolute size of the COVID response spending was larger than that following the GFC, the green stimulus is far lower as a percentage of the total stimulus compared to the post-GFC fiscal interventions (World Resources Institute, 2020). Analysis by private consulting company Vivid Economics concludes that announced stimulus to date will have a net negative environmental impact in 16 of the G20 countries and economies. As a result, the vast majority of the money going to business in the short term could be risking future environmental sustainability. Roughly US$840 billion in announced stimulus (11% of the total) will flow into sectors with high impacts on the environment. Among more developed countries, the US stimulus package stands out as the most damaging, followed by Australia, Italy, and Japan. The ‘Next Generation EU’ recovery package is the most environmentally friendly stimulus package. It contains a Euro672.5 bn Recovery and Resilience Facility, 37% of which will be directed toward green initiatives, including targeted measures to reduce dependence on fossil fuels and to enhance energy efficiency. Furthermore, all recovery loans and grants to member states will have attached ‘do no harm’ environmental safeguards using the EU Taxonomy Regulation (Vivid Economics, 2020). Under the Facility, which commenced in February 2021, member states must each submit recovery and resilience plans to the European Commission, with the reforms and investments included in the plans to be implemented by 2026. The European Commission will assess Member States’ plans and translate their content into legally binding acts (European Commission, n.d.).

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Further COVID response and recovery spending represents a key entry point for the greening of fiscal policy, as discussed further in the next chapter.

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CHAPTER 5

Environmental Governance and the Greening of Fiscal Policy

Abstract A comprehensive framework is put forward for environmental governance and the greening of fiscal policy. The framework combines national State of Environment Reporting, incorporation of the highest priority environmental indicators and targets in key national indicators, and their mainstreaming through integration in fiscal policy and the annual budget cycle. The key components of green fiscal policy are identified together with suggested annual green budget reports and periodic green fiscal reports. This is followed by discussion of the implementation of the greening of fiscal policy, covering six principles of green fiscal policy; preconditions for implementation; and an extensive discussion of priority entry points for greening fiscal policy depending on country circumstances.

Helpful comments have been received on this chapter from Richard Allen, Andrew Blazey, Jonathan Boston, Stuart Brodie, Jim Brumby, Fabien Gonguet, Tim Irwin, Michelle Pawson, Paolo de Renzio, Eivind Tandberg, and Claude Wendling.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 M. Petrie, Environmental Governance and Greening Fiscal Policy, Palgrave Studies in Impact Finance, https://doi.org/10.1007/978-3-030-83796-9_5

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Keywords Green taxes · Environmental risks · Fiscal risks · Climate change mitigation · Climate change adaptation · Public infrastructure investment · Win-win policies

1

Introduction

This chapter puts forward a comprehensive framework for more effective environmental governance and the greening of fiscal policy. The framework incorporates elements introduced in Chapter 2 on national State of the Environment Reporting, in Chapter 3 on integrating environmental targets in government strategy, and in Chapter 4 on the evolution of green budgeting. The framework put forward here has a somewhat wider scope than the OECD’s green budgeting framework, because the ambition is broader: to hold governments more effectively to account for environmental stewardship.1 This goes beyond attempting to align fiscal policies with environmental goals. It also incorporates the need to ensure regular high-quality data on the national State of the Environment and on environmental risks; the wider practice by governments of setting priority environmental targets and reporting progress; and integrating the highest priority environmental indicators in a dashboard of core national indicators of social, economic, and environmental progress and incorporating them in government strategy, fiscal policy, and budgeting. The framework is deliberately ambitious given the severity, scale, and urgency of the challenges. As noted in Chapter 4, the aim is not to elevate or privilege environmental goals over economic and social goals. Rather the aim is to ensure that environmental considerations have a place at the tables where key societal decisions are made—in a way that they have manifestly not to date. The central government’s annual budget is recognized as its most important policy statement and the key instrument to mainstream the environment into government strategy and policy—even while recognizing the crucial role that government regulation at national and subnational levels plays in environmental management.

1 This framework originated in work designed to strengthen government accountability for environmental stewardship in New Zealand, see Petrie (2018, 2019a). This framework was subsequently expanded and adapted to the global level in Petrie (2019b, 2019c, 2019d, and 2019e).

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As defined in Chapter 4, the term ‘green fiscal policy’ is used in this chapter to clearly indicate that the framework incorporates fiscal strategy, covers both tax and expenditure policies, and the full range of fiscal policy tools and processes. The term ‘greening’ is used to signal that the incorporation of environmental considerations into budgeting and fiscal policy will be a long process, reflecting both the complexity and scope of the task and the low starting point. The structure of this chapter is as follows: Section 2 puts forward a comprehensive framework for environmental governance and the greening of fiscal policy. Section 3 discusses implementing the greening of fiscal policy, in three sub-sections: Subsection 3.1: Principles of green fiscal policy. Subsection 3.2: Preconditions for greening fiscal policy. Subsection 3.3: Entry points for greening fiscal policy.

2 A Comprehensive Framework for Environmental Governance and the Greening of Fiscal Policy In principle a green fiscal policy framework needs to cover: a. Impacts on all environmental domains, not just climate change or other selected domains such as water or air quality or land use change. This highlights the importance of national State of the Environment Reporting as the foundation for assessing environmental sustainability, as discussed in Chapter 2. b. All environmental impacts, including negative impacts (e.g., from environmentally harmful tax breaks or subsidies for coal or oil production) as well as positive impacts; primary intended benefits as well as co-benefits2 ; impacts within the national territory and

2 Co-benefits are other environmental benefits achieved as a by-product of the main intended benefit, e.g., a renewable energy power station, in addition to lower GHG emissions, will result in less air pollution and pollution-related deaths than a coal-fired plant; increased public transportation can reduce traffic congestion, reduce accidents and fatalities, and improve air quality as well as cut GHG emissions.

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outside it; direct and indirect impacts; and unintended as well as intended impacts. c. All elements of fiscal policy and public finance, as described in Chapter 4 (Fig. 2 in Chapter 4). d. The potential for new or increased ‘green taxes’ to improve economic efficiency at the same time as raising public revenues. The tax system is an important potential tool to address market failures from externalities (unpriced social costs), such as the costs to society of carbon emissions or of pollution (Nordhaus, 2021, Chapter 17). The Stern Review described climate change as the ‘greatest and widest ranging market failure ever seen’ (Stern, 2006). e. Nearer term as well as long-term impacts, e.g. long-lived public infrastructure projects can lock-in high GHG emissions, and be exposed to damage from the increased incidence of natural disasters in coming decades due to climate change; predictable paths of announced future carbon price increases can provide signals to the private sector and promote earlier and less costly changes to investment and employment; climate change may impact on long-term economic growth and therefore on long-term fiscal sustainability (Baur et al., 2021). f. The interface between fiscal policies and government regulation in achieving environmental goals and targets, including the use of instruments that are substitutes for fiscal policies or are hybrid combinations of fiscal and regulatory interventions—such as a combination of carbon or fuel taxes and emissions trading schemes. Figure 1 illustrates the components of the comprehensive Environmental Governance and Green Fiscal Policy framework. It includes key elements of the OECD’s Green Budgeting framework (Box 4 in Chapter 4), such as the anticipated environmental impacts of the new and ongoing policies in the budget, cross-national benchmark indicators, and periodic supplementary green fiscal reports. In addition to the elements in the OECD’s Green Budgeting framework (Box 4 in Chapter 4), the comprehensive framework for environmental stewardship and green fiscal policy also includes: 1. Regular, independent, and forward looking national State of the Environment Reporting. The absence of environmental reporting

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Fig. 1 Comprehensive Framework for Environmental Governance and Green Fiscal Policy

from a green fiscal policy framework might be viewed as something like having a Public Finance Act with no reference to the accounting standards, systems, and processes by which a government’s financial statements are compiled. The timing of national state of the environment reports should be aligned as feasible with the national electoral cycle. 2. A government response to each national State of the Environment Report indicating the government’s top priority environmental goals, targets, and interim milestones. Without a formal government response, State of the Environment reports risk being shelved or going largely unnoticed. Mandatory environmental target setting (with the actual numerical targets either left to the government

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of the day or specified in law) would represent the environmental equivalent of Fiscal Responsibility Laws that require governments to publish and report against targets for the main fiscal aggregates (e.g., fiscal deficit, public debt). As discussed in Chapter 4, Climate Change Acts are increasingly adopting this framework, with the legislature setting a long-term mitigation target and the executive responsible for setting and reporting progress toward a series of interim carbon budgets (in a number of countries with part of this function delegated to independent Climate Change Commissions). Mandatory target setting provides a means to focus government action, to measure performance, and to hold governments accountable, and can reduce uncertainty for the private sector (particularly with respect to long-lived investments in the face of climate change). Without clear targets environmental goals may be no more than vague political compromises or disingenuous wishes (as argued in the Introduction). 3. The integration of the top priority environmental targets into government strategic planning and fiscal policy. Government strategy statements remain dominated by economic goals and targets, with social policy objectives increasingly featuring. It is important to ensure that environmental commitments are integrated in overall government priorities and are fiscally sustainable. For instance, budget documentation can highlight the linkages between GHG emissions targets, the economy, and fiscal policy. However, environmental goals have relatively limited visibility, with climate change a very recent but growing exception. Other critically important environmental indicators might, depending on country circumstances, include freshwater quantity and/or quality, air quality, deforestation, soil quality, size of protected land or marine areas, and endangered species. 4. A number of potential additional annual and periodic (less than annual) supplementary green fiscal reports on the interfaces between fiscal policy and environmental outcomes, depending on country circumstances and capacity. These additional elements are intended to outline the full scope of the comprehensive framework put forward here and are far beyond current practices anywhere, although as discussed in Chapter 4 some countries are implementing some of the practices. Practical starting points are discussed in subsequent sections of this chapter on preconditions and entry points for

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the greening of fiscal policy. The set of potential additional green fiscal reports includes: (a) The anticipated environmental impacts of new tax and spending policies in the annual budget. This is a key entry point for the greening of fiscal policies as discussed below, including assessing their consistency with national and international environmental commitments and targets and their consistency with advice and recommendations from any independent entities such as a Climate Change Commission. This should incorporate offbudget activities, such as expenditures from an extra-budgetary Environment Fund, and any relevant projects and activities of international development partners. (b) The anticipated environmental impacts of selected parts of the ongoing tax and spending budget baseline. Another key entry point is focusing on the ongoing tax and expenditure policies that are known to be the most environmentally harmful. Again this should include consistency with advice and recommendations from any independent entities such as a Climate Change Commission. (c) Cross-national benchmark indicators . An important component to draw attention to relative country position, effort, and fairness and to promote debate and accountability. (d) A discussion of fiscal risks from the environment. These include fiscal risks from climate change mitigation, adaptation, and transition risks, and risks from other forms of environmental degradation (Sect. 3 in Chapter 4). The discussion of fiscal risks from the environment would ideally be in the form of a section in an annual Fiscal Risk Statement presented with the budget, or a section in a medium-term fiscal strategy report. The discussion should include indications of how the risks are being managed (e.g., how risks are being mitigated, transferred, accepted, or controlled). Environmental degradation and climate change should also be incorporated in a Long-Term Fiscal Statement where such a report is produced. (e) An assessment of environmental resilience and near-term risks around critically important environmental outcomes. This information is required so that the information in fiscal strategy documents and annual budgets on risks around the economic

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outlook and around government revenues, expenditures, and public debt can be set alongside information on environmental risks and thresholds. This would enable a more informed analysis and debate on complementarities and trade-offs between economic, social, and environmental objectives and outcomes. Currently, without this component on environmental resilience and risk, economic and fiscal considerations almost inevitably dominate fiscal strategy and annual budgets, which effectively precludes adequate weight being given to environmental objectives and the possibility of win-win policies. This could be in the form of an annual document (or chapter in a Fiscal Strategy Report), presented with the annual budget and a periodic stocktake informed by each multiyear (e.g., four yearly) national State of the Environment Report. (f) A description and assessment of the use of economic instruments to pursue environmental goals. Economic instruments include energy taxes, pollution charges, resource use charges, waste charges, congestion charges, subsidies, cap-and-trade schemes such as Emissions Trading Systems and transferable fisheries quotas, and feebate schemes. Economic instruments have great scope to improve environmental outcomes by ‘pricing’ or internalizing external social costs from pollution, GHG emissions, or congestion. They can improve equity and strengthen incentives to reduce pollution by implementing the polluter pays principle. Subsidies for private sector green R&D can address the ‘double externality’ barrier to green innovation (Nordhaus, 2021, chapter 18) arising from the combination of relative underpricing of green production (due to environmental externalities) and the fact that the private returns to innovation are below the public returns. Economic instruments also have potential to raise revenues that can be used to increase spending, reduce other taxes, reduce public debt, or a mix of these. Green taxes ‘…are the holy trinity of environmental policy: they pay for valuable public services, they meet our environmental objectives efficiently, and they are nondistortionary. Few policies can be endorsed with such enthusiasm’ (Nordhaus, 2021, p. 203). Transparency is required, however, particularly around the revenue potential of cap-and-trade schemes (e.g., ETSs) and any foregone public revenues from government decisions not to

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auction rights or from differential treatment of sectors or industries (which are similar conceptually to tax expenditures and seem likely to be similarly open to abuse of the public interest). Information on cap-and-trade schemes should be included in annual budget documents. There should also be transparency of the ‘shadow price of carbon’ used in government cost–benefit analysis, e.g., in appraisals of public investment projects. (g) An overview of the environmental impacts of the Public Corporations’ Sector. This needs to cover both nonfinancial and financial public corporations owned or controlled by central government, which can have significant negative environmental impacts (e.g., public natural resource and energy companies) and have a significant role to play in financing either brown or green activities in the private sector (e.g., public Development Banks). An overview report should describe the instruments the government uses to promote or ensure alignment between the government’s environmental objectives and targets and the activities of the corporations it owns, and any negative environmental impacts due to government policy that corporations are required to implement, such as underpricing of energy. It should present information on the environmental impacts of the public corporations’ sector and their exposure to risks and opportunities from climate change and other environmental degradation. Reporting should be aligned with any private sector sustainability reporting or environment-related disclosure requirements—for instance, mandatory climate-related disclosures of individual financial institutions (Task Force on Climate-Related Financial Disclosures, 2017) and any requirements introduced that financial institutions also disclose biodiversity-related impacts and risks (Informal Working Group on Nature-Related Financial Disclosures, 2021). (h) An overview of the environmental impacts of the fiscal policies of subnational governments. As discussed in Sect. 4.2 in Chapter 4, the constitutional relationship between central government and state and local governments varies considerably. However, it would be appropriate in all cases for the central government to publish an overview of the instruments the central government uses to direct, influence, coordinate, or support as relevant the interface between fiscal policies of subnational governments and

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the environment, and as available, information on environmental impacts, e.g., GHG emissions of infrastructure projects, adaptation to climate change, environmental taxes, environmental protection expenditures. (i) A periodic Green Monitoring and Evaluation Report . A regular Monitoring and Evaluation (M&E) report—perhaps once each election cycle—could present a stocktake of the evidence on the efficiency and effectiveness of government’s fiscal and regulatory interventions in achieving environmental objectives and targets. The report should link the programs/outputs/projects funded in agency budgets through intermediate progress indicators to the government’s higher level environmental outcome targets and other environmental indicators. In more advanced countries this element could form part of performance-oriented budget reports included in annual budget documents, as discussed later in this chapter under entry points for green fiscal policy, but an annual stocktake is too frequent for the type of exercise advocated here. The report should incorporate information from agency program evaluations, regulatory reviews, performance audits by the SAI, evaluations completed by development partners funding or implementing programs in-country, and information from civil society activities. Such a report would be likely to require or prompt the government to develop an explicit strategy for its M&E and R&D in the environment sector and to progressively build the capacity to implement it, to improve the evidence on which its expenditure, tax, and regulatory decisions are based. One example of this is the four yearly environmental M&E stocktake published in Sweden (Box 2 in Chapter 3). The frequency and timing of a regular M&E report in any country could be linked to its electoral cycle, e.g., mid-way between elections, to promote public and political discussion and deliberation over environmental policies outside the heat of an election year, and in time to inform the development of political party platforms for the next election.

3

Implementing the Greening of Fiscal Policy

In this section a set of principles is put forward as a framework for implementing green fiscal policies. This is followed by a discussion of

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the preconditions for greening fiscal policy, and a range of generic and country-specific entry points for countries wishing to start or to continue to mainstream environmental objectives in government strategy and fiscal policy. 3.1

Principles of Green Fiscal Policy

Drawing on the previous chapters, Box 1 puts forward a set of six principles for green fiscal policy that emphasize environmental stewardship. Box 1 Principles of green fiscal policy Green fiscal policies should: 1. Incorporate all environmental domains. While climate change receives the most attention and interacts with and exacerbates biodiversity loss and other forms of environmental degradation, the collapse in biodiversity itself represents an existential environmental threat. 2. Be tailored to individual national priorities, set through national deliberation and debate and reflecting national circumstances. From the perspective of any one country global frameworks contain a mix of high, medium, low, and irrelevant goals and priorities as well as some goals that conflict and that need to be resolved at the national or subnational levels. While countries should design reporting frameworks that bridge from the national to regional and global levels to facilitate monitoring and benchmarking, green fiscal policy should be designed around nationally determined environmental priorities. 3. Be fully integrated in fiscal policy and budgeting. A green perspective needs to be integrated into the decision-making processes for setting government strategy and priorities, medium-term fiscal policy, and priorities for the annual budget. A Green Budget or Climate Budget that is produced as a separate exercise, for example through just tagging and adding up related expenditures, risks producing information that is of little use.3

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4. Observe principles of ‘do no harm’. A conceptual starting point for green fiscal policy should be a baseline under which taxation and spending do not significantly harm the environment, as measured for instance through application of the EU taxonomy of sustainable environmental outcomes (EC, 2020). Fiscal support for activities which are environmentally harmful may of course be justified on other grounds, e.g., they make a positive contribution to other environmental outcomes or to economic growth and/or social outcomes. But the environmental impacts need to be disclosed ex ante and ex post as feasible (particularly the risk of breaching environmental bottom lines), the trade-offs need to be transparent, and the decisions should be well reasoned and legitimately reached. 5. Protect and advance equity. Green fiscal policy has a key role to play in ameliorating the impacts of environmental degradation which fall most heavily on women and girls (UNEP, 2016), the poor, and indigenous peoples,4 and to offset the at-times inequitable transitional impacts of associated policy responses (such as carbon pricing). Green or climate budgeting also has an important role to play in attracting international financial flows to assist developing countries to meet climate change adaptation and mitigation objectives and other environmental goals. 6. Avoid ‘greenwashing’. There are easy opportunities for countries to report environmentally favorable fiscal activities while omitting to refer to environmentally harmful activities – and this has

3 A similar argument, of the need for disclosures on climate-related risks in the private financial sector to be incorporated in mainstream financial reporting, is made by the Task Force on Climate-Related Financial Disclosures, which noted that this would foster shareholder engagement, broader use and understanding of the information, help ensure that appropriate controls govern the production and disclosure of the information, and that practices and techniques will evolve more rapidly (Task Force on Climate-Related Financial Disclosures, 2017, pp. iv, v). 4 Indigenous Peoples are distinct social and cultural groups that share collective ancestral ties to the lands and natural resources where they live, occupy, or from which they have been displaced.

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largely been the story of climate budgeting and green budgeting to date. In addition, how much paper or electricity a government agency such as a ministry of finance uses is trivial compared to the environmental impacts of the tax and spending policies it is responsible for providing advice on and the latter should be the focus of green fiscal policy.

3.2

Preconditions for the Greening of Fiscal Policy

The first precondition is the availability of reliable monitoring data on key environmental stocks and flows, as discussed in Chapter 2. In lower capacity environments this should, as feasible, focus on critically important environmental indicators in each country. Ideally this would be progressively complemented by forward-looking information on critical environmental risks and potential tipping points, including an enhanced ‘DPSIRR’ framework for environmental reporting as proposed in Chapter 2. A second precondition is the capacity of the PFM system to produce and report basic reliable audited data on revenues and expenditures according to recognized international standards. This includes expenditure classifications by administrative and functional (or program) categories and relevant revenue classifications (IMF, 2014a). This also includes a functional Financial Management Information System and internal control framework and on the revenue side, sound tax administration capacity and the ability to implement carbon pricing schemes (taxes and/or emissions trading schemes). Thirdly, and related, the ability to attract international climate finance flows requires sufficient capability to be ‘accredited’ as a recipient of climate finance and other international environmental finance or to meet the requirements of the sovereign green bond market. For instance, the Green Climate Fund has accreditation criteria that assess whether applicant entities such as national or subnational governments have the ability to manage resources in line with the Fund’s fiduciary standards as well as the ability to manage environmental and social risks that may arise at the project level (Green Climate Fund, n.d.).

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Fourthly, it is probably critical that the ministry of finance is at least amenable to using fiscal policy and budget management to promote environmental outcomes. A hostile or uninterested MOF would be a major barrier, amenable perhaps only to sustained and strong political direction from a minister of finance who in turn has sufficient support in Cabinet. The MOF also needs a basic level of environmental awareness, some technical capacity in environmental policy to engage technically with environment agencies, and at least a soft mandate to do so. It is not clear, however, how a ‘greening’ objective will fit with the core business of a ministry of finance—typically seen as aggregate fiscal control of the fiscal deficit and public debt, efficiency in allocating resources across sectors, and efficient service delivery. There can clearly be conflicts between economic and fiscal objectives, on the one hand, and environmental goals on the other. It may be a hard ask for these conflicts to be accommodated within one government agency without undesirably masking trade-offs at the technical level within a MOF, reducing green fiscal policy to a presentational exercise that does not impact on budget decision-making, or potentially diluting existing core MOF functions. This suggests there may be a need to accompany the greening of fiscal policy with institutional changes that strengthen the President’s Office/Prime Minister’s Department. In some countries this may require legislative change to public finance and national development planning laws to impose more top-level control over these processes by the Head of Government. Fifth, and also crucial, a level of expertise in government is required on assessing the likely environmental impacts of fiscal policies and on a selective basis understanding how to design and conduct ex post evaluations. International guidance has been developed in this area, starting with identifying the amounts spent by a government on environmentally positive and negative activities—e.g., the EU’s comprehensive taxonomy of sustainable environmental outcomes that includes detailed lists of qualifying activities with respect to mitigation and qualitative criteria for adaptation activities (European Commission, 2020), and climate budget tagging (OECD, 2021). Guidance and good practice methodologies are also available on the estimation of emissions and removals of GHGs (IPCC, 2006, 2019) and in carbon pricing (Carbon Pricing Leadership Coalition, n.d.). Contracting in consultants—as is a common practice for environmental impact assessments of public investment projects—can be a way to leverage limited resources but also requires some core capacity

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within government to design consulting inputs and to review and ensure their quality. Similarly, governments require a certain level of environmental policy capacity to engage effectively with development partners and to ensure externally funded projects meet national objectives and priorities and are a good fit with local circumstances. This points to the need for a certain level of capacity of the ministry for the environment and related environment sector agencies, as well as in key environment- related sector ministries such as transport, energy, and agriculture. As noted in Chapter 2, environment ministries are often relatively low in influence within government, reflecting small staff numbers and budgets, lack of levers to influence sector ministries, and perhaps the political priority that has hitherto been attached to environmental considerations. Sixth, institutional arrangements are required to coordinate the fiscal policy/environment interface across government and the public sector. New or augmented cross-agency coordination mechanisms are also likely to be required, such as interdepartmental working groups and standing committees to support relevant Cabinet Committees. It may well be appropriate to assign theenvironment ministry some ‘central agency functions.’ For example, if the environmental impacts of new tax and spending decisions in the budget are to be analyzed and disclosed—or at least those of large new infrastructure projects—Cabinet regulations might mandate that comment from the environment ministry must be included in all new fiscal policy proposals going to Cabinet. New institutions may be warranted, such as an independent Climate Change Commission of the type established in an increasing number of countries, to provide assurance over the process of setting carbon budgets to meet the country’s announced GHG-reduction targets and policy advice on how to meet them. Independent Fiscal Institutions may also play a role, for example in advising on the fiscal policy changes needed to meet environmental targets or identifying fiscal risks from climate and environmental degradation. Box 2 discusses some country institutional arrangements for mainstreaming environmental policy into fiscal policy and budgeting. For more advanced levels of green fiscal policy, for instance based on evidence of the impact of fiscal policies and agency outputs on environmental outcomes, capacity for results-based or performance-oriented budgeting is required. Generally, this has been associated with ‘program budgeting’, where expenditures are grouped into programs based on common policy objective, but for climate change it is possible to focus

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more narrowly at the project level, as is the case in reporting results for green bonds. Developing countries that receive development assistance should in principle be able to integrate the results-based information on projects often produced by development partners (e.g., change in GHG emissions due to a new renewable energy project) into their policy analysis, advice, and budget documents and reporting (although there is limited evidence of this at present). Box 2 Cross-government coordination mechanisms to support the greening of fiscal policy The Philippines: Guidelines to line ministries on tagging climate expenditure during budget preparation are provided in a Joint Memorandum Circular issued in 2013 by the Department of Budget and Management and the Climate Change Commission (CCC). The CCC is responsible for verification of climate expenditures through quality review and assurance forms submitted by line ministries. The CCC participates in the technical budget hearings alongside the MOF and the Planning Ministry (UNDP, n.d., pp. 8, 24, 71). Norway: the Ministry of Climate and Environment has overall crosssectoral responsibility for policy coordination and development and in the budget proposal summarizes all relevant policies across government and describes the government’s climate priorities. The chapter also includes estimates of the impacts of selected expenditures on the environment. With respect to the SDGs, each of the 17 SDGs is assigned to one coordinating ministry that covers progress made in its annual budget report. The MOF sums up the main points in a chapter in the annual budget (OECD, 2019). France: the 2021 Green Budget was prepared by an interdepartmental working group comprising the Ministry of Finance (the Directorates of Budget, Treasury and Economic Analysis, and Tax Policy) and the Ministry of Ecological and Inclusive Transition. The working group applied a methodology developed by two state inspection bodies (The General Inspectorate of Finance and the General Council for Ecology and Sustainable Development), as described in Box 6 in Chapter 4. The Budget Directorate guided line ministries on how to use the methodology in preparing their 2021 budget proposals. The working group conducted a consistency check as the detailed information was consolidated into the first (2021) Green Budget (Lelong & Wendling, 2020).

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New Zealand: The Public Finance Act was amended with effect from July 1, 2020 to require the Minister of Finance to present to Parliament every four years a report prepared by the Treasury on economic, social, and environmental well-being using indicators and describing the state of well-being, how it has changed over time, and the sustainability of, and any risk to the state of well-being in NZ (S. 26NB). Despite the introduction of well-being into the Public Finance Act, the only entity referred to with responsibilities in terms of the new provisions in the Act is the Treasury. The well-being report is to contain information on matters that are outside the Treasury’s professional expertise, for example, the state of the environment and any risks to environmental sustainability. This is an inappropriate institutional arrangement through which to mainstream environmental policy into fiscal policy as it does not include an explicit role for the Ministry for the Environment. New institutional arrangements are required, with the Ministry for the Environment assigned lead responsibility for issues relating to environmental sustainability.

In addition to basic preconditions, there are some elements that might be described as ‘system multipliers.’ These are legislative oversight, auditing by the SAI, and monitoring and engagement by civil society. In some countries, legislatures have taken the lead in directing or prompting governments to initiate elements of environmental stewardship or green budgeting—for example, in Norway, Sweden (with respect to environmental targets), and the Netherlands (green procurement). In addition to passing laws requiring mandatory target setting and progress reporting (e.g., the UK’s pioneering Climate Change Act 2008) legislatures also have mechanisms to scrutinize the government on its environmental stewardship through select committee review processes, review of fiscal strategy and the annual budget, and review of environment sector performance (Boston et al., 2019). Legislatures may need to design new committee structures and support arrangements to facilitate their scrutiny of climate change issues. The draft PEFA Climate module currently being piloted contains an indicator (CRPFM 4 Legislative Scrutiny) that assesses how climate change aspects are included in the legislature’s scrutiny of budget and audit reports (PEFA Climate, 2020, p. 32). SAIs have potential to enhance accountability for environmental expenditures and performance by conducting program and project audits—for instance by developing performance measures to evaluate government’s progress in achieving the

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environment-related SDGs (INTOSAI, 2019). Finally, civil society actors provided both with information and opportunities to engage in public debate and deliberation can be an important force for the greening of fiscal policy—as discussed in Chapter 6. 3.3

Entry points for the Greening of Fiscal Policy

Entry points will depend very much on individual country circumstances, the availability of environmental data, the capacity for environmental policy analysis, and the level of PFM capacity. The quality of environmental monitoring and reporting determines the basic platform of environmental data on which to base environmental stewardship and the greening of fiscal policy. With respect to PFM capacity the OECD has noted that ‘any approach to green budgeting should build on a country’s existing PFM framework and thus be attuned to the strengths and limitations of the existing budgeting process’ (OECD, n.d.). For example, where a country has a strong performance budgeting system or a well-established periodic public expenditure review process it could incorporate environmental considerations in them. Before introducing climate budget tagging Pakistan completed a thorough assessment of its PFM system to determine the design of the tagging system (UNDP, n.d., Box 4 and Annex 3). Country circumstances matter hugely, both with respect to the levels and types of exposure to climate change and environmental degradation and exposure to the associated fiscal impacts of climate change. For example, the IMF has estimated that the effect of a 1 degree C average temperature rise would be significantly harmful to economic output (and therefore to varying degrees to fiscal revenues) in Africa, India, and much of south-east Asia, but beneficial in Canada, Russia, and Scandinavia (IMF, 2017). With respect to fiscal impacts, small island developing countries are exposed to massive increased costs as a percentage of GDP from natural disasters—with countries such as Kiribati facing complete inundation from sea level rise and already forced to adopt the adaptation policy of buying land in another country (Fiji) for their citizens to relocate to. At a different extreme, oil rich countries such as Saudi Arabia face transition risks to their public balance sheets and fiscal revenues from loss of value of their natural resources as well as potential litigation against their stateowned oil companies and are pursuing diversification of their economies financed from accumulated surplus oil revenues.

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There are, nonetheless, a number of generic points of entry for the progressive greening of fiscal policy in all countries. A first entry point is the new policies being introduced in the next annual budget. This is the point in the PFM and political systems where there is both maximum visibility of fiscal policies and the maximum point of leverage of government central agencies, the Cabinet, of legislatures, and to a lesser extent of the media and civil society. New policies typically require either a change in law (for tax policies) or a new or increased legislative expenditure appropriation, and this provides a focus and a level of detailed information on individual policies that is typically absent when existing policies are ‘rolled-over’ inside the current policies budget baseline. Starting with a focus on new policies is consistent with the long-established political perspective of government budgeting as an incremental process: ‘budgets are based on last year’s budget with special attention given to a narrow range of increases or decreases’ (Wildavsky, 1964). There may at least be less political opposition to avoiding new or additional fiscal support for environmentally harmful activities than there is to cutting existing fiscal support. Introducing a requirement in the annual budget circular that line ministries provide an assessment of the estimated environmental impacts of all new tax and spending policies being proposed for the next budget would be a key point of leverage. Amending the Organic Budget Law to require the government to provide this information with the annual Budget Proposal to the legislature would add a powerful impetus to the greening of fiscal policy. In the post-pandemic world, COVID-19 recovery packages are the new policies entry point par excellencefor the greening of fiscal policy because of their size. Given the urgency of macroeconomic stimulus and recovery measures, COVID recovery packages may be implemented outside the regular budget cycle. In any case they represent a huge potential misstep with decades-long consequences if the initial COVID-19 crisis containment packages are anything to go by; as noted in Chapter 4, they contained limited green elements and much that was environmentally harmful. It is imperative for environmental sustainability that subsequent COVID recovery packages are far greener than the first given their size and the steadily narrowing window to cut emissions in time to avoid catastrophic global warming. This is particularly the case for large infrastructure projects that can lock in high GHG emissions and promote maladaptation by the private sector for decades.

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In fact, there does not need to be a trade-off between fiscal stimulus and environmental sustainability, the two objectives can often overlap in win–win policy combinations. A recent global survey of senior central bank and finance ministry officials found respondents saw a ‘green route’ out of the crisis as also being highly economically effective (Hepburn et al., 2020). Examples include investment in renewable energy production, such as wind or solar, which is relatively labor intensive compared to fossil fuel investments. ‘For projects with low-cost financing that tap high-quality resources, solar PV is now the cheapest source of electricity in history’ (IEA, 2020). Other win-win policies include increasing the energy efficiency of existing buildings through retrofitting, clean R&D spending, natural capital investment for ecosystem resilience, public works programs to provide income support to the poor (e.g., irrigation, tree planting, invasive species removal); and, for developing countries, rural support scheme spending. Unconditional airline bailouts were rated the most poorly in terms of economic impact, speed, and climate impacts. At the least, fiscal support for brown activities should be conditional on making progress on environmental goals, as France and Canada did. More generally there is a case for public investment in climate change adaptation and mitigation given the public good aspects. For mitigation, public investment can provide infrastructure that may not be provided by private investors (e.g., connecting renewable electricity sites to the grid, a nationwide network of electric vehicle charging stations). Rates of return on investments to adapt to climate change (e.g., protection against sea level rises) are often greater than 100%, so that official aid for adaptation is an effective use of public money (IMF, 2020b, p. xii). Some public investments contribute to both mitigation and adaptation simultaneously, while others advance one objective at the expense of the other—Fig. 2. Other things equal, new investments should aim to promote both objectives or at least avoid advancing one objective without causing significant or unanticipated damage to the other. Governments should identify a pipeline of recovery projects that can be carefully appraised and ready for implementation within the next 2– 3 years that promote transition to a low-carbon economy, strengthen resilience to climate change, and invest in the conservation, sustainable use, and restoration of biodiversity (IMF, 2020, p. 48).

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Projects with negative adaptation benefits

Projects with negative mitigation impacts (increase GHG emissions) New highways with inadequate drainage systems Water desalination plants

Projects with adaptation benefits

Fig. 2

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Projects with mitigation benefits (decrease GHG emissions)

Small hydropower schemes (where competing for scarce water supplies)

Replacement of GHG-emitting energy production by distributed solar power systems that are less vulnerable to natural disasters. Building resilient, low-carbon mass transit systems. Preserving coastal mangroves to protect against storm surge and sequester carbon in comparison to building new sea walls. Agro-forestry projects.

Matrix of mitigation and adaptation impacts of public infrastructure3

The OECD has argued it is crucial that the impact of COVID recovery measures on environmental outcomes is monitored and evaluated—something that was not done after the 2008 GFC—and has presented 13 environmental indicators that can be used to measure the impact of stimulus measures. These include carbon intensity, fossil fuel support, exposure to air pollution, water stress, and environmentally related tax revenues (OECD, 2020b). A second generic entry point for green fiscal policy is to focus on the sectors and policies that are already known to be environmentally damaging. This will make the best use of scarce analytical capacity and avoid getting bogged down in attempts to exhaustively map the whole fiscal policy space for environmental impacts. As noted by the OECD, a strong candidate for the greening of public finances is to scale back any existing support measures for fossil fuel extraction or use. The OECD’s inventory of government support for fossil fuels provides the latest data on such measures (OECD, 2020a).4 Other fiscal support measures can have important negative impacts on biodiversity, deforestation, over-fishing, and water shortages or water quality. Unintended 3 Adapted from OECD (2012, p. 28), and World Resources Institute (2020). 4 The inventory includes almost 800 spending programs and tax breaks used by govern-

ments in OECD countries and key emerging G20 economies (Brazil, China, Colombia, India, Indonesia, Russia, and South Africa) to encourage the consumption or production of fossil fuels. These include measures that reduce prices for consumers, as well as those that lower exploration and exploitation costs for oil and gas companies.

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negative environmental impacts may also result from tax preferences for investments that are potentially environmentally harmful (OECD, 2018). Comprehensive but low-level approaches—for instance just tagging all environmentally relevant expenditures and revenues—that do not focus on the obvious areas of most concern may be a form of green washing. A third generic entry point is the regular cycles associated with meeting each country’s international commitments under the Paris Agreement, which provides a potential link with financing and the budget process. The Paris Agreement works on a 5-year cycle of increasingly ambitious national climate action, with countries due to submit their next NDCs by November 2021. In their NDCs countries communicate actions they will take to reduce their GHG emissions to reach the goals of the Paris Agreement. Countries also typically communicate in their NDCs actions they will take to adapt to the impacts of climate change. Some include costed projects for mitigation and adaptation for which they are seeking funding from domestic and external sources, and these need to be integrated with domestic public investment planning and budget processes. Finally, countries are invited to formulate and submit long-term low greenhouse gas emission development strategies. An increasing number of countries have introduced Climate Change Acts with legislated long-term GHG targets and have established independent Climate Change Commissions to advise on interim targets and pathways to the long-term goal in the form of multiyear carbon budgets (Grantham Research Institute, n.d.). This architecture provides regular opportunities for detailed analysis, consultation, and public deliberation over climate change policies and the trade-offs and complementarities with other policy objectives. Similarly, regular high-level government strategy processes such as a National Development Plan provide an entry point for fundamental reconsideration of a country’s approach to environmental stewardship. In many countries five year or longer development plans play a key role in setting priorities, often for the term of an incoming administration. The approaches advocated above—reviewing the most environmentally damaging fiscal policies, reassessment of tax and spending policies—could be incorporated in the process of developing new national development plans. Lower-level plans, such as National Infrastructure Plans or sector investment strategies, also present an important opportunity to move to

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greener public investments, transition to low-carbon technologies, and avoid locking in new high GHG-emitting infrastructure. A fourth generic entry point is to build environmental impacts and climate resilience into the public investment management cycle. Given the long life of much new public infrastructure being planned and the huge scale of new infrastructure required over the next decade to meet the SDGs, there is a pressing need for countries to develop environment-smart public investment management processes and build them into the public investment management and annual budget cycles, and there is international capacity development available in this field. This needs to cover how a country plans, coordinates, appraises, budgets for, implements, and manages the fiscal risks from public investment. Green procurement can also be an important mechanism to reduce the negative environmental impacts of government spending and help to promote private sector development and uptake of greener technologies. Fifth, an immediate Green Spending Review could be an effective way to focus on the most damaging fiscal policies. If possible, a Green Spending Review or a Climate Change Public Expenditure and Institutional review could be completed in time to inform at least some of the COVID recovery packages. A Green Spending Review could cover central government and the activities of its public nonfinancial and financial corporations but in practice could focus on the most environmentally relevant areas of spending and the most relevant public corporations. It would also be desirable for the review to analyze the full range of economic instruments—including environmentally related taxes, fees and charges, tradable permits, deposit-refund systems, environmentally motivated subsidies, and voluntary approaches used for environmental policy.5 This would help to ensure a more integrated and effective approach to environmental policy and stewardship than keeping tax strategy and expenditure policy in separate silos as is common practice by governments at present. In general, green spending reviews could be conducted once every electoral cycle. In low-income and middle-income countries they could be supported by international financial institutions such as 5 The OECD database of Policy Instruments for the Environment (PINE) contains detailed qualitative and quantitative information on 6 types of policy instruments from 110 countries worldwide, allowing in-depth cross-country comparisons of important environmental policy instruments. It is accessible at www.oecd.org/env/policies/database.

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the World Bank and the regional Multilateral Development Banks—for instance, the World Bank conducts reviews focused on climate change, in the form of the CCPEIR (World Bank, 2014). A related immediate mechanism to focus on the most environmentally damaging fiscal policies would be a Green Tax Policy Review. Such a review should consider the role of green taxes in the country’s overall tax mix and strategy. Green taxes are at least to some extent incentive compatible for governments because of their potential to generate significant additional revenues. Low oil prices and the need to rebuild post-pandemic fiscal positions make raising carbon taxes (or closely related instruments such as fuel taxes) and eliminating fossil fuel subsidies especially opportune. ‘For many countries a $75 per ton carbon tax would increase pump prices by less than the recent collapse in global oil prices’ (IMF, n.d., p. 3). Low oil prices also reduce the incentive of the private sector to invest in mitigation. Increasing the carbon price now is critically important if the private sector is to transition to a low-carbon economy. Given the potential resistance from the public and vested interests, the reform process should involve in-depth public engagement and deliberation by government during the policy development stage, a feature generally missing from tax reforms but used successfully by the Canadian government when enacting a carbon tax (see below and Chapter 6 on the role of civil society). The scope for earmarking the revenues from green taxes and cap-and-trade schemes to specific spending programs could also be effective in building majority coalitions in support of green taxes (Partnership for Market Readiness, 2018, p. 49). Following an initial green tax review, periodic reviews could be conducted perhaps every 5–10 years. A further generic entry point is publication of cross-national benchmark indicators in annual budget documents. This could be a way to motivate green ambition and to highlight the fact that most countries are moving, for example, on climate change mitigation but at very different rates. As advocated by the OECD, such indicators can assist in monitoring countries’ progress toward or compliance with international environmental obligations, for example on biodiversity (e.g., the Aichi Biodiversity Targets under the Convention on Biological Diversity) or other environmental goals. Such indicators could include GHG emissions per capita, renewable energy as % of total energy supply, fossil fuel support as % of GDP; the International Union for Conservation of Nature (IUCN) ‘red list index’ of threatened species, size of protected areas as

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% of total land/marine area, air and water quality, the use of economic instruments to promote environmental outcomes, and so on. The OECD has put forward 13 headline environmental indicators that can be used to measure the environmental impacts of COVID-19 stimulus measures (OECD, 2020a, 2020b). Use can also be made of already available information to produce regular analytical reports on environmental management to accompany the budget. The information available from existing PFM classification systems and other available sources of information includes: • data from the administrative classification on the expenditures of environmental protection agencies or of agencies managing national parks and other public lands. Over time this information can include a performance orientation, first with respect to the delivery of outputs and progressively on the outcomes resulting from delivering outputs. • data on individual public infrastructure projects that have a climate change mitigation or adaptation focus or environmental protection or improvement focus, using the project classification of expenditure and drawing as relevant on development partner project and other reports. • data on environmental protection expenditures by subcategory from the functional classification of spending, maintained by government finance agencies or by the national statistical agency. • data on spending on environment-related expenditure programs where a program classification is in place, including performance indicators and available information from any program evaluations or performance audits. • reports on trends in levels of pollution taxes, and on revenues from taxes on the exploitation of natural resources—particularly in countries where natural resources are important to the economy and/or the public finances—from standard revenue classifications. • Considerable environmental information is available with respect to projects implemented by development partners and is also increasingly available from national systems in the form of reports to the UNFCCC on GHG emissions and climate change adaptation and from reports to the financiers of green bonds. These should also be collated, summarized, and incorporated in regular reports to

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national accountability institutions, including to the legislature with the annual budget. • Where a revenue or other agency maintains records on tax expenditures, or the government publishes a report with the budget on tax expenditures, the information could be used to identify and assess the potential environmental impacts of these programs.6 Reporting of tax expenditures is a recognized part of international fiscal transparency standards.7 Finally, all countries should create or expand opportunities for direct public engagement on the interface between fiscal policy and the environment. There has been a major increase over the last decade in the attention given to the importance of direct public participation in fiscal policy design and implementation. GIFT promulgated, as one of its High-level Principles, that ‘Citizens should have the right and they, and all non-state actors, should have effective opportunities to participate directly in public debate and discussion over the design and implementation of fiscal policies.’ GIFT supported this with a set of ten Principles of Public Participation in Fiscal Policy, including accessibility of information, openness, inclusiveness, timeliness, and depth of engagement.8 These principles have subsequently been incorporated in the International Budget Partnership Open Budget Survey that measures country performance on budget transparency and openness (IBP, n.d.). Public participation has historically been less developed in practice on the revenue side of the budget. There is great scope for new initiatives to promote direct public engagement in the development and implementation of the greening of fiscal policies and budgeting, including from grass roots organizations and the traditionally marginalized.

6 The OECD has noted that tax expenditures can have wide-ranging implications for green objectives, and that to ensure that tools such as green budgeting help highlight the alignment between fiscal policy and green objectives, governments must significantly improve their reporting on tax expenditures. OECD (2021, Sect. 5.4). 7 Principle 1.1.4. of the 2014 IMF Fiscal Transparency Code stipulates that the government regularly discloses and manages revenue loss from tax expenditure. IMF (2014b). 8 GIFT (n.d.) Disclosure: the author helped to draft the GIFT Principles of Public Participation in Fiscal Policy.

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Country-Specific entry points Beyond these generic entry points there are also a range of entry points that depend more on individual country circumstances. For those countries looking to attract international flows of climate (and other environmental) finance, climate or green budgeting in its various forms is the logical starting point.Climate budget tagging helps countries package public investment projects for external financing by demarking them from the rest of the budget. It can in addition help a government prioritize allocations of domestic resources to climate change action. Off-budget Climate Change Funds are also used in many countries to receive international climate finance, but care must be taken to embed these in the government’s overall climate change policy, planning, and financial management to avoid the weaknesses of parallel budgeting (World Bank, 2014, Chapter 6.4). Flows of climate finance from developed to developing countries, both fiscal transfers and market transactions, are the main means of reconciling equity—developing countries have contributed little to the increase in levels of atmospheric CO2 — with effectiveness and efficiency—some of the biggest emitters of CO2 are now developing countries, and a large share of the required mitigation is required in developing countries if global GHG targets are to be met. Furthermore, as noted, rates of return on investments to adapt to climate change can be high, making official development assistance for adaptation an effective use of public money (IMF, 2020b, p. xii). There are ready opportunities for easy wins, in fact win–win on mitigation-adaptationefficiency, e.g., distributed solar power plants financed by concessional international climate finance will cut global GHG emissions at lower economic cost than if the mitigation was done in developed countries, provide low-cost new public infrastructure, generate electricity at lower operating costs, reduce oil imports, and may be less exposed to natural disasters than a single central facility in the recipient country. Many countries are exposed to significant fiscal risks from the likely increased incidence of climate-related disasters.9 The most important tax base of governments in most countries is the national economy. Increasing evidence of the threat to economic growth from climate 9 This paragraph draws from Gamper et al. (2017), and Fiscal Affairs Department (2018).

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change and other environmental degradation should naturally attract the interest of governments, suggesting that identification and analysis of fiscal risks from the environment is likely to grow—in turn strengthening the incentives on governments to mitigate the environmental risks with the largest expected economic and fiscal impacts. International support is available in disaster risk reduction, preparedness, mitigating risks through adaptation, and mechanisms to help finance the fiscal costs of disasters, e.g., insurance, disaster-contingent bonds. Finally, but not least, investments in capacity development are critically important points of entry for governments and international actors; capacity constraints need to be factored into the design of any program of greening of fiscal policy. A scaled approach to implementation of reforms is typically recommended, in which countries start with smaller and feasible reforms that are at key system leverage points or which are less of a stretch of existing capacity and expand their efforts over time. This would point to focusing on new policies before tackling the budget baseline. It would suggest piloting in some sectors before rolling out across government. It might point to starting with upstream budget or project preparation processes rather than attempting to cover the whole PFM and public investment management cycles from the outset. Or it might suggest focusing on areas already known to be a major cause of negative environmental impacts, and putting all available resources, including additional international support, into those areas. As argued in Chapter 2, regular national environmental reporting is a precondition for effective environmental governance and therefore a key supporting component of the progressive greening of fiscal policy. Additional resources need to be allocated by governments to introduce or deepen the function of national environmental reporting. An expanded international effort is needed to scale up technical and financial support to developing countries for environmental data collection, monitoring and the regular production of national State of the Environment Reports as core infrastructure for sustainable development. In low-capacity contexts this should focus on improving the monitoring of critically important environmental indicators. From the perspective of the biodiversity crisis international efforts might be best focused on

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the megadiverse countries.10 As noted, expertise in government is also required on assessing the likely and actual environmental impacts of fiscal policies. Capacity development in the ministry for the environment and related environment sector agencies, as well as in the MOF, will be required in most countries including in many advanced countries. With respect to climate budgeting, capacity limitations have been identified as a significant constraint. ‘Good management practice, transparency, and track records all are essential to gain direct access to international climate finance’ (Government of the People’s Republic of Bangladesh, 2019). An expansion of technical assistance by multilateral and bilateral institutions in this area seems warranted. Attention should also be given to ensuring that more effective use is made by government officials of the results of post-project evaluations conducted by development partners. Workshops in recipient countries for officials in line ministries, central agencies, and outside parties could help build appreciation of the importance of monitoring and evaluation and contribute to policy learning and capacity building. The UNDP has and continues to provide considerable capacity development assistance on climate budgeting, particularly in the Asia–Pacific region. Many multilateral development partners run global readiness programs for developing countries to enable them to access international climate finance. The Global Climate Fund provides readiness support to help organizations in developing countries prepare to become Accredited Entities, as well as helping those which have already been accredited to strengthen their organizational capacities. The Partnership for Action on Green Economy (PAGE) coordinates UN capacity building in greener and more inclusive growth trajectories. The World Bank through its work on public expenditure reviews and through its CCPEIRs and support on disaster risk reduction has contributed significantly to capacity development. The IMF and World Bank have since 2017 been conducting Climate Change Policy Assessments (CCPAs) in small island developing countries that assess carbon price levels and the design of climate change 10 Countries that contain the majority of Earth’s species and high numbers of endemic

species. The World Conservation Monitoring Centre of the United Nations Environment Program has identified a total of 17 megadiverse countries. The non-advanced countries include Brazil, China, Democratic Republic of Congo, Ecuador, India, Indonesia, Madagascar, Malaysia, Papua New Guinea, Peru, the Philippines, South Africa, and Venezuela.

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mitigation and adaptation activities. As outlined in Chapter 4, public good technical support has also been provided in areas such as environmental cost–benefit analysis and estimating fuel excises to internalize climate externalities. The ‘PEFA Climate Module,’ designed to assess the quality of management of climate change mitigation and adaptation appears to be a worthwhile initiative that could help to identify well-specified capacity development needs for development partners to finance. On the basis of an in-depth assessment of New Zealand’s approach to broadening the focus of fiscal policy to better incorporate environmental and social well-being, Huang et al. identify lessons for other countries, including drawing on and adapting existing international wellbeing models and frameworks; adopt an incremental, iterative strategy, linking short- and long-term goals and institutionalizing through legal changes; invest in developing capacity in analysis, evidence, and measurement; and engage civil society to support and help build a well-being approach (McCullough et al., 2020). This points to the potential role of international peer networks to facilitate the rapid sharing of experience between practitioners, supported by international capacity development inputs. The OECD’s Paris Collaborative on Green Budgeting is one such model as is the Coalition of Finance Ministers for Climate Action and the Green Fiscal Policy Network. A further example of this in the sphere of external audit is cooperative audits involving staff from different national SAIs as a capacity development tool, the most common subject of which are environmental audits (INTOSAI, 2021). There is a need for expanded activity and additional networks bringing practitioners together from developing and middle-income countries. Such networks should include both ministry of finance and ministry of environment officials and need to involve officials from different parts of the MOF responsible for tax, expenditure, and the budget, at times in separate strands of activity. They should also include systematic spaces for civil society engagement, ideally in formal multistakeholder networks. The important role to be played by civil society in the greening of fiscal policies is discussed further in the next chapter.

References Baur, M., Bruchez, P.-A., & Nicol, S. (2021). Climate Change and Long-term Fiscal Sustainability (Scoping Paper, GOV/PGC/SBO).

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Boston, J., Bagnall, D., & Barry, A. (2019, June). Foresight, insight and oversight: Enhancing long-term governance through better parliamentary scrutiny. Institute for Governance and Policy Studies, Victoria University of Wellington. Carbon Pricing Leadership Coalition. (n.d.). Resource Library. https://www.car bonpricingleadership.org/resource-library Climate Financing for Sustainable Development: Budget Report 2020–21. European Commission. (2020). EU taxonomy of sustainable environmental outcomes. https://ec.europa.eu/commission/presscorner/detail/en/qanda_ 19_6804 Gamper, C., Signer, B., Alton, L., & Petrie, M. (2017, June). Managing disasterrelated contingent liabilities in public finance frameworks. OECD and the World Bank. Global Initiative for Fiscal Transparency. (n.d.). Principles of Public Participation in Fiscal Policy. http://www.fiscaltransparency.net/giftprinciples/ Government of the People’s Republic of Bangladesh. (2019, June). Financing for Sustainable Development: Budget Report 2020–2021. Finance Division, Ministry of Finance. Grantham Research Institute on Climate Change and the Environment. (n.d.). Climate Change Laws of the World. https://climate-laws.org/ Green Climate Fund. (n.d.). https://www.greenclimate.fund/ Green Fiscal Policy Network. (n.d.). https://greenfiscalpolicy.org/ Gupta, J., Scholtens, J., Perch, L., Dankelman, I., Seager J., Sänder, F., StanleyJones, M., & Kempf, I. (2019). Re-imagining the driver-pressure-state-impactresponse framework from an equity and inclusive development perspective. Hepburn, C., O’Callaghan, B., Stern, N., Stiglitz, J., and Zenghelis, D. (2020, May 4). Will COVID-19 fiscal recovery packages accelerate or retard progress on climate change? Oxford Smith School of Enterprise and the Environment (Working Paper No. 20-02). ISSN 2732–4214 (Online). Informal Working Group on Nature-Related Financial Disclosures. (2021, February 24). https://tnfd.info/news/qa-with-the-three-co-chairs-of-the-inf ormal-working-group-bringing-together-a-tnfd/ Intergovernmental Panel on Climate Change. (2006). Guidelines for National Greenhouse Gas Inventories. Intergovernmental Panel on Climate Change. (2019). 2019 Refinement to the 2006 IPCC Guidelines for National Greenhouse Gas Inventories. International Budget Partnership. (n.d.). Open Budget Survey. https://www.int ernationalbudget.org/open-budget-survey International Budget Partnership and UNDP. (2018). Budgeting for a greener planet: An assessment of climate change finance accountability in Bangladesh, India, Nepal, and the Philippines. International Energy Agency. (2020, October). World Energy Outlook. Outlook for Electricity.

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International Monetary Fund. (2014a). Government Finance Statistics Manual 2014. International Monetary Fund. (2014b). Fiscal Transparency Handbook. International Monetary Fund. (2017, October). World Economic Outlook. International Monetary Fund. (2018, June). How to manage the fiscal costs of natural disasters (Fiscal Affairs Department How to Notes, 18/03). International Monetary Fund. (2020a, October). World Economic Outlook. International Monetary Fund. (2020b, October). Fiscal Monitor. International Monetary Fund. (n.d.). Greening the Recovery. Fiscal Affairs Department Special Series on Fiscal Policies to Respond to COVID-19. INTOSAI. (2019). Research Paper: Potential Criteria for Auditing Climate Change Adaptation—Strengthening Resilience and Adaptive Capacity to Climate-Related Hazards, 2019. INTOSAI Working Group on Environmental Auditing. https://www.environmental-auditing.org/media/113688/ 21e-wgea_climate-change_2019_corbel.pdf INTOSAI. (2021). The virtual catalogue of cooperative audits: The road so far and the future ahead. https://www.intosaicbc.org/wp-content/uploads/ 2021/02/SCA-article-about-the-Virtual-Catalogue-vf-002.pdf Lelong, M.-L., & Wendling, C. (2020, November 2). France’s ‘Green Budget’ for 2021. International Monetary Fund PFM Blog. https://blog-pfm.imf.org/ McCullough, D., De Renzio, P., & Huang, C.-C. (2020, June 2). Reinventing public finance: A closer look at New Zealand’s Well-Being Budget experiment. International Budget Partnership. New Zealand Public Finance Act 1989. Part 2, Fiscal responsibility and wellbeing. https://www.legislation.govt.nz/act/public/1989/0044/lat est/DLM161663.html Nordhaus, W. (2021). The spirit of green: The economics of collisions and contagions in a crowded world. Princeton University Press. OECD. (2012). Towards a Policy Framework for Low-Carbon, Climate-Resilient Infrastructure Investment. Staff consultation draft, 1 December 2011. OECD. (2018, June 20). Working Party of Senior Budget Officials, Paris Collaborative on Green Budgeting Experts Workshop on Green Budgeting: Mapping the forward agenda and testing initial outputs. OECD Conference Centre. OECD. (2019). Governance as an SDG Accelerator: Country Experiences and Tools, Annex C. Case Studies on the effective use of budgeting and public procurement tools. OECD Publishing. OECD. (2020a). Inventory of government support for fossil fuels 2020. https:// www.oecd.org/fossil-fuels/ OECD. (2020b, October 6). Making the green recovery work for jobs, income and growth. OECD. (2021, February 13). Green budget tagging: Introductory guidance & principles.

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OECD. (n.d.). OECD Green Budgeting Framework: Highlights. http://www. oecd.org/environment/green-budgeting/OECD-Green-Budgeting-Framew ork-Highlights.pdf; OECD database of Policy Instruments for the Environment (PINE). www.oecd. org/env/policies/database Partnership for Market Readiness and Carbon Pricing Leadership Coalition. (2018). Guide to Communicating Carbon Pricing. World Bank. Public Expenditure and Financial Accountability (PEFA). (2020, August 4). PEFA Climate. https://www.pefa.org/sites/pefa/files/resources/downlo ads/PEFA%20Climate%20Framework%20from%20August%204%202020% 20Final.pdf Petrie, M. (2018, May). Reversing the degradation of New Zealand’s environment through greater government transparency and accountability. Policy Quarterly, pp. 32–39. Petrie, M. (2019a, April 29). Environmental outcomes and fiscal policy in NZ: Need for increased transparency and accountability. Presentation to the OECD Green Budgeting Experts Group Meeting. https://www.slideshare. net/OECD-GOV/towards-green-budgeting-a-roadmap-murray-petrie-newzealand Petrie, M. (2019b, July 17). Averting environmental catastrophe: what would real accountability for environmental stewardship look like? And why it has a lot to do with fiscal policy. Blog on the GIFT web site. http://www.fiscaltranspare ncy.net/blog_open_public.php?IdToOpen=7130 Petrie, M. (2019c, July 25). Better Stewardship can Avert Environmental Catastrophe. Blog posted on the IMF’s Public Financial Management Blog. https://blog-pfm.imf.org/pfmblog/2019/07/better-stewardship-canavert-environmental-catastrophe.html Petrie, M. (2019d, July 29). High Time for Green Budgeting. Blog posted on the IMF’s PFM Blog. https://blog-pfm.imf.org/pfmblog/2019/07/high-timefor-green-budgeting.html Petrie, M. (2019e). Averting environmental catastrophe. Podcast on the International Budget Partnership web site. https://www.internationalbudget.org/ 2019/11/1-2-3-averting-climate-catastrophe/ Stern Review. (2006, October). The Economics of Climate Change. Task Force on Climate-Related Financial Disclosures. (2017, June). Recommendations of the task force on climate-related financial disclosures. United Nations Development Program. (n.d.). Knowing what you spend. In N. Bain, L. Nguyen, & K. Baboyan, A guidance note for Governments to track climate finance in their budgets (p. 14). Climate Change Financing Framework Technical Note Series. United Nations Environment Program. (2016). Global gender and environment outlook. UN Environment.

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Wildavsky, A. (1964). The politics of the budgetary process. Little, Brown and Company. World Bank. (2014). Climate change public expenditure and institutional review sourcebook. World Resources Institute. (2020, February 10). 5 Strategies that Achieve Climate Mitigation and Adaptation Simultaneously. Isabella Suarez.

CHAPTER 6

The Role of Civil Society in Promoting Government Accountability for Environmental Stewardship

Abstract Citizens and CSOs are important agents of good governance and sustainable development. They play diverse roles in holding governments to account for their environmental stewardship through using invited spaces, and by initiating civic action. International norms on public access to information and participation and country examples of civic environmental activism are described. Two new potential green civil society instruments are put forward: an annual Green Guide to the Budget to highlight government performance on environmental stewardship and the environmental impacts of fiscal policies; and a new Environmental Governance Index to provide a cross-country ranking of the quality of environmental governance. Keywords Access to environmental information · Participation in environmental decision-making · Green citizen’s budget · Environmental indices · Environmental governance

Helpful comments on earlier drafts have been received from Andrew Blazey, Jonathan Boston, Jim Brumby, Shelley Fischer, Juan Pablo Guerrero, Jason Lakin, Delaine McCullough, Vivek Ramkumar, and Paolo de Renzio. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 M. Petrie, Environmental Governance and Greening Fiscal Policy, Palgrave Studies in Impact Finance, https://doi.org/10.1007/978-3-030-83796-9_6

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1

Introduction

The theory of change underlying this book includes an important role for civil society as a force for promoting environmental sustainability— primarily by using published information on environmental outcomes, by engaging in public debate over environmental policies and demanding improved performance, and by holding governments more effectively to account for their environmental stewardship.1 The importance attached to the public’s right of access to information and to public participation in the policy process reflects acceptance that the public and CSOs are important agents of good governance and sustainable development, alongside markets and the state. They face severe capacity challenges compared to the resources of governments and private vested interests, especially in developing countries, and there has been a chronic shrinking of civic space over the last decade.2 Nevertheless, civil society remains an important force for social and political change, and new ICT tools as well as the internet have provided new platforms for civic mobilization and voice and the rapid dissemination of information—while also creating new problems of censorship, surveillance, and use by antidemocratic forces. This chapter is structured as follows: Section 2 discusses the diverse roles that civil society actors play in promoting more effective government accountability and performance. Section 3 provides a short overview of international norms on access to information and public participation.

1 Civil society spans civil society and nongovernment organizations, academic institutions and individual academics, other non-state institutions such as the media, consumer organizations, religious organizations, trade unions, grass roots organizations, and individual citizens. Civil society also includes new mixed forms of governance such as Multi-Stakeholder Initiatives that involve civil society and government (and in some cases the private sector) in sharing experience, developing new norms, and monitoring government (and corporate) performance. Examples include the Carbon Pricing Leadership Coalition (CPLC, n.d.), the Open Government Partnership (OGP, n.d.), the Extractive Industries Transparency Initiative (EITI, n.d.), and the Global Initiative for Fiscal Transparency (GIFT, n.d.). Disclosure: the author is special advisor to GIFT. 2 Freedom House found that 2019 was the 14th consecutive year of decline in political rights and civil liberties. https://freedomhouse.org/report/freedom-world/2020/leader less-struggle-democracy. For examples of civil push back against shrinking civic space see https://solidarityaction.network/solidarity-playbook/case-studies/.

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Section 4 puts forward two potential new civil society instruments to promote more effective government accountability for environmental stewardship: Subsection 4.1: A Green Guide to the Budget. Subsection 4.2: An Environmental Governance Index.

2

Role of Civil Society in Promoting Government Accountability

Civil society actors play diverse roles, including engaging actively in public debate and deliberation on policy design and implementation, reporting information in the media and questioning government officials and ministers, and monitoring environmental outcomes and government performance. Direct public engagement is a means to ensure that all those with a stake in, affected by, or intended to benefit from public policies have a voice in decisions that affect their lives. Forms ofpublic participation include those in which governments or legislatures invite public input, e.g., public submissions may be invited on a new green tax policy or on reforms to an environmental protection program. There are also newer forms of deliberative democracy in which members of the public deliberate in small groups or take part in citizen juries in attempts to explore divisive issues and identify areas of consensus (Climate Assembly UK, n.d.; The Economist, 2020). Public participation may be by right, e.g., the directly affected public may have a legal right to be consulted on the impacts of a new public infrastructure project; the media will often also enjoy rights to investigate and report. Jane Davidson, the government minister who proposed the Well-being of Future Generations (Wales) Act 2015, describes the important role played by civil society in the evolution and successful adoption of the legislation (Davidson, 2020). Public participation may also be initiated by civil society, often described as created or claimed participation (Gaventa, 2009), e.g., where a CSO publishes reports monitoring a government’s environmental stewardship and engages in public debate on environmental policy issues; a nonprofit organization aims to connect environmental problems to effective solutions (Zoi, n.d.); a CSO initiates legal action against a government to protect the environment (e.g., ClientEarth, n.d.; Golnaraghi

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et al., 2021) or someone uses their smart phone to document and report a pollution incident and start a social media campaign. On a more systematic basis nonexpert citizens are being organized by governments, scientists, or themselves to observe and track trends on some aspects of the environment (Conrad & Hilchey, 2011), and citizen science is being systematically incorporated in official environmental monitoring (e.g., US NOAA, 2021). There is increasing recognition of the need to incorporate indigenous knowledge in these efforts (Tengö et al., 2021). An example of sustained CSO-initiated activism to promote more transparency and accountability is the campaign by Fundar in Mexico to overturn the practice of secrecy of tax amnesties. Over the course of a decade from 2009 Fundar used a combination of a citizen petition, official requests for information, filing of lawsuits against the government, a strategic alliance with an autonomous government agency, partnering with an investigative news agency, and publication of previously secret information on the names of the beneficiaries and the amounts involved, to successfully achieve a constitutional reform in 2020 prohibiting tax amnesties (International Budget Partnership, n.d.). In the environmental space, citizens and CSOs applied to Nepal’s Supreme Court against a factory causing environmental degradation to the Godavari Forest and its surroundings. The Court held that Nepal’s constitutional provision protecting the right to life necessarily included the right to a clean and healthy environment and ultimately issued directives to the Parliament to pass legislation to protect the Godavari environment (UNEP, 2019). In Bolivia resistance by indigenous peoples and a wider social mobilization against construction of a road through a national park forced the government to put the project on hold (Sólon, 2018, p. 124). In Brazil, a CSO, INESC, mounted a campaign to eliminate tax secrecy provisions preventing the names of companies benefiting from tax incentives from being published, making it impossible to know how much public money goes to mining companies that have been responsible for major environmental disasters. In Peru, Ciudadanos al Día (CAD) published a comprehensive study on tax expenditures, highlighting the government’s lack of transparency and impact evaluation. CAD publicized their research findings via public events and the media. Partly as a response, one of the government’s key fiscal policy documents, the Multiannual Macroeconomic Framework 2019–2022, included a

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commitment to carry out a comprehensive review of tax expenditures and promote more transparency around the practice (de Renzio & Ciconello, 2019). Several environmental movements have emerged in West Africa including one that succeeded in halting illegal small-scale mining that was having devastating environmental impacts (World Wildlife Fund, 2020a). In China Li et al. have documented cases ofpublic participation in environmental protection (Li et al., 2012). Other CSOs are engaged in research to promote more accountability with respect to international climate change commitments, flows of climate finance, or to promote measurement of and awareness of the impacts of climate change, including impacts on the poor. For instance, three CSOs launched a standard in 2014 for cities to measure and report their GHG emissions—the Global Protocol for Community-Scale Greenhouse Gas Emission Inventories (World Resources Institute, 2014). The International Budget Partnership (IBP) and the UNDP collaborated in a four-country study of climate finance accountability (International Budget Partnership and UNDP, 2018) while the World Wildlife Fund is active in monitoring the quality of country NDCs under the Paris Agreement on Climate Change (World Wildlife Fund, 2020b). The International Institute for Environment and Development has published research demonstrating that rural households in Bangladesh spend more than twice as much on disaster preparedness and response than their government and over 12 times more than multilateral international financing to Bangladesh’s rural population (Eskander & Steele, 2019). The aim of this chapter is to highlight the importance of civil society as a force for environmental stewardship, and to put forward two potential new instruments that civil society could initiate: a Green Guide to the Budget, and an Environmental Governance Index. These are outlined in section iv. But first the next section provides a short overview of the main international instruments relating to access to information andpublic participation in environmental matters and with respect to fiscal policy.

3 International Norms on Access to Information and Public Participation The Rio Declaration on Environment and Development, 1992, set out three fundamental rights: access to information, access to public participation, and access to justice as key pillars of sound environmental governance. Principle 10 states that: ‘Environmental issues are

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best handled with participation of all concerned citizens, at the relevant level. At the national level, each individual shall have appropriate access to information concerning the environment that is held by public authorities, including information on hazardous materials and activities in their communities, and the opportunity to participate in decisionmaking processes. States shall facilitate and encourage public awareness and participation by making information widely available. Effective access to judicial and administrative proceedings, including redress and remedy, shall be provided’ (UN, 1992). At the regional level, the United Nations Economic Commission for Europe (UNECE) Convention on Access to Information, Public Participation in Decision-Making and Access to Justice in Environmental Matters 1998 (the Aarhus Convention) sets out a rights-based approach to access to environmental information, public participation in environmental decision-making, and binding independent review of decisions on access to environmental information and decisions.3 In 2018 a similar regional agreement was adopted in Latin America and the Caribbean.4 More generally, Sustainable Development Goal 16 calls for accountable and transparent institutions that ensure public access to information and inclusive decision-making (UN, n.d.). International standards on fiscal transparency first emerged in the late 1990s (Petrie, 2013). The IMF’s Code of Good Practices on Fiscal Transparency in 1998 was the first attempt to codify what fiscal openness comprised. This was closely followed by the OECD’s 2002 Best Practices in Budget Transparency, International Public Sector Accounting Standards, the multi-stakeholder Extractive Industries Transparency Initiative, and the multi-donor Public Expenditure and Financial Accountability (PEFA) reports that commenced in 2005, focusing on countries receiving development assistance. The IBP introduced the biannual Open Budget Survey (OBS) in 2006 which provided the first independent civil society assessment of budget transparency, including a country ranking (the Open Budget Index). The activities of official international organizations, civil 3 The UNECE is one of the five regional commissions of the United Nations Economic and Social Council. It has 56 Member States, some of which are outside Europe. https:// unece.org/. 4 Regional Agreement on Access to Information, Public Participation and Justice in Environmental Matters in Latin America and the Caribbean. As of January 2021 twenty four countries had signed the agreement. https://www.cepal.org/en/escazuagreement.

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society, and financial markets in promoting fiscal transparency were viewed by some as complementary (Petrie, 2003). With respect to public participation in fiscal policy, GIFT High Level Principle Ten asserts that citizens should have the right and they, and all non-state actors, should have effective opportunities to participate directly in public debate and discussion over the design and implementation of fiscal policies (GIFT, n.d.). This perspective was subsequently incorporated in the 2014 IMF Fiscal Transparency Code (IMF, 2018, Principle 2.3.3) and in the OECD Recommendation on Budgetary Governance (OECD, 2015). The IBP added an expanded section to the Open Budget Survey in 2017 on public participation in the budget process (IBP, n.d.). The OECD Budget Transparency Toolkit put forward the proposition that meaningful and informed public participation is ideally supported by information on the multidimensional impacts of policy options, e.g., economic, social, and environmental impacts (OECD, 2017, p. 84). The Toolkit also refers to the importance of governments publishing budget data in freely accessible open digital form (open data) to facilitate civil society analysis and participation (pp. 80–82). There are similar international norms and standards on openness and public engagement in the regulation making process. For instance, a 2012 OECD Recommendation on Regulatory Governance calls for transparency and participation in the regulatory process to ensure that regulation serves the public interest and is informed by the legitimate needs of those interested in and affected by regulation (OECD, 2012). This includes providing meaningful opportunities for the public to contribute to the process of preparing draft regulatory proposals and to the quality of the supporting analysis.

4 Potential New Civil Society Environmental Accountability Instruments 4.1

A Green Guide to the Budget

The concept of a Citizens or Peoples Guide to the Budget was initiated and introduced by a civil society group in the Indian state of Gujarat as a means to help members of the legislature understand the government’s budget and to help legislators hold the government more effectively to account (IBP, 2001). It has subsequently become a recognized part of international fiscal and budget transparency standards: a Citizens Budget

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is published by a government as a simpler, less technical version of the government’s budget by summarizing key contents of the budget documents in a user-friendly way (IBP, n.d.; OECD, 2017, p. 79). A few countries have published a Citizens Climate Budget (e.g., Government of Bangladesh, 2020–2021) or included climate change and other environment-related expenditures in the main Peoples Guide to the Budget, e.g., the Philippines (Republic of the Philippines, 2018, pp. 34– 35). In Nepal climate budget tagging data was used by a local CSO to develop a Climate Citizens Budget summarizing Nepal’s main climate change risks and government spending and recommending the government should regularly publish such a document (UNDP, 2019). The objective was to raise public awareness of government’s climate change actions and thus the ability of citizens and CSOs to participate in budget decisions and oversight. The NGO Forum in Cambodia has published a similar document (NGO Forum, 2020). These Citizens Climate Budgets—both government and civil society produced—are confined to the expenditure side of the budget, and, being drawn from information in the government’s budget documents, are confined to only those expenditures that are intended to be beneficial to climate change mitigation and adaptation. One of the motivations for a CSO-produced Green Guide to the Budget is to offset the incentive for governments to greenwash, particularly important given the current absence of standards and good practices in this field and the initial practice of nearly all governments to be transparent only about their spending that is intended to benefit the environment (as discussed in Chapter 4). A traditional government-produced ‘Peoples Green Guide to the Budget’ might at the current juncture therefore, at the worst, do no more than summarize a government’s green washing. In most countries it could contain only limited information given the current dearth of environment-related information in national budget and related documents. In contrast, the Green Guide to the Budget advocated here would be produced by civil society. It would cover all dimensions of fiscal policy that impact on the environment, including taxation, spending, government lending, and other forms of fiscal support such astax expenditures and guarantees (Sect. 4.3 in Chapter 4). It would be a summary assessment designed and produced by local civil society experts in environmental and fiscal policy of the environmentally relevant fiscal activities and their potential (and as feasible the actual) environmental impacts. The Guide

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could identify the key environmental indicators, trends and risks, and the government’s announced environmental policy goals and targets. It should identify the main environmentally relevant new tax and spending policies being introduced in the budget, including those that damage the environment—whether or not these policies are identified by the government in its budget documents (or anywhere else). For the reasons put forward in Chapter 5, the new policies being introduced in the next budget are a compelling entry point for green budgeting. It will however be a challenge for CSOs to rapidly assess the budget proposal in time to make submissions to the legislature and generate media and public pressure unless the new policies have been under public discussion prior to the tabling of the budget, which though highly desirable is not currently a common practice.5 Alternatively and more realistically the new policies introduced in a budget could be subjected to analysis and public debate by civil society in the months following the budget. A Green Budget Guide should also progressively include the environmental impacts of selected parts of ongoing policies (the budget baseline)—focusing on those tax and expenditure policies that are known to be the most environmentally damaging, such as tax incentives, expenditure subsidies, or other fiscal support for fossil fuel production or consumption, deforestation, or fresh water use in water-stressed environments; or large long-lived public infrastructure projects being prepared that would lock-in high GHG emissions and promote maladaptation to climate change. Such analyses of ongoing and prospective policies could be completed at any time between budgets, and local expertise could be leveraged through international collaboration with tax, expenditure, and environmental experts. There is increasing useful technical guidance available on how to assess the environmental impacts of fiscal policies. On the expenditure side of the budget a starting point is to classify and sort expenditures by their likely environmental impact, e.g., by using the EU Taxonomy of Sustainable Environmental Outcomes and the associated detailed technical screening criteria (European Commission, 2020; European Union Technical Expert Group on Sustainable Finance, 2020). This provides a starting point in identifying amounts allocated to environmentally positive and negative activities. The PEFA Climate Change Module being 5 The average score for public participation in the 2019 OBS was a ‘dismal’ 14 out of 100. International Budget Partnership, 2019, Executive Summary, p. 7.

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piloted in 2021 provides a further source of technical guidance on how to assess the climate responsiveness of public financial management (PEFA, 2020). In terms of environmental impacts, as noted, the Global Protocol for Community-Scale Greenhouse Gas Emission Inventories provides detailed user-friendly guidance on estimating GHG emissions, e.g., by multiplying activity data such as kilowatt hours of electricity produced, by an emissions factor (mass of GHG emissions per unit of the activity) associated with the technology being used to generate the electricity (World Resources Institute, 2014). While a Green Budget Guide would be produced by civil society environmental and fiscal experts, it should be based on wide engagement with diverse communities on what information would be of most interest and value to the public, including marginalized and indigenous communities, and journalists active in environmental issues. The Guide should use clear, simple language and illustrations, be widely disseminated, and contain links to further sources of information. A Green Guide to the Budget could be published at two points in the annual budget cycle: • As soon as possible after the Government’s budget proposal is first tabled in the legislature, in time to inform public debate and the legislature’s budget deliberations. This could focus on the new policies being introduced in the budget. • At another key point in the budget calendar or policy cycle, e.g., at the time of publication of a Budget Policy Statement or Budget Strategy paper indicating priorities for the upcoming budget, or to coincide with publication of the end of year budget implementation report, or to coincide with a Tax Policy Review or a Public Expenditure Review. These Guides could highlight the environmental impacts of ongoing tax and spending policies (the budget baseline) and review the implementation of announced policies. Box 1 puts forward some possible elements of a Green Budget Guide. Availability of information will be a challenge in many countries at present. One approach therefore would be to compile an initial Green Guide that includes an assessment of what information is and is not available and use it to mount a campaign for more detailed and comprehensive

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disclosure, particularly with respect to the revenue and expenditure policies, programs, and projects that are the most environmentally damaging. A campaign could also include advocacy for wider public consultation and engagement in the development of new fiscal and environmental policies. Box 1 A Green Guide to the Budget: Indicative Outline CSOs and experts in environmental and fiscal policy in each country, as desirable collaborating with international counterparts, should take the lead in designing the content and format of a Green Guide to the Budget tailored to individual country circumstances—such as priority environmental issues, the types and significance of environmentally relevant fiscal policies, the availability of information, the capacity of civil society and the media to process and analyze it, and the diverse information needs of the public. Because of its universal relevance and importance, climate change mitigation and adaptation should be a core component of all Green Guides to the Budget. In principle, possible elements of a Green Budget Guide include: • Key environmental outcomes, trends, and the main risks to environmental sustainability. • The government’s environmental goals and targets and relevant international commitments and targets (e.g., Nationally Determined Contributions to GHG emissions under the Paris Agreement, the environment-related SDGs, the Aichi Biodiversity targets); distance from targets, and trends; consistency of national and sector plans and policies with targets. • Information on the amounts of resources allocated to or revenues raised that impact significantly on the environment. Data should be disaggregated by revenue type and expenditure classification. • Comparative environmental fiscal data: environmental tax revenues as a percentage of total tax revenues; environmental protection expenditures as a percentage of total expenditures; amounts spent on and details of environment-related R&D. • Information on the anticipated environmental impacts (positive and negative) of new tax and spending policies being introduced in the budget, including whether these are likely to result in movement toward or further away from targets and commitments.

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• As feasible, information on the potential and actual environmental impacts of the most environmentally harmful existing ongoing policies, e.g., support for fossil fuel extraction or use, subsidies for water use in water-stressed contexts or for land use change and deforestation. • Discussion of the performance of environmentally relevant expenditure programs (e.g., conservation programs, biodiversity preservation, waste management), including outputs produced and outcomes or results. • Information on fiscal risks and long-term threats to fiscal sustainability from the natural environment, e.g., exposure to and actual damages from sudden impact and slow onset climate-related disasters, from environmental degradation. • Cross-national benchmark indicators and a comparison of relative country performance (and for climate change, discussion of fairness in this context, e.g., Climate Action Tracker, n.d.). Indicators could include GHG emissions per capita; the ratio of GHG emissions in the current year as a proportion of emissions in a relevant base year; renewable energy as % of total energy supply; fossil fuel support as % of GDP; IUCN red list % of endangered/critically endangered species; size of protected areas as % of total land/marine area; measures of water stress, of air pollution, etc. • The environmental impacts of nonfinancial and financial public corporations. • Performance on indicators of environmental governance. For example, the existence and quality of national state of the environment reporting; the existence and nature of environmental outcome targets across all environmental domains and of published reports on progress; the quality of information disclosed on environmental taxation and public expenditures; performance on the PEFA Climate module; access to environmental information; the level of public consultation and engagement in developing and implementing relevant policies. • Civil society recommendations: for example, on revenue and expenditure policies, on the activities of public corporations; recommendations on improving environmental governance, e.g., on State of the Environmental reporting, on the availability of and access to environment-related fiscal information.

In particular, a ‘standstill’ campaign might be mounted by civil society: no new fiscal policies should be introduced in the annual budget without

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the government providing an analysis of their anticipated environmental impacts. The objective would be to cement this expectation through inclusion in the Ministry of Finance’s Budget Call Circular to line ministries when preparing their budget submissions (together with appropriate technical guidance), and in the organic budget law to require government to present this information to the legislature with the annual budget proposal. The capacity of civil society, and the need for people with some expertise on the environment, taxation, public expenditure, and sector experts (e.g., energy) to work together will also be a challenge. It would require collaboration between different CSOs with different areas of expertise of a type that is not common or easily arranged (IBP and UNDP, 2018, pp. 24–27). International development agencies, multistakeholder networks, and CSOs may be able to help facilitate and support such collaborations. Development of capacity in the media to report on and analyze environmental/fiscal information and data will also be important. It would be desirable to see a variety of different country approaches to Green Budget Guides, with cross-country sharing of experience and refining of approaches over time. Whether practices converge on a recognized international norm in terms of content or the process by which they are compiled is less important than that the initiative gets underway rapidly and starts to put more pressure on governments to stop the most environmentally damaging fiscal policies and to redesign others—including smart packages of fiscal and regulatory interventions— to achieve win/win outcomes that simultaneously advance environmental, social and economic goals (as discussed in Chapter 5). 4.2

An Environmental Governance Index

There are a number of existing environmental indices measuring performance on environmental governance at the level of individual countries to enable cross-country comparisons and rankings.6 The indices vary in their objective and therefore in their design and measurement components:

6 The material in this section on environmental indices has benefited from an unpublished review article by Shelley Fischer (Fischer, 2020).

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• Some, such as the Environmental Vulnerability Index (Kaly et al., 2004) and the Proportional and Absolute Environmental Impact Ranks (Bradshaw et al., 2010), measure only the environmental component of sustainability and explicitly exclude policy, human health, and socioeconomic indicators to avoid confounding results. The exclusion of confounding indicators means that these indices can be used alongside other metrics (such as the Worldwide Governance Indicators, Kaufmann et al., 2010) to investigate links between governance quality and environmental state. • Some measure sustainability across social and/or economic dimensions as well as environmental, e.g., the Yale and Columbia Environmental Performance Index (EPI). The EPI also measures how far countries are from established environmental policy targets (Wendling et al., 2020). The EPI has been described by some as one of the best of existing environmental indices (Halkos & Zisiadou, 2018). However, because it also includes human health and socioeconomic variables the EPI dilutes the environmental component of the index and does not give a pure assessment of environmental performance (Bradshaw et al., 2010). It has been criticized because the diluted environmental component of the index does not capture typical environmental problems in industrialized countries such as water pollution from agriculture (Haberland, 2008). • At least one index measures environmental policy stringency, the OECD’s Environmental Stringency Index, defined as the ‘cost’ imposed on polluting or other environmentally harmful activity (Botta & Ko´zluk, 2014). The objective of this book is to develop an index that measures the quality of national environmental governance—that is, the processes by which environmental policies are made and implemented in each country, not the policies themselves. So, for instance, what would be measured is whether the government has announced and reported against measurable and time-bound targets, e.g., for water or air quality, rather than the adequacy of the targets, what policies are in place to achieve them, or how far actual outcomes are from target. This approach is based on the assumption that the governance of environmental stewardship is on its own an important determinant of environmental outcomes. A new international country ranking index that measures only the quality of environmental governance could help

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sharpen incentives on governments to strengthen their stewardship of the environment. An additional benefit is that designing an index confined only to environmental governance parameters would allow the intervention logic to be tested by conducting statistical analyses of the relationship between ranking on the index and environmental outcomes. A more composite index, that included variables relating to environmental policy, or non-environmental variables, would both blur the information content with respect to environmental governance and confound the ability to assess its effects. There is also a variety of approaches to how civil society develops and implements cross-country indices. At least five distinct approaches can be identified: 1. Designing a new synthetic index using information drawn from already available measures in existing regularly administered surveys. This approach was adopted by Transparency International (TI) to measure corruption at the country level shortly after formation of TI in Berlin in 1993, using the widely known Corruption Perceptions Index (CPI). The CPI is a composite of questions in existing surveys and has been published each year since 1996.7 The 2019 survey covered 180 countries. The CPI has achieved significant global impact, is used widely in advocacy by domestic actors as well as international entities and is also used as a variable in a wide range of research on governance and corruption. 2. Designing a completely new survey instrument in-house drawing on an international network of civil society partners and experts, and progressively building that network to regularly administer the survey. This approach was adopted by the International Budget Partnership, a Washington DC-based CSO, to introduce the Open Budget Survey (OBS) and associated Open Budget Index in 2006 (IBP, n.d.). The Open Budget Index was the first civil society measure of budget transparency at the country level and is still the only international quantitative ranking of budget transparency. The OBS was designed by IBP with inputs from international experts and modeled partly on the initial international codifications of what

7 A description of the methodology for the 2020 CPI is at https://www.transparency. org/en/cpi/2020/index/.

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constitutes fiscal transparency by the IMF and the OECD.8 The OBS is comprehensive but requires substantial resource and time to administer, and consequently is conducted only every two years. Coverage has progressively expanded from 59 countries in 2006 to 117 countries in the 2019 survey. But the fact that it produces a quantitative score and ranking marks it out clearly from other instruments that measure fiscal/budget transparency, giving it a significant profile and some impact. A somewhat similar type of index and approach is the Environmental Democracy Index developed by The Access Initiative and the WRI in collaboration with partners around the world. In 2015 the Index assessed 75 countries for the right to access environmental information, the right to participate in environmental decision-making, and the right to seek enforcement of environmental laws.9 Finally, the World Press Freedom Index compiled by Reporters Without Borders (RSF) measures the degree of freedom available to journalists in 180 countries (Reporters Without Borders, n.d.). It is compiled by pooling the responses of selected experts to a questionnaire devised by RSF, combined with quantitative data on abuses and acts of violence against journalists during the period evaluated. 3. Collaboration between a CSO and an academic, in which the academic developed and administered a new survey instrument, with the survey later being taken over and administered by an in-house team in the CSO. This approach was adopted by Freedom House to develop ‘Freedom in the World,’ an annual report launched in 1973 assessing the level of freedom in each country, with a numerical score and ranking as Free, Partly Free, or Not Free (Freedom House, n.d.). The 2020 survey covered 195 countries. 4. Collaboration between two CSOs in one country to analyze country performance in meeting international environmental commitments. This is the approach adopted by two German CSOs, Climate Analytics and New Climate Institute, to produce the Climate Action Tracker. Climate Action Tracker is an independent scientific analysis 8 Disclosure: the author advised the IBP on the design of the Open Budget Survey and conducted the first four Open Budget Surveys of New Zealand as the local civil society researcher. 9 https://www.environmentaldemocracyindex.org/. The aim was to publish the Index every two years, but it does not appear to have been published since 2015.

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of countries’ Paris Agreement climate change mitigation commitments and assessment of whether each country is on track to meeting them (Climate Action Tracker, n.d.). It tracks 36 countries and the EU covering around 80% of global emissions. Countries are rated on a 6-level ordinal scale ranging from ‘critically insufficient’ (the country’s NDC is well outside the country’s fair share and well outside that required to limit global warming to 2 degrees Celsius) to ‘role model’ (the country is contributing more than its fair share and the NDC is consistent with the 1.5C warming). 5. A private company developing a new environmental index. For example, Vivid Economics, a private consulting firm, developed the Greenness of Stimulus Index in 2020, an index of the orientation of COVID-19 stimulus in the G20 countries in relation to climate change, biodiversity, and other environmental impacts (Vivid Economics, 2020). Comparing these five approaches, the synthetic index has obvious advantages: being a composite of questions in existing surveys, it saves the cost and time to construct a new survey and to administer it. It can therefore be produced annually at relatively low cost (provided the underlying instruments are administered annually). However, the synthetic approach may or may not accurately measure the phenomena of interest, depending on the nature of the existing survey questions it draws from. It would be attractive to design a new synthetic cross-country measure of environmental governance drawing from existing international environmental indices. However, an initial impression is that there may be little in existing regularly administered surveys that could be drawn on to create a new synthetic Environmental Governance Index (Fischer, 2020).10 If further analysis confirms this then consideration could be given to initiating the design of a new survey. 10 One index measuring environmental sustainability across regions in Italy included ‘good governance’ as one of the ten themes in its theoretical framework but did not include it in the index due to lack of systematic data at the regional level. See Floridi et al. (2011). A further index, the Climate Laws, Institutions and Measures Index (CLIMI), attempted to measure policy responses to the risk of climate change in 95 countries (Steves & Teytelboym, 2013). The index used National Communications to the UNFCCC and comprised 12 variables grouped into four areas: international cooperation; domestic climate framework (climate change laws, targets, and institutional arrangements); sectoral fiscal or regulatory measures or targets; and cross-sectoral fiscal or regulatory measures.

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Looking at the other instruments described in 2–5 above, the approach adopted by the IBP to develop the OBS has a number of advantages. An international globally focused environmental CSO could take the lead, drawing on an international network of in-country civil society partners, to design a new Environmental Governance Index (EGI). The network and country coverage could be progressively expanded over time. The analysis for the EGI could be conducted by local CSOs or independent researchers in each country, based on information retrieved locally, rather than trying to draw from cross-country data sets that either do not exist at present or comprise just a few indicators that are inadequate for the task. Having EGI assessments conducted by in-country CSOs or independent experts would provide the necessary in-depth country knowledge as well as the legitimacy of domestic leadership. A disinterested civil society initiative could also provide more credibility than a private sector initiative. An EGI would not be a scientific instrument, like the IUCN Red List of Threatened Species, so a multistakeholder approach that also involved governments is likely to be inappropriate (IUCN, n.d.). The EGI is intended to be an advocacy tool for civil society to use to pressure governments to improve their environmental stewardship. However, an EGI could and should be much simpler, shorter, and less resource intensive to implement than the OBS, the 2019 version of which comprised 142 questions. Box 2 sets out some possible variables to measure in an EGI. Criteria for selection of indicators should include relevance to environmental stewardship in all country settings, measurability, and availability of the information across countries. It would probably be desirable to keep the index simple with a small number of variables for reasons of practicality, quality of measurement, and cost. Box 2 Environmental Governance Index: possible variables for inclusion The following is an indicative list of possible variables and needs to be reviewed and refined after further analysis and assessment of practicality.

This index is confined to climate change and while it contains some governance elements, they are less broad than what is needed for the purpose here.

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• The existence and quality of national State of the Environment reporting. • The existence and nature of environmental outcome targets across all environmental domains. • The quality of published reports on progress toward environmental targets. • The extent to which environmental outcome targets and progress toward them are incorporated in key government strategy documents. • The extent to which government publishes environmental indicators comparing the country’s performance against other countries, including on a per capita basis as relevant. • The extent to which annual budget documents contain information on the amounts of environmentally positive and negative taxation and expenditure policies, programs, or projects; and on the anticipated and actual environmental impacts (positive and negative) of tax and expenditure policies, programs, or projects. • The extent of legal obligations for government to publish environment-related fiscal information. • Transparency and public engagement in environmental regulation. • A measure of the existence and quality of opportunities for direct public engagement in the design and implementation of environmental policies. • The right to access environmental information, the right to participate in environmental decision-making, and the right to seek enforcement of environmental laws.

The variables in Box 2 contain some de jure elements (e.g., laws obliging government to publish environment-related fiscal information or mandating public rights to access environmental information) but are mainly de facto elements (e.g., actual observable practices in national state of the environment reporting, in reporting on progress toward targets, and the content of government publications). The simplest approach may be to construct ordinal indicators with a small number of levels (say, 3 or 4 levels). These could be combined in a composite index with defined bands of performance. Many composite indicators use equal weighting across all variables in the index, as is the case in the OBS and the CPI. Equal weighting can, however, result in double counting if some indicators are highly correlated, and analysis should be conducted of the main alternative approaches to weighting

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(equal weighting, expert opinion, and statistical models) to decide the best approach (OECD, 2008, pp. 31–33). In any case, analyses should be conducted and published of the effects of different weights to illustrate the sensitivity of results. CSOs in countries covered by the index could use it to advocate for improvements in specific components of environmental governance covered in the index. Experience from the OBS and other indices suggests that governments are aware of cross-country rankings and that quantitative rankings can generate pressures on and/or incentives for governments to improve their ranking compared to peer countries, e.g., regional neighbors. There may also be scope to create incentives for improved performance through the label attached to the top band of scores (similar to the ‘role model’ in the Climate Action Tracker), and to name and shame the worst performers. Investigation and development of a new Environmental Governance Index could be an attractive initiative for an official donor or official international financial institution, a large CSO, or a private company to finance. As with any proposed new international index, the challenge is to assess the possible demand for, use of, and ultimately the impact of such an index over time on the quality of environmental stewardship, in relation to its cost. One approach would be to start by initiating an international effort on the publication of civil society-produced Green Guides to the Budget, which could start to compile data on country performance on some of the environmental governance variables suggested for inclusion in the Guide in Box 1.

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United Nations. (n.d.). Regional Agreement on Access to Information, Public Participation and Justice in Environmental Matters in Latin America and the Caribbean. https://www.cepal.org/en/escazuagreement United Nations Development Program. (2019). Knowing what you Spend: A Guidance Note for Governments to Track Climate Finance in their Budgets. United Nations Environment Program. (2019). Environmental Rule of Law: First Global Report. United Nations Environment Programme. Vivid Economics. (2020, April 24). Green Stimulus Index. https://www.vivide conomics.com/wp-content/uploads/2020/04/2004249-Stimulus-GreenIndex-summary-report.pdf Wendling, Z., Emerson, J., de Sherbinin, A., Esty, D., et al. (2020). 2020 Environmental Performance Index. Yale Center for Environmental Law & Policy. epi.yale.edu World Resources Institute. (2014, December 8). Release: Launch of first global standard to measure greenhouse gas emissions from cities. World Wildlife Fund. (2020a). Can Civil Society help build a fair and just society for people and nature? Thoughts form West Africa. Living Planet Report 2020 Special Edition. World Wildlife Fund. (2020b, June 12). WWF releases checklist to assess #NDCsWeWant. Zoï Environment Network. (n.d.). https://zoinet.org/

CHAPTER 7

The Way Forward

Abstract Will we experience further escalating environmental degradation and catastrophe, or can our current and new forms of governance restore environmental sustainability? This chapter revisits the need for new forms of governance and the associated need for changes in government and voter behavior to achieve them. The main arguments in the book are summarized and ten key takeaways distilled on what needs to be done to make governments more accountable for their stewardship of the natural environment. Keywords Environmental stewardship · Environmental values · Green fiscal policy · Environmental capacity development

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New Forms of Governance

It is worth recalling the challenge issued by the Brundtland Commission in 1987: ‘the major central economic agencies of governments should

Helpful comments on this chapter have been received from Jonathan Boston. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 M. Petrie, Environmental Governance and Greening Fiscal Policy, Palgrave Studies in Impact Finance, https://doi.org/10.1007/978-3-030-83796-9_7

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now be made directly responsible for ensuring that their policies and budgets support ecologically sustainable development’ (United Nations, Chapter 12, paragraph 26). This remains an appropriate if still distant level of aspiration and is far more urgent than it was in 1987. Many of the tools required to achieve this have been or are in the process of being developed. Comprehensive application to environmental stewardship of transparent target setting and systematic independent reporting of progress may well be a key change required if we are to begin to turn around the potentially cataclysmic decline in the state of the environment. The lack of transparency and accountability for environmental stewardship compared to other policy domains has received insufficient attention and is urgent. It is only thirty years ago that few would have imagined many governments would pass laws obligating themselves to high levels of transparency around measurement, target setting, and reporting on the public finances, or to publishing binding monetary policy targets. Transparent forwardlooking risk analysis and accountability for risk management have also become increasingly central to fiscal and monetary policy and are being pushed strongly with respect to management of climate-related risks to the financial system (Task Force on Climate-Related Financial Disclosures, 2017). Transparency of policy goals, targets, and progress is also becoming the norm with respect to climate change and GHG emissions under the 2015 Paris Agreement, and the introduction of independent Climate Change bodies, exemplified by the UK Climate Change Committee, is an important institutional innovation. But there is a glaring gap in the application of this type of accountability framework to other environmental domains. Today similar leaps of imagination in the design of governance frameworks, and more crucially of citizen demands and of political leadership, are needed to protect the natural environment for future generations. David Attenborough has eloquently documented the radical shifts in environmental baselines over the last ninety years. ‘The natural world is fading…It has happened during my lifetime…It will lead to our destruction’ (Attenborough, 2020, p. 7). Fiscal policy and budgets are at the core of the exercise of government power. They have a key role to play in achieving the transition to low-carbon, equitable, and environmentally sustainable development. As always, what is politically feasible will determine the course of events. It

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has often taken a crisis to prompt major reforms and changes to governance and institutional arrangements. It is an open question at what point the escalating environmental crises will prompt governments to embark on and implement on a sustained basis the transformational reforms required to protect environmental sustainability. As Raworth (2017) has argued, ‘much will depend upon the twentyfirst century creating far more effective forms of governance, on every scale, than ever seen before….and on institutional innovations’ (pp. 59, 242). Similarly, UNEP argues that sustainable development will be more likely to be achieved through new modes of governance and adaptive management that give greater priority to the environmental dimension of the Sustainable Development Goals (UNEP, 2019, para 25). This book is intended as a contribution to some of the important environmental governance and institutional changes required. In an influential analysis of how environmental degradation led to or contributed to the collapse of civilizations throughout history, Jared Diamond identified two choices made by past societies that were crucial in tipping outcomes toward success and away from collapse: the first was willingness to reconsider core values, the second was long-term planning and anticipatory decision-making (Diamond, 2005, p. 522). With respect to values, it may be that a change in public attitudes to the exploitation of nature, or at least in the attitudes of the median voter, is required before fundamental changes in governance can be achieved. There is evidence that climate change is an increasingly important influence on voters’ stated preferences, and social movements such as Schools Strike for Climate appear to indicate changing attitudes among the young. It is possible that demands for sustainability are approaching tipping points (Carney, 2021, pp. 312–213). To paraphrase Carney, it is perhaps a matter of when voters will no longer settle for political parties that preach green but do not manage their environmental footprints, governments and political leaders that do not know or won’t disclose whether their fiscal policies and budgets are on the wrong side of climate and biodiversity history (Carney, 2021, p. 311). Social attitudes are likely to be influenced by the increasing availability of win–win approaches, and the heightened awareness of the costs of inaction such as escalating natural disasters (in line with the predictions of climate models) and the link between environmental degradation and pandemics. Further elements of self-interested support for sustainable

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policies could emerge from international pressures, such as the possibility of carbon border adjustments by the EU, USA, and other large economies that would impose a carbon price on imports from countries with a relatively low carbon price, or collaborative action to implement an international carbon price floor among large emitters (Georgieva, 2021). With respect to values, it is important to ensure that indigenous perspectives and voices are heard.1 Indigenous peoples own, occupy, or use a quarter of the world’s surface area. The land and natural resources on which they depend are at the core of their identities, cultures, and well-being, they retain important traditional knowledge of stewardship of their environment, and they safeguard 80% of the world’s remaining biodiversity. However, much of the land they occupy is under customary ownership and does not have formal recognition, and they are often marginalized and excluded in public discourse and decisionmaking. Activities that degrade the environment, such as deforestation, the expansion of agriculture, and the hunting of wildlife ‘…are undertaken, habitually, in indigenous peoples’ territories without their free, prior and informed consent’ (Sena, 2020, pp. 44–45). The perspective of many indigenous peoples toward the environment is one in which nature has intrinsic and spiritual value, contrasting with the anthropocentric view of nature as a resource to be exploited for human benefit. Sólon has argued that a key question is how to incorporate these nonanthropocentric values in legal and governance systems (Sólon, 2018, pp. 113 and 121). The second choice made by past societies that Diamond identified as crucial in averting the historical collapse of civilisations was long-term planning. This book has argued that long-term environmental planning must be combined with nearer term quantitative targets and regular independently verified reporting of progress against interim milestones to force early action; the integration of the top priority environmental indicators in key national measures of societal progress; and mainstreaming implementation of environmental plans and policies in fiscal policy and the annual budget cycle. Diamond concluded his historical analysis by framing the choice we face as follows: ‘…the world’s environmental problems will get resolved, in one way or another, within the lifetimes of the children and young 1 This paragraph draws from World Bank (n.d.). See also World Resources Institute (n.d.).

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people alive today. The only question is whether they will become resolved in pleasant ways of our own choice, or in unpleasant ways not of our choice, such as warfare, genocide, starvation, disease epidemics, and collapse of societies’ (Diamond, 2005, p. 498).

2

Key Arguments

The key arguments made in this book are: 1. In the current system of sovereign nation states it is only national governments (and the subnational jurisdictions within them) that can make and enforce the decisions required for environmental stewardship (with the partial exception of the EU). This is true for climate change and for all other environmental domains. Planetary or regional boundaries can in the main only be managed at the national level. 2. While many corporates are adopting strategies to cut emissions and to invest in nature there are fundamental limits to what can be achieved by voluntary market-based approaches. Only governments have the tools to change behavior throughout an economy to bring about the transformational changes needed at the required scale and speed. 3. Publication of regular independent national State of the Environment Reports is required to provide the physical outcomes data needed for environmental stewardship. Yet there are serious weaknesses in national environmental reporting, where it exists: it is the poor cousin of economic statistics, is typically relatively underresourced, and the reports have limited visibility or impact on decisions. The leading framework of national State of the Environment Reporting is predominantly backward looking, resulting in inadequate attention to environmental risks. National State of the Environment reporting is far from being recognized as necessary core infrastructure for sustainable development. 4. There are increasingly important actual and potential impacts of fiscal policies on the environment, both environmentally harmful and beneficial, and environmental degradation has growing fiscal impacts and poses escalating fiscal risks. 5. The central government’s annual budget cycle is widely recognized as its most important policy statement and its most powerful policy

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integration and mainstreaming instrument. While regulation is critically important for environmental stewardship there is no annual regulatory policy cycle or process that could integrate and mainstream environmental goals into government strategy, cross-sector prioritization, and policy implementation. In countries with multiyear National Development Plans the public investment projects that are typically the main focus must be implemented in large part through annual budget allocations. In addition, there are important environmental policy tools that are hybrids of fiscal and regulatory interventions, e.g., emissions trading schemes; and government policy increasingly needs to consider complex smart packages of regulatory and fiscal interventions, e.g., with respect to carbon pricing and the use of other economic instruments. 6. The greening of fiscal policy is therefore the key tool to mainstream environmental objectives, targets, and instruments to government strategy and policy and to make governments more accountable for environmental stewardship. Two possible objections to greening fiscal policy should be addressed: i. Objection 1: ‘Greening fiscal policy attempts to elevate or privilege environmental goals over economic and social goals.’ On the contrary, the aim is to ensure that environmental considerations are fully and transparently incorporated in government strategy, fiscal policy, and in the criteria used in fiscal policy and budget decision-making in ways that have not been the case. The increasingly detailed information in fiscal strategy documents and annual budgets on risks to the economic outlook and to government revenues, expenditures, and public debt needs to be set alongside information on environmental risks and thresholds. This would enable a more informed analysis and debate on complementarities and trade-offs between economic, social, and environmental objectives and outcomes. Currently, without this component on environmental resilience and risk, economic and fiscal considerations almost inevitably dominate fiscal strategy and annual budgets, which effectively precludes adequate weight being given to environmental objectives and the possibility of win–win policies. Rebalancing policies toward environmental sustainability will, however,

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require significant public investments in environmental monitoring, reporting, policy analysis, modeling and forecasting, and evaluation to provide the required data, information, and analysis. ii. Objection 2: ‘The environment is just one sector, and it should not be elevated over other important sectors such as health or energy or security.’ The environment does not refer to the environmental sector as just one of the sectors in the classification of the functions of government. It refers to all elements of natural capital stocks and flows that underpin the functioning of the whole of society and the whole economy. Expenditures in all sectors (transport, energy, health, education, etc.), and all taxes, potentially impact on the environment and in turn may be impacted by the environment. Green fiscal policy attempts to systematically incorporate the most important of these two-directional cross-cutting interactions.

3

Ten Key Takeaways

Work at the interfaces between fiscal policies and the environment is at an early stage. A variety of approaches have emerged over the last decade. A sense of urgency is apparent as awareness grows of the alarming rate of environmental degradation, potential and actual tipping points in environmental systems, their potential impacts on human welfare and on the generations to come, and the key roles, negative and positive, of fiscal policy. Rapid development and early implementation of new governance approaches is underway. This book attempts to lay out a broad framework for more effective environmental stewardship by governments, and to identify practical approaches and entry points. The framework is deliberately ambitious given the severity, scale, and urgency of the challenges. Much more work is required and is already underway in diverse initiatives to fill in the gaps and flesh out the details. The aim should be to rapidly develop a set of widely accepted international norms and standards for government environmental stewardship and green fiscal policy and to invest in the data, analysis, and capacity to progressively implement them. This would, in a sense, be the counterpart to the work to strengthen environmental disclosure in the private financial sector—the 2017 Report of the Task Force on Climate-Related Financial Disclosures and the current initiative to create a Task Force on Nature-Related Financial Disclosures (Informal Working Group on Nature-Related Financial Disclosures, 2021). Perhaps

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a similar coordinated ‘Task Force’ type approach across key institutions and interests should be considered to rapidly develop agreed global standards for green fiscal policy and for national environmental reporting and to support their implementation. To conclude, Box 1 brings together ten key takeaways on how to make governments more accountable for stewardship of the natural environment. Box 1 Ten Key Takeaways: how to make governments more accountable for environmental stewardship 1. Strengthen the practice and impact of regular national State of the Environment reporting, with the addition of forward-looking assessments of environmental risks and potential tipping points, a requirement for government to respond to each report, and alignment of the timing of reports as feasible with an appropriate point in the electoral cycle. 2. Incorporate the most critically important physical environmental outcome indicators in high-level dashboard measures of societal progress (key national indicators) that cover economic, social, and environmental indicators. 3. Expand the use beyond the domain of climate change of national commitments to transparent time-bound environmental targets, regular verified reporting on progress, and independent policy advice, for the most critically important environmental outcomes in each country. 4. Use the government’s most important policy statement and its most powerful strategy and policy integration tool—fiscal policy and the annual budget cycle—to incorporate the highest priority environmental objectives and targets, and information on environmental risks in government strategy and policy. 5. Progressively implement the greening of fiscal policy by incorporating environmental objectives, targets, analysis, and filters across thebudget cycle, in tax policy, and in the public investment management cycle. 6. Utilize key entry points for the greening of fiscal policy: • the new policies in the annual budget and their consistency with national and international environmental commitments and targets—with COVID recovery packages, because of their size, currently being the new policy entry point par

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excellence in many countries. Test whether new projects are ‘planet-ready’ as well as ‘shovel ready.’ the ongoing tax and expenditure policies that are known to be the most environmentally damaging, such assubsidies for fossil fuels, water use, agriculture, fishing. using established high-level processes such as National Development Plans or Nationally Determined Contributions under the Paris Agreement to integrate environmental objectives and commitments in fiscal policy. integrating climate and the environment across the public investment management cycle, from national and sector planning, through project appraisal, selection, and budgeting, implementation, monitoring and reporting, and review and evaluation. introducing climate (green) budget tagging for countries seeking to attract international climate (green) finance. cross-national benchmark indicators taxing environmental externalities and earmarking the proceeds (including from cap-and-trade schemes) to public expenditure programs, e.g., to fund mitigation, adaptation, transitional assistance to those most adversely affected by green taxes. identifying, analyzing, mitigating, and disclosing fiscal risks from the environment. the performance (outputs and results) of environmentally relevant expenditure programs, e.g., conservation programs, biodiversity preservation, waste management, invasive species control. the accountability framework for public corporations, and the oversight framework for subnational governments. conducting periodic Green Spending Reviews and Green Tax Reviews.

7. Ensure a high degree of transparency and accountability by progressively presenting a range of supplementary green budget documents and periodic green fiscal reports to the legislature and the public, including at the time of presentation of the annual budget proposal. 8. Directly engage the public, including traditionally excluded or marginalized voices and indigenous peoples, in debate and deliberation on the design and implementation of fiscal policies and frame

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policy issues and public debate in ways that promote environmental sustainability. 9. Enable civil society including the media to actively monitor governments’ environmental stewardship, call out ‘greenwashing,’ and promote the public interest over the interests of elites, including through new civil society-initiated tools such as a Green Guide to the Budget and a new Index of Environmental Governance. 10. Invest in capacity development in the executive (especially in ministries of finance and environment ministries), the legislature, the Supreme Audit Institution, and civil society, in national State of the Environment monitoring and reporting, environmental tax and expenditure analysis, and in green disclosure and public engagement.

References Attenborough, D. (2020). A life on our planet. Witness Books. Carney, M. (2021). Value(s): Building a better world for all. William Collins. Diamond, J. (2005). Collapse: How societies choose to fail or succeed. Penguin. Georgieva, K. (2021, June 18). A Proposal for an International Carbon Price Floor Among Large Emitters. Remarks by Managing Director Kristalina Georgieva at the Brookings Institution Event: Building climate cooperation: The critical role for international carbon price floors. https://www.imf.org/ en/News/Articles/2021/06/18/sp061821-launch-of-imf-staff-climate-note Informal Working Group on Nature-Related Financial Disclosures. (2021, February 24). https://tnfd.info/news/qa-with-the-three-co-chairs-of-the-inf ormal-working-group-bringing-together-a-tnfd/ Raworth, K. (2017). Doughnut Economics. Random House Business. Sena, K. (2020). Recognising Indigenous Peoples’ land interests critical for people and nature. Living Planet Report 2020, Special Edition. Sólon, P. (2018). The Rights of Mother Earth. In V. Satgar (Ed.), The Climate Crisis: South African and Global Democratic Eco-Socialist Alternatives (pp. 107–130). Wits University Press, JSTOR. www.jstor.org/stable/ 10.18772/22018020541.10. Accessed 18 May 2021. Stiglitz, J., Sen, A., & Fitoussi, J.-P. (2009). Report by the Commission on the Measurement of Economic Performance and Social Progress. Task Force on Climate-Related Financial Disclosures. (2017, June). Recommendations of the Task Force on Climate-related Financial Disclosures.

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United Nations. (1987). The World Commission on Environment and Development. Our common future. United Nations Environment Program. (2019, February 12). GEO-6 Key Messages (Developed by the Bureau members of the Summary for Policymakers meeting). UNEP/EA.4/INF.18. World Bank. (n.d.). Indigenous peoples. https://www.worldbank.org/en/topic/ indigenouspeoples World Resources Institute. (n.d.). Improving Governance for Sustainable, Just Solutions. https://www.wri.org/governance

Glossary

Aarhus Convention United Nations Economic Commission for Europe (UNECE) Convention on Access to Information, Public Participation in Decision-Making, and Access to Justice in Environmental Matters 1998. Accounting policies the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting its financial statements. Accounting system The set of accounting procedures, internal mechanisms of control, books of account, and plan and chart of accounts that are used for administering, recording, and reporting on financial transactions. Adaptation climate change adaptation refers to actions to reduce vulnerability to the effects of climate change. Administrative classification a classification of expense that identifies the responsible administrative units (e.g., ministries, departments, agencies). Aichi Biodiversity Targets 2011–2020 a set of 5 strategic goals and 20 targets that Parties to the UN Convention on Biological Diversity are intended to use as a guiding framework for their national commitments toward biodiversity conservation, sustainable use, and the equitable sharing of its benefits.

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 M. Petrie, Environmental Governance and Greening Fiscal Policy, Palgrave Studies in Impact Finance, https://doi.org/10.1007/978-3-030-83796-9

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Appropriation an authority under a law given by the legislature to the executive, valid for a specified period of time, to spend public funds for a specified purpose. Assets Any economic resource controlled by an entity as a result of past transactions or events and from which the economic owner may obtain future economic benefits over a period of time. Assets may be financial or nonfinancial, and the latter include infrastructure assets (see definition of infrastructure below). Backcasting a planning method that starts by defining a desirable future and then works backward to identify policies and programs likely to achieve the desired future state. Biodiversity the variability among living organisms. It includes diversity within and among species and diversity within and among ecosystems. Biodiversity is the source of many ecosystem goods, such as food and genetic resources, and changes in biodiversity can influence the supply of ecosystem services. Brown activities activities that are environmentally harmful. Budget calendar a calendar indicating the key dates in the process of preparing and approving the government’s budget. Budget documents The documents that are published with the executive’s annual budget submission to the legislature or that are related to the process of preparing the budget. In addition to the draft appropriation bill, these documents could include a fiscal strategy statement, a medium-term budget framework, a fiscal risk statement, and a report on the execution of the budget for the previous year. Budgetary central government The ministries, departments, agencies, and other entities belonging to the central government whose spending, revenues, and borrowing activities are included in the central government’s annual budget. Cap and trade a scheme where government puts a limit, or cap, on the overall level of a pollutant (e.g., Greenhouse Gases (GHGs)) and creates and distributes tradeable quotas through auctions and other means of allocation. Polluters that exceed their quota must buy unused quota from other companies, creating an incentive for efficient emissions cuts. Cap and trade differs from a tax in that it provides a high level of certainty about the future quantity of emissions, but not about the price of those emissions (carbon taxes do the reverse). Carbon budget specifies a maximum allowable amount of CO2 emissions that a country can emit over a period, e.g., 5 years.

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Carbon credit a tradeable permit that allows the entity that holds it to emit a certain amount of carbon dioxide or other GHGs as part of a cap-and-trade scheme. Carbon dioxide (CO2) the predominant greenhouse gas (GHG). Carbon price a price that captures the external (social) costs of carbon dioxide or other GHG emissions. The main carbon pricing approaches are reducing or eliminating fossil fuel subsidies; taxes and tax-like measures (carbon taxes, fuel taxes, environmental duties, levies, and charges which are scaled in accordance with carbon emissions); Emissions Trading Systems and similar cap-and-trade mechanisms; and regulatory policies which result in an implicit marginal price on carbon, such as tradeable performance standards. Governments and companies may use an internal carbon price in their investment decisions, e.g., in cost–benefit analysis or financial analysis. Carbon price gap a summary indicator of a country’s use of carbon pricing, it measures the difference between actual carbon rates (prices) and a selected benchmark carbon rate (price). Carbon taxes charges on the carbon content of fossil fuels. A tax imposed on CO2 releases emitted largely through the combustion of carbon-based fossil fuels. Administratively, the easiest way to implement the tax is through taxing the fossil fuels—coal, oil, and natural gas—on the basis of their carbon content. Cash accounting an accounting system that recognizes transactions and events when cash is received or disbursed. Central government all government entities that are included in the budgetary central government, plus any units funded by extrabudgetary funds and nonmarket nonprofit institutions that are controlled by the central government. Circular economy an economy in which resources are kept in use for as long and as productively as possible, and products and materials are recovered and recycled at the end of their service life. In contrast to the traditional linear, ‘take-make-dispose’ economy. Climate budget tagging the separate identification of expenditures in a government budget that are related to climate change adaptation and mitigation. These expenditures cut across the standard budget classifications. Climate budgeting the practice of tagging (separately identifying) and tracking (monitoring and reporting) climate change adaptation and mitigation expenditures.

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GLOSSARY

Climate change adaptation anticipating the adverse effects of climate change and taking appropriate action to prevent or minimize the damage they can cause or taking advantage of opportunities that may arise. Climate change mitigation reducing climate change by reducing the flow of heat-trapping greenhouse gases (GHGs) into the atmosphere, either by reducing sources of these gases (e.g., burning fossil fuels) or enhancing the ‘sinks’ that store these gases (e.g., forests). Co-benefits environmental benefits achieved as a by-product of the main intended benefit, e.g., a renewable energy power station, in addition to producing lower GHG emissions, will result in less air pollution and pollution-related deaths than a coal-fired plant; increased public transportation can reduce traffic congestion, reduce accidents and fatalities, and improve air quality as well as cut GHG emissions. Convention on Biological Diversity Convention dedicated to promoting sustainable development signed by 150 government leaders at the 1992 Rio Earth Summit. It covers the conservation of biological diversity, the sustainable use of the components of biological diversity, and the fair and equitable sharing of the benefits arising out of the utilization of genetic resources. Deforestation clearance of forests, often for the preparation of land for use as pasture or crops. De facto practices that are performed although they are not officially required by law. De jure practices that are legally required whether or not they are performed. Double materiality a term referring to disclosure by private sector financial institutions of how their financial activities depend on climate and biodiversity, as well as how their financial activities impact on climate and biodiversity. Drivers, Pressures, State, Impact, Response an analytical framework based on the causal relationships between its components, used for analysis and for reporting on the state of the environment. Earmarked taxes taxes raised and allocated by a mechanism specified in policy or law to be spent on a specific expenditure program(s), often through an extrabudgetary entity. Economic instruments fiscal and other economic incentives and disincentives to incorporate environmental costs and benefits into the

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183

budgets of households and enterprises, intended to encourage environmentally sound and efficient production and consumption through full-cost pricing. They include energy taxes, pollution charges, resource use charges, congestion charges, waste charges, subsidies, cap-andtrade schemes such as Emissions Trading Systems and transferable fisheries quotas, and feebate schemes. Ecosystem a dynamic complex of plant, animal, and microorganism communities and the nonliving environment, interacting as a functional unit. Humans are an integral part of ecosystems. Ecosystem goods goods produced by ecosystems including naturally occurring food (meat, fish, vegetables, etc.), water, fuels, and timber. Ecosystem services the benefits people obtain from ecosystems. These include provisioning services such as food and water; regulating services such as flood control and disease control; cultural services such as spiritual, recreational, and cultural benefits; and supporting services such as nutrient cycling, that maintain the conditions for life on Earth. Emissions factor a representative value that attempts to relate the quantity of a pollutant released to the atmosphere with an activity associated with the release of that pollutant, e.g., a measure of the mass of GHG emissions from the use of electricity, calculated by multiplying data on kilowatt hours (kWh) of electricity used by the emission factor (kgCO2/kWh) for electricity, which will depend on the technology and type of fuel used to generate the electricity. Emissions trading system or scheme systems in which firms are required to acquire allowances to cover their emissions, the government controls the total supply of allowances, and trading of allowances among firms establishes an emission price. A market-based policy to reduce emissions. Auctioning the allowances can provide a valuable source of government revenue. Environmental assessment the process of undertaking an objective evaluation and analysis of information designed to support environmental decision-making. Environmental data large amounts of observations and measurements about the environment and related processes. Environmental protection expenditures expenditures whose primary purpose is the prevention, reduction, and elimination of pollution and other forms of degradation of the environment.

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GLOSSARY

Environmental reporting regular published reports on the state of the environment, using physical environmental outcome indicators, often using the DPSIR framework and integrated environmental assessment. Environmental statistics environmental data that have been structured, synthesized, or aggregated according to statistical methods, standards, and procedures. Environmental stewardship the responsible use and protection of the natural environment through conservation and sustainable practices that meet the needs of the present without compromising the ability of future generations to meet their own needs. Environmental sustainability development that meets the needs of the present without compromising the ability of future generations to meet their own needs. Environmental tax a tax whose tax base is a physical unit (or a proxy of it) of something that has a proven, specific, negative impact on the environment. EU taxonomy of sustainable environmental outcomes a taxonomy intended to provide governments, businesses, and consumers with a common understanding of what economic activities can unambiguously be considered environmentally sustainable. Export credits government financial support, direct financing, guarantees, insurance or interest rate support provided to foreign buyers to assist in the financing of the purchase of goods from national exporters. Exposure risks arising from interactions between people or physical assets and hazards, e.g., the exposure of a highway to damage from flooding. Externalities situations when the production or consumption of goods and services imposes costs or benefits on others which are not reflected in the prices charged for the goods and services being provided. E.g., health care costs from air pollution caused by the consumption of fossil fuels, loss of life and property from the increased incidence of climaterelated natural disasters due to global warming. External financing financing provided by international financial institutions or bilateral development partners by means of grants and concessional or non-concessional loans. Extrapolate to predict by projecting past experience or known data. Extra-budgetary entities (or funds) entities (or public funds) set up under legislation that carry out government functions but receive

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185

funds other than through annual appropriations by the legislature, for instance through earmarked taxes or fees. Feebate a scheme which combines taxes and subsidies to promote a specific policy objective. Feebates involve a sliding scale of fees for products or activities with, for example, above-average emissions intensity and rebates for those with below-average intensity. Financial corporations corporations that are principally engaged in providing financial services, including insurance and pension fund services, to other institutional units, e.g., Public Development Banks. Financing source term used in the budget to describe a type of financing with broadly similar conditions, such as budget funds (the pool of funds from tax, non-tax, and domestic borrowing over which the government has full discretion over use), external financing, or public– private partnerships. Fiscal aggregates summary fiscal indicators, including flows—total expenditure, total revenue, net lending/net borrowing, and the overall fiscal balance—and stocks—gross and net debt. In an accrual accounting system also includes total assets, total liabilities, and net worth. Fiscal policy the use by government of taxation, public spending, and government lending, and the related accumulation of government assets and liabilities, to achieve public policy objectives such as the stabilization of the economy, the reallocation of resources, and the redistribution of income. Macro-fiscal policy is concerned with achieving broad objectives relating to aggregate demand for goods and services and overall levels of employment, inflation, and economic growth. Micro-fiscal policy refers to the use of tax and spending policies to achieve narrower objectives relating to individual markets, resource allocation across industries, sectors, or regions, or social or environmental policy objectives. Fiscal risks potential shocks to government revenues, expenditures, or the value of assets or liabilities that may cause fiscal outcomes to depart from expectations or forecasts. Fiscal risks can be classified into macroeconomic risks that arise when forecasts of key macroeconomic variables are different from forecast; or specific risks such as natural disasters or pollution incidents. Fiscal sustainability the ability of a government to sustain its current spending, revenue raising, and other policies without threatening

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government liquidity or solvency or defaulting on some of its liabilities or promised expenditures. Fiscal transparency refers to the information available to the public about the government’s fiscal policymaking process; the clarity, reliability, frequency, timeliness, and relevance of public fiscal reporting; and the openness of such information. Flow a variable measured over an interval of time, e.g., a river contains a quantity of water flowing at a certain volume per second, while an aquifer is a stock of water at a particular time; the flow of new GHG emissions is measured over a period of time, while there is an accumulated stock of GHGs in the atmosphere at any point in time. Functional classification (of expenditure) provides information on the purpose for which an expenditure was incurred. The United Nations’ Classification of Functions of Government (COFOG) is a detailed classification of the functions, or socioeconomic objectives, that government entities aim to achieve through various kinds of expenditure. It is generally used to measure the allocation of resources by government for the promotion of various activities and objectives (e.g., health, education, transportation, environmental protection). Governance the process by which decisions are made and implemented. Within government, governance is the process by which public institutions conduct public affairs and manage public resources. Good governance refers to the management of government in a manner that is transparent, open to public inputs, free of abuse and corruption, and with due regard for the rule of law. Government guarantee the most common type is a governmentguaranteed loan, which requires the government to repay any amount outstanding in the event of default by the guaranteed party. Other types of guarantee include exchange rate, price, or revenue guarantees. Green activities activities that contribute positively to environmental outcomes. In the EU Taxonomy of Sustainable Environmental Outcomes green activities have a more specific definition: activities that in and of themselves contribute substantially to one of the six environmental objectives without having a significant negative impact on any other environmental objective. Green bonds bonds issued to raise money from investors to fund new and existing projects with climate change and/or environmental benefits, where the borrower agrees to use the proceeds only to finance

GLOSSARY

187

eligible green projects and report on the use of proceeds of the bond for ‘green’ purposes. Green budgeting a term increasingly used to describe a wide range of activities related to the interface between fiscal policies and the environment not limited to climate change. May refer only to the expenditure side of the budget; or may also include green taxes and hybrid tax and regulatory instruments such as emissions trading schemes. It may also refer to the use of the budget process and the budget cycle to ensure more attention to the impacts of government spending on the environment and the implications of environmental degradation for fiscal sustainability. From 2017 the leading comprehensive definition of green budgeting is that advanced by the OECD: green budgeting is the use of the tools of budgetary governance to help drive improvements in the alignment of national expenditure and revenue processes with climate and other environmental goals. Green fiscal policy defined in this book as the interface between the full range of fiscal policy instruments and parameters and all environmental domains, and includes national State of the Environment reporting and the wider use by governments of target setting for key environmental outcomes and their incorporation in fiscal strategy. Green taxes economic instruments that can be revenue raising for governments and that can improve environmental outcomes. Examples include carbon taxes, emissions trading schemes, congestion charging, and waste disposal levies. Greenhouse gas (GHG) a gas in the atmosphere that is transparent to incoming solar radiation but traps and absorbs heat radiated from the earth. CO2 is the most predominant GHG and is long-lived, while other gases such as methane are shorter lived but are more effective at trapping heat while in the atmosphere. There are six greenhouse gases covered by the United Nations Framework Convention on Climate Change (UNFCCC): carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulphur hexafluoride. Green washing the practice of a government or other entity saying that their policies, services, products, or activities are environmentally friendly (or align with the Paris Agreement or other environmental virtues) when they are not (or do not). Gross Domestic Product a monetary measure of the market value of all the final goods and services produced in a specific time period within a country.

188

GLOSSARY

Hazards (climate-related) with respect to public investment, an event that may cause damage to public infrastructure assets and impact negatively on the services they deliver. Climate-related hazards include tropical cyclones, tornadoes, drought, heavy rain episodes causing floods or landslides, high winds, fires, and temperature extremes. Hazards can be described quantitatively by the likely frequency of occurrence of different intensities or above a certain threshold, for different areas, as determined from historical data or scientific analysis. Hybrid tax and regulatory instruments public policies or instruments that combine features of taxation and of government regulation. A leading example is an emissions trading scheme, which combines features of a tax (a price at which emissions are traded and which generate revenues for the government) and a regulation (a government-imposed constraint on the volume of allowable emissions). Indicator observed value representative of a phenomenon to study. Environmental indicators provide information about and describe the state of the environment, often by aggregating or synthesizing different and multiple data, thus simplifying information that can help reveal complex phenomena. Indices combination of two or more indicators or several data. Indices are often used in international assessments to show higher levels of aggregation for comparative purposes. Infrastructure nonfinancial fixed assets, including economic and social infrastructure. Social infrastructure supports the provision of public services such as schools, hospitals, and public housing. Economic infrastructure supports economic activity with telecommunication networks, transportation assets (such as roads, railways, canals, ports, and airports), water and wastewater pipes and treatment plants, and electricity production and transmission. Integrated environmental assessment an assessment that includes environmental, social, and economic aspects in an analysis of environmental state and trends linked with policy analysis. IUCN red list The International Union for Conservation of Nature’s Red List of Threatened Species evaluates the risk of extinction for thousands of animal, fungus, and plant species. It classifies the risk of extinction by seven categories in order of severity, from Least Concern to Extinct.

GLOSSARY

189

Invited spaces a term referring to the variety of ways in which governments invite members of the public or civil society organizations to contribute to processes of developing, implementing, monitoring, or reviewing public policies. Maladaptation an action that may lead to increased risk, e.g., building new public infrastructure in locations that are exposed to increased incidence and/or severity of natural disasters (and possibly thereby also encouraging new private investment in those locations). Market failure a situation where the private sector by itself would not make production and consumption decisions that would be efficient from society’s perspective, e.g., the market failure caused by excessive generation of GHG emissions that are not priced for their environmental damages. Other market failures include those causing underinvestment in clean technologies. Medium-term a period usually covering three to five years which may be applied both to budgets and planning documents. May have a longer time horizon when applied to environmental phenomena such as climate change. Medium-term fiscal policy or budgeting a set of institutional arrangements for prioritizing, presenting, and managing revenue and expenditure over a period of three to five years. Megadiverse countries countries that contain the majority of earth’s species and high numbers of endemic species. The World Conservation Monitoring Centre of the United Nations Environment Program has identified a total of 17 megadiverse countries. Mitigation actions to reduce risk. Climate change mitigation refers to actions to limit the magnitude and/or rate of long-term climate change. Mitigation generally involves reductions in human-caused emissions of greenhouse gases but may also be achieved by increasing the capacity of carbon ‘sinks.’ A ‘sink’ refers to forests, vegetation, or soils that can reabsorb CO2. Mitigation can also be achieved through the use of new technologies for carbon capture and storage. Monitoring repeated observations, generally according to a regular schedule, of one or more elements, e.g., of the environment to detect their characteristics (status and trends). National State of Environment report a regular published report on the state of the environment at the national level (the national territory including the surrounding sea area covered in an exclusive economic zone and the airspace over the country) using physical environmental

190

GLOSSARY

outcome indicators, often using the DPSIR framework and integrated environmental assessment. Nationally Determined Contributions (NDCs) under the Paris Climate Change Agreement NDCs embody efforts by each country to reduce national emissions and adapt to the impacts of climate change. Natural capital natural assets providing natural resource inputs and environmental services for economic production, including natural resource stocks, land, and ecosystems. Nonfinancial corporations corporations whose principal activity is the production of market goods or nonfinancial services. Norms informal rules or expectations that are socially enforced but not legally mandated. Off-balance sheet activities an asset or debt or financing activity not on an entity’s balance sheet. Where a government prepares financial statements on an accruals basis they may appear in the accompanying Notes to the Financial Statements. These activities may constitute or contain contingent liabilities, such as guarantees, PPPs, legal claims for environmental damages, potential future obligations to reduce GHGs. Off-budget activities financial transactions that are not included in the expenditures appropriated in a government’s budget. Ordinal indicators show the order of the value (e.g., first, second, third) rather than a cardinal indicator which shows the actual quantity. Organic Budget Law a law specifying the procedures by which the budget should be prepared, approved, executed, accounted for, and final accounts submitted for approval. Also referred to as a Public Finance Law. Outputs and outcomes in a performance-assessment framework for government, outputs are defined as the goods or services produced by government agencies (e.g., construction of a new power station and delivery of electricty), and outcomes are defined as the effects on social, economic, or environmental indicators arising from the delivery of outputs (e.g., an increase in GHG emissions, or a reduction (increase) in the vulnerability of public infrastructure to climate-related damages. Outcomes may also be referred to as results. Paris Agreement the Paris Agreement is a legally binding international treaty on climate change adopted by 196 Parties at the Conference of the Parties 21 in Paris on December 12, 2015 and which entered into force on November 4, 2016. Its goal is to limit global warming to well below 2 degrees Celsius, preferably to 1.5 degrees Celsius,

GLOSSARY

191

compared to preindustrial levels. The Agreement works on a 5-year cycle of nationally determined contributions (NDCs) in which countries communicate actions they will take to reduce their GHGs in order to reach the goals of the Paris Agreement. Countries also communicate in the NDCs actions they will take to build resilience to adapt to the impacts of rising temperatures. Planetary boundary concept developed by Rockström et al., 2009 of nine interconnected environmental categories, each with thresholds of allowable human impact that if transgressed, indicate unacceptable levels of degradation. Probabilistic forecasts forecasts that provide a set of confidence intervals around a central forecast to illustrate the degree of uncertainty inherent in the forecasting process as well as the distribution of risks above and below the central prediction, e.g., fan charts to illustrate risks around a government’s central fiscal forecasts. Program budgeting/program classification presentation of proposed expenditures in a budget according to the intended objectives and results of the associated programs, which may be defined as groups of related activities carried out by a government. A program classification applies this principle across all government activities. Program budgets allocate expenditures by program and are often associated with performance-oriented or results-based budgets in which indicators are used to measure whether expenditure policies and programs are achieving their desired objectives, outputs, or outcomes. Public corporation a legal entity that is owned or controlled by the government and that produces goods or services for sale in the market at economically significant prices. There are two main classes of public corporation: nonfinancial corporations (e.g., electricity utilities) and financial corporations (e.g., development banks). Public Expenditure Review a comprehensive assessment of public expenditures in a country. One analytical framework, associated with the World Bank, includes analysis of an appropriate public–private mix of goods and service provision in the economy after the rationale for public intervention—market failure (efficiency) and redistribution (equity)—has been identified; an assessment of revenue policies and fiscal sustainability; evaluation of public expenditure priorities given the resource constraint and distributional objectives; examination of the link between expenditure inputs and outcomes; and focus on the

192

GLOSSARY

public sector institutional arrangements needed to improve the efficacy of public spending. Public financial management (PFM) cycle the cycle running from budget formulation, budget execution, accounting and reporting, and external scrutiny and audit. The PFM cycle is commonly viewed as contributing to the achievement of performance at three levels: aggregate fiscal discipline, strategic allocation of resources, and efficient service delivery. Public Private Partnerships (PPPs) a group of long-term arrangements or contracts where the private sector supplies infrastructure assets and services that have been traditionally provided or financed by the government. PPPs typically comprise a long-term contract between a private party and a government entity for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance. Public procurement the purchase by governments and public corporations of goods, services, and works. Published information, or publications information that is made readily accessible to the general public in a proactive and inexpensive way. Modes of communication that constitute publication include printed documents prepared by the government, open-access government websites, social media, radio, television, newspapers, and magazines. Resilience the capacity of a system to recover from disturbance, e.g., with respect to public investment, the ability of an asset or network exposed to hazards to resist, absorb, accommodate to, and recover from the effects of a hazard in a timely and efficient manner, including through the preservation and restoration of its essential basic structures and functions. Risk mitigation with respect to public investment, refers to actions to reduce the exposure of public investments to climate-related hazards, or to reduce the vulnerability of public assets to hazards. The process of identifying, analyzing, and managing hazards, exposure, and vulnerability, tolerating, controlling or transferring risks, and reporting. Sendai Framework for Disaster Risk Reduction 2015–2030 framework adopted at the Third UN World Conference on Disaster Risk Reduction in Sendai, Japan, on March 18, 2015. Outlines seven targets and four priorities for action to prevent new and reduce existing disaster risks.

GLOSSARY

193

Sovereign green bonds green bonds issued by a government (see green bonds). Standard an established norm, specification, or requirement, usually in a formal document. A standard may be voluntary but widely adopted (de facto) or may be mandated in law (de jure). State of Environment report a regular published report on the state of the environment, using physical environmental outcome indicators, often using the DPSIR framework and integrated environmental assessment. Can be at varying scales, e.g., global, regional, national, subnational. Stock a variable measured at one specific time, representing a quantity existing at that point in time, e.g., an aquifer is a stock of water at a particular time, while the associated flow variable is measured over an interval of time, e.g., a river contains a quantity of water per second. Stranded assets assets that have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities, due, for example, to climate change associated factors such as an increase in carbon prices or a fall in the cost of green technologies. Subnational governments decentralized government entities, created by constitution or law, that have legislative, judicial, or regulatory authority over a geographically delineated part of the country and have some autonomy with respect to budgets, staff, and assets. Subnational governments include state, provincial, or regional governments, as well as municipalities and other local governments. Supreme Audit Institution (SAIs) the highest national auditing authority within the constitutional system that is responsible for auditing the management of public funds. SAIs may perform compliance, financial, or performance audits. Most SAIs are members of the International Organization of Supreme Audit Institutions (INTOSAI), which acts as a professional standard-setting body. Sustainable development development that meets the needs of the present without compromising the ability of future generations to meet their own needs. Tax a compulsory, unrequited amount paid by nongovernment entities and individuals to government. Tax expenditures revenue foregone, attributable to provisions in the tax law that allow special exclusions, exemptions, deductions, credits, concessions, preferential rates, or deferral of tax liabilities for select groups of taxpayers or specific activities. These exceptions may be

194

GLOSSARY

regarded as alternatives to other policy instruments, such as spending or regulatory programs. Theory of change a conceptual model that describes how and why a desired change is expected to happen in the context of a particular effort; describes the processes of change by outlining the causal pathways from outputs to initial outcomes, intermediate outcomes, and eventually to long-term goals. A Theory of Change may also include the assumptions and risks that ought to be addressed for the goals to be realized. Transition risks with respect to public investment, the financial risks government bears as owner of nonfinancial assets which could result from the process of adjustment toward a lower-carbon economy, e.g., the risk of loss of value of a publicly owned coal mine as carbon prices increase. Vulnerability with respect to public investment, refers to the characteristics and circumstances of a public investment asset that make it susceptible to the damaging effects of a hazard. It is possible to be exposed but not vulnerable (for example by living in a floodplain but having sufficient flood defences). However, to be vulnerable to an extreme event, it is necessary to also be exposed. Win-win a situation or proposal that is advantageous or satisfactory to all, or that is advantageous from multiple perspectives e.g., a policy proposal such as renewable energy that improves economic growth and environmental sustainability is a win-win policy.

Index

A Aarhus Convention, 26, 148 Accounting standards, 148. See also Standard Adaptation. See Climate change Administrative classification, 133 Advanced countries, 96 Africa, 126 Aichi Biodiversity Targets, 132 Air pollution, 8, 14, 27, 73, 129, 154 Asia Pacific, 137 Australia, 28, 33, 34, 51, 101

B Bangladesh, 79, 87, 88, 97, 98, 137, 147, 150 Belize, 28 Biodiversity Biodiversity Finance Initiative (BIOFIN), 81, 97 definition, 2 ecosystem services, 46, 67, 75

loss of, 2, 9, 12, 63, 75, 76 public expenditure, 86, 152, 154 Blue budgeting, 64 Boston, Jonathan, 47, 93, 125 Brazil, 95, 129, 137, 146 Brundtland Commission, 3, 57, 62, 77, 167 Budget annexes, 88, 92, 93 Budgetary governance, 64, 149 Budget baseline, 115, 127, 136, 151, 152 Budget circular, 127 Budget classifications administrative, 133 climate budget tagging (CBT), 78, 79, 87, 88, 99, 122, 126, 135, 150 functional, 66, 121, 133 program, 70, 88, 89, 121, 123 project, 89, 124, 135 Budget cycle, 3, 7, 8, 44, 64, 127, 131, 152, 170, 171, 174

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 M. Petrie, Environmental Governance and Greening Fiscal Policy, Palgrave Studies in Impact Finance, https://doi.org/10.1007/978-3-030-83796-9

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196

INDEX

Budget documents, 58, 83, 85, 90, 91, 117, 118, 124, 132, 150, 151, 161, 175 Budget Laws, 127, 155 Budget proposal, 124, 127, 151, 152, 155, 175 Budget strategy, 57, 152

C Canada, 28, 95, 97, 98, 100, 101, 126, 128 Capacity development capacity gaps, 29, 35, 122 environmental reporting, 15, 28, 36, 136 of civil society, 36, 153, 155 Cap and trade. See Hybrid fiscal/regulatory instruments Carbon budget, 6, 114, 123, 130 Carbon prices, 11, 14, 80, 112, 132, 137, 170 Carbon Pricing Leadership Coalition (CPLC), 80, 122 Carbon taxes, 6, 56, 73, 80, 82, 89, 132 Carney, Mark, 5, 48, 169 Central government, 11, 51, 75, 87, 93, 95, 110, 117, 131, 171 China, 72, 95, 97, 98, 100, 101 Civil society, 9 cross-country indices, 157 networks, 138 public participation, 144, 145, 147 roles, 144, 145 Climate budgeting. See also Green budgeting; Green fiscal policy climate budget report, 86, 88 climate budget tagging (CBT), 79, 87, 122, 126, 135, 150 country examples, 87 international climate financing, 88

Climate change. See also Nationally determined contribution (NDC) Acts, 6, 55, 90, 91, 114, 125, 130 adaptation, 63, 68, 69, 87, 89, 98, 115, 120, 128, 133, 135, 136 Commissions, 55, 114, 115, 123, 124, 130 mitigation, 14, 15, 44, 63, 68, 69, 74–76, 78, 86, 87, 89, 94, 115, 120, 128, 130, 132, 133, 138, 150, 153, 159 Paris Agreement, 23 public investment, 63, 79, 81, 85, 128, 131, 175 Climate Change Policy Assessment (CCPA), 137 Climate Change Public Expenditure and Institutional Review, 79 Coalition of Finance Ministers for Climate Action, 85, 138 Co-benefits, 8, 84, 111 Contingent liabilities. See Fiscal risks Cost–benefit analysis (CBA), 76, 138 Costa Rica, 97 Country practices in climate budgeting, 16, 63, 86 in environmental reporting, 15, 27, 28 in green budgeting, 62, 78, 86 COVID-19 pandemic, 127 fiscal impact, 6, 54 greenness of response and recovery, 16, 93 Cross-national benchmark indicators, 85, 112, 115, 132, 154, 175

D Dashboard of national indicators, 3, 44–46, 56 Debt. See Green bonds Denmark, 89, 97

INDEX

Department of environment. See Environment ministry De Smedt, 31, 32, 46 Developing countries, 15, 28, 50, 73, 78, 120, 124, 126, 128, 135–137, 144 Development partner, 115, 118, 123, 124, 133, 137, 138 Diamond, Jared, 169, 170 Disaster risk management, 79, 80 Drivers-Pressures-State-ImpactsResponses (DPSIR). See Environmental reporting

E Earmarked taxes, 92 Economic instruments, 90, 116, 131, 133, 172 Economist, The, 73, 74, 145 Ecosystem, 22, 25, 51, 67, 68, 76, 84, 90, 128 definition, 2 goods and services, 67 Emerging market, 73 Emissions factor, 152 Emissions trading scheme (ETS). See Hybrid fiscal/regulatory instruments Enabling activities. See EU taxonomy of sustainable environmental outcomes Entry points for green fiscal policy, 119 Environment. See also EU taxonomy of sustainable environmental outcomes interactions with fiscal policy, 150 Environmental data and statistics, 47 Environmental degradation, 3, 4, 8, 9, 14, 26, 31–33, 44, 63, 64, 66, 74, 75, 94, 99, 115, 117, 120,

197

123, 126, 136, 146, 154, 169, 171, 173 Environmental equity, 27, 29 environmental justice, 120 Environmental governance. See also Aarhus Convention definition, 110 environmental justice, 29 index of, 176 public participation, 147 transparency, 50, 51, 55, 82, 161 Environmental Governance Index, 16 Environmental impact assessments (EIAs), 76, 78, 84, 97, 122 Environmental information, 26, 36, 133, 148, 154, 158, 161 Environmental justice. See Environmental governance Environmentally harmful fiscal policies expenditures, 83, 87, 92 subsidies, 7, 71, 87 taxation, 7, 56, 83, 150 tax expenditures, 150 Environmentally sustainable activities. See EU taxonomy of sustainable environmental outcomes Environmental outlooks and scenarios, 30. See also Environmental risks Environmental reporting country practices, 8, 15, 24, 27 Drivers-Pressures-State-ImpactResponse (DPSIR), 24–26, 29, 30, 32, 38, 121 gender, 27 global, national scale of reporting, 24 institutional independence, 33 national state of environment reporting, 16, 22, 26, 36, 44, 48, 110, 112 recommendations to strengthen, 14, 34, 37, 38, 121, 171

198

INDEX

reporting, 64 Environmental risks. See also Fiscal risks forward looking analysis, 32 resilience, 30, 32, 38, 115, 116, 172 tipping points, 2, 30, 38, 121, 173, 174 Environmental stewardship, 2–5, 8, 10, 12, 13, 15, 16, 22–24, 32, 35, 37, 44, 48, 50, 53, 57, 64, 95, 110, 112, 119, 125, 126, 130, 144, 145, 147, 156, 160, 162, 168, 171–173, 176 Environmental targets, 15, 44, 52, 114, 123, 125, 161, 174. See also Mainstreaming environmental policies Environmental taxes, 9, 73, 92, 118 Environment ministry, 57, 123 European Environment Agency, 24, 26, 28, 30, 33 European Union, 4, 68, 72, 97, 151 EU taxonomy of sustainable environmental outcomes, 68, 101, 120, 151 Evaluation. See Monitoring and evaluation (M&E) Expenditures, 7, 12, 63, 66, 70, 81, 125, 127, 130, 150, 151, 153, 172. See also Economic instruments; Green procurement Budget classifications, 78 public expenditure, 175 Expenditure tracking. See Climate budget tagging External audit. See Supreme Audit Institution (SAI) Externalities, 7, 10, 80, 84, 112, 116, 138, 175 Extra-budgetary funds. See Off-budget

F Fiji, 79, 89, 98, 126 Financial public corporations. See Public corporations Financing, 14, 63, 70, 71, 76, 78, 79, 86, 88, 89, 91, 98, 117, 128, 135, 147 Fiscal aggregates, 114 Fiscal policy. See also EU taxonomy of sustainable environmental outcomes climate change, 85 COVID-19 pandemic, 5 environmental impacts of, 56, 62, 71, 73, 76, 77, 89, 117, 122, 137, 151 fiscal impacts of environmental degradation, 64, 74, 94, 123 fiscal policy objectives, 56, 122 fiscal sustainability, 64, 84, 85, 112, 154 macro-fiscal policy, 64 strategy, 6, 7, 32, 35, 44, 55, 57, 58, 64, 66, 87, 93, 97, 111, 115, 116, 125, 172 Fiscal risks climate change and other environmental risks, 56, 136 fiscal risk analysis, 31 natural disasters, 8, 9, 82, 94 reporting, 94, 98 risk management, 168 Fiscal rules, 50 Fiscal sustainability. See Fiscal policy Fiscal targets, 49 Fiscal transparency, 134 evolution of international standards, 148 fiscal responsibility, 114. See also Budget Laws IMF Fiscal Transparency Code, 82, 149

INDEX

IMF Fiscal Transparency Handbook, 82 International Budget Partnership, 134 OECD Budget Transparency Toolkit, 149 OECD Principles of Budgetary Governance, 149 Fisheries, 31, 82, 92, 116 Fitoussi, J.-P., 30, 33, 44–47 Flows, 46, 66, 83, 87, 120, 121, 135, 147, 173 Fossil fuels, 7, 69, 71, 75, 94, 101, 129, 175. See also Subsidies France, 64, 69, 89, 91, 92, 97, 100, 101, 124, 128 Functional classification, 66 Fundar, 146

G G20 countries, 71, 100, 101, 159 Gaventa, John, 13, 145 Gender, 27, 38 Global Environment Outlook (GEO), 2, 34, 36 Global Financial Crisis (GFC), 6, 54, 101, 129 Global Initiative for Fiscal Transparency (GIFT) high level principles of fiscal transparency, participation and accountability, 149 multi-stakeholder network, 36, 138 principles of public participation in fiscal policy, 98, 134, 149 Good practices, 86, 148, 150 Government Finance Statistics Manual, 79 Government strategy, 3, 6, 7, 15, 32, 35, 44, 48, 110, 114, 119, 161, 172, 174

199

Grantham Research Institute on Climate Change and the Environment, 90, 91, 130 Green activities. See EU taxonomy of sustainable environmental outcomes Green bonds, 15, 70, 88, 89, 98, 124, 133 Green budgeting country practices, 16, 78, 86, 96 definition, 62, 63. See also Climate budgeting green budget documents, 83, 175 OECD framework, 83 periodic green fiscal reports, 175 Green Climate Fund, 121 green sovereign bonds, 14 Green COVID response. See COVID-19 pandemic Green fiscal policy. See also Fiscal policy; Green budgeting comprehensive framework, 16, 66, 110–113 definition, 62, 64 entry points, 16, 102, 111, 114, 118, 126, 174 preconditions, 16, 111, 114, 119, 121 principles of, 111, 119 principles of green fiscal policy, 118 public expenditure review, 84, 126, 131, 137 reports, 85, 112, 114, 175 tax policy review, 132 Green Fiscal Policy Network, 64, 81, 82, 138 Green Guide to the Budget, 16. See also Civil society Greenhouse gases (GHG), 4, 130, 147, 152 Greening fiscal policy, 111, 119, 172. See also Green fiscal policy

200

INDEX

Green list classification system. See EU taxonomy of sustainable environmental outcomes Green monitoring and evaluation. See Monitoring and evaluation (M&E) Green procurement, 98, 125, 131 Green recovery, 96, 99 Green sovereign bonds, 64 Green taxes, 99, 112, 116, 132, 175 Green tax policy review. See Green fiscal policy Greenwashing, 120, 150 Gross Domestic Product (GDP), 2, 15, 31, 32, 44, 45, 66, 72, 75, 81, 85, 100, 126, 132, 154 Guarantees, 70, 150 Guidance material on green budgeting, 155 Gupta, Joyeeta, 9, 26, 27

H High-Level Expert Group on the Measurement of Economic Performance and Social Progress, 46 High Level Principles of Fiscal Transparency, Participation and Accountability. See Global Initiative for Fiscal Transparency (GIFT) Hybrid fiscal/regulatory instruments, 13, 56 emissions trading schemes (ETS), 11, 13, 56, 64, 70, 112, 121, 172 feebates, 56, 71, 80, 116

I India, 28, 72, 95, 129, 137

Indicators, 5, 6, 15, 24, 26, 29, 30, 33, 38, 44–48, 54, 90, 110, 118, 121, 125, 129, 133, 136, 151, 154, 156, 160, 161, 170, 174 Indigenous people, 120, 146, 170 knowledge, 170 Indonesia, 79, 87–89, 95, 97, 98, 129, 137 Inequality. See Environmental equity Infrastructure investment, 73. See also Public investment; Sustainable development goals (SDGs) investment requirements, 73, 99 lock in, 127 public investment requirements, 73, 82 Institutional independence, 32, 55 Integrated Environmental Assessment (IEA), 24, 55 Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), 2, 67 International Budget Partnership (IBP), 88, 134, 146, 147, 155, 157, 158. See also Open Budget Survey (OBS) International Monetary Fund (IMF) carbon prices, 14, 80 climate change, 75, 81, 82, 137 Covid-19 pandemic, 75 fiscal transparency, 82, 134, 148, 149, 158 International Organisation of Supreme Audit Institutions (INTOSAI), 46, 49, 56, 126, 138 Intervention logic. See Theory of change Investment projects. See Public investment Ireland, 30, 79, 89, 94, 97, 98 Italy, 89, 98, 100, 101, 159

INDEX

J Japan, 27, 98, 100, 101

K Kenya, 89, 97

L Legal claims, 145 Legislative oversight, 125 Leverage points, 8, 136 Liabilities, 46, 70, 85 Long-term projections. See Fiscal sustainability

M Mainstreaming environmental policies budget cycle, 174 cross-government coordination, 124 dashboard of indicators, 44 fiscal policy, 84 government strategy, 44, 110 Markets, 9, 11, 13, 46, 144, 149. See also Private sector Meadows, Donella, 8, 48 Media, 9, 12, 14, 16, 127, 145, 146, 151, 153, 155, 176 Megadiverse countries, 36 Mexico, 89, 97, 98, 146 Middle income. See Emerging market Middle Income Countries (MICs), 53 Milestone, 5, 35, 38, 50, 51, 170 Ministry of Environment. See Environment ministry Ministry of finance, 57, 84, 96, 121, 122, 124, 138, 155 Ministry of planning, 124 Moldova, 28, 89, 98 Monitoring and evaluation (M&E), 13, 45, 88, 89, 98, 118, 175 evaluation, 13, 89, 118, 137, 175

201

monitoring, 7, 9, 11–13, 35, 36, 38, 45, 56, 88, 98, 118, 137, 175 Multilateral development banks, 15 Multi-stakeholder network, 36, 138 N National budget, 89, 92, 150 National Development Plan, 6, 89, 90, 97, 122, 130, 175 projects, 56 Nationally Determined Contribution (NDC), 14, 82, 153, 175 Nationally Determined Contributions, 130 National state of environment reporting. See Environmental reporting Natural capital, 2, 47, 66, 128, 173 Natural disasters, 27, 74, 80–82, 94, 112, 126, 135, 169. See also Fiscal risks Natural resources, 22, 31, 46, 51, 67, 120, 126, 133, 170 Nepal, 15, 79, 87, 88, 97, 98, 146 Netherlands, 23, 25, 29, 30, 52, 77, 89, 98 New policies in budget green fiscal policy entry points, 151 New Zealand, 21, 23, 28, 33, 34, 38, 49–51, 93, 98, 110, 125, 138, 158 Nonfinancial Public corporations. See Public corporations Norms, 36, 144, 149, 173 Norway, 77, 90, 96, 97, 124, 125 O Off-balance sheet, 70 Off budget, 70 Ongoing policies. See Budget baseline

202

INDEX

Open Budget Survey (OBS), 148, 149, 157. See also International Budget Partnership (IBP) Open Budget Index, 148, 157 Open data, 82, 149 Open Government Partnership, 15, 36, 101 Organic Budget Law. See Budget Laws Organisation for Economic Cooperation and Development (OECD). See also National state of environment reporting biodiversity loss, 2 climate change, 2, 56 green budgeting, 56, 64, 83, 110, 112, 126, 138 indicators, 132 Outcome(s), 4, 5, 7, 16, 34, 35, 54, 89, 96, 116, 123, 133, 156, 169, 172. See also Performance-oriented budgeting Output(s), 4, 9, 11, 72, 77, 79, 89, 118, 123, 126, 133, 154, 175. See also Performance-oriented budgeting P Pakistan, 87, 89, 126 Paris Agreement, 4, 14, 23, 79, 80, 86, 92, 94, 99, 101, 130, 147, 153, 159, 168, 175 Paris Collaborative on Green Budgeting. See Green budgeting; Organisation for Economic Co-operation and Development (OECD) Peer networks, 138 Performance-oriented budgeting, 133 performance information on environment, 90 Performance reporting, 98 Petrie, Murray, 48, 49, 148, 149

Philippines, 79, 87, 94, 98, 124, 137, 150 Policy cycle, 6, 24, 37, 48, 56, 96, 152, 172 Policy governance, 44, 48, 49 Policy objectives, 7, 26, 30, 44, 51, 53, 54, 70, 90, 114, 130 Polluter pays, 116 Pollution, 7, 14, 22, 68, 73, 76, 112, 116, 146, 156. See also Green taxes Principles of green fiscal policy. See Green fiscal policy Private sector, 4, 8, 12, 54, 55, 70, 73, 76, 77, 99, 112, 114, 116, 117, 127, 131, 132, 144, 160 Program budgeting, 123 Project, 7, 36, 56, 63, 74, 76, 78, 79, 89, 115, 118, 122, 124, 125, 130, 133, 136, 146, 151, 153, 161, 175. See also Green COVID response Public corporations environmental impacts, 11, 117 financial and nonfinancial, 11, 117, 131, 154 sector overview report, 117 summary reporting, 175 Public Expenditure and Financial Accountability (PEFA), 86, 125, 148, 152, 154 public expenditure, 148 Public Finance Act. See Budget Laws Public goods, 9, 10, 12, 46 Public infrastructure, 131. See also Public investment Public investment, 131. See also Project climate change, 79, 81, 128, 130, 175 entry point for green budgeting, 151

INDEX

203

external financing, 79, 135 lock-in, 73, 112, 151 management cycle, 131, 136, 174, 175. See also Entry points for green fiscal policy projects, 6, 63, 79, 117, 135 win-win approaches, 128, 135 Public participation, 98, 134, 145, 147–149 country examples, 87, 135 international standards and norms, 144, 147, 149

environmental taxes, 73 green taxes, 112, 132 tax expenditures, 70 Risks, 3, 7, 32, 57, 75, 76, 115, 121, 135, 151, 168, 172 environmental risks, 9, 31, 32, 38, 57, 76, 82, 98, 110, 116, 121, 136, 171, 174 fiscal risks, 32, 57, 82, 94, 115, 123, 131, 154, 171, 175 Rockström, Johan, 22 Russia, 29, 72, 126, 129

R Raworth, Kate, 44, 169 Regulations, 6, 7, 11–13, 53, 56, 68, 70, 80, 123, 149, 161, 172. See also Hybrid fiscal/regulatory instruments interface with fiscal policy, 112, 114, 134 transparency and public participation, 134, 149 Renewable energy, 8, 71, 74, 93, 94, 111, 128, 132, 154 Report by the Commission on the Measurement of Economic Performance and Progress, 44 Reporting green budget reports, 119 performance reporting, 98 periodic green fiscal policy reports, 175 progress toward environmental targets, 161 Research and development (R&D), 7, 56, 70, 71, 73, 116, 118, 128, 153 Results based management. See Performance-oriented budgeting Revenues, 133 classification, 121, 133

S Sen, A., 30, 33, 44–47 Sendai Framework for Disaster Risk Reduction, 80 Shadow price, 117 Small island developing countries, 126, 137 South Africa, 28, 90, 97, 98, 129, 137 South Korea, 98, 101 Sovereign green bonds. See Green bonds Standard, 13, 31, 74, 79, 95, 121, 147–150, 173, 174 State-owned enterprises. See Public corporations State, regional, and local governments. See Subnational governments State sovereignty, 4, 22 Statistics, 6, 7, 24, 29, 33, 35, 36, 55, 57, 66, 171 Stern, Lord, 8, 112 Stiglitz, J., 30, 33, 44–47 Stocks, 2, 45, 46, 66, 121, 173 Subnational governments, 11, 95, 96, 121 role in environmental stewardship, 95

204

INDEX

Subsidies, 8, 70–72, 82, 87, 100, 111, 116, 131, 151, 154 fossil fuels, 7, 71, 175 water, 7, 175 Summary reporting fiscal risks, 94 green monitoring and evaluation, 118 public corporations, 87, 117 subnational governments, 96 Supreme Audit Institution (SAI), 118, 125, 176 auditing SDGs, 89 cooperative environmental audits, 138 Sustainable development goals (SDGs), 124 budgeting, 83, 89 national circumstances, 119 public investment requirements, 73 Sweden, 6, 23, 50, 51, 89, 90, 97, 118, 125 T Target setting, 3, 5, 49–51, 55, 113, 114, 125, 168 Task force, 31, 54, 117, 168, 173, 174 Tax expenditures, 70, 92, 93, 117, 134, 146 fiscal transparency, 147 Theory of change, 7, 13, 14, 144 Tradeable permits. See Hybrid fiscal/regulatory instruments Transition, 24, 68, 77, 91, 94, 99, 115, 124, 128, 132, 168 activities, 69 risks, 94, 115, 126 Transparency, 3, 5, 6, 9, 16, 35, 48, 50, 51, 54, 82, 84, 117, 147. See also Fiscal transparency; Regulations

emissions trading schemes (ETS), 112 monetary policy, 5, 15, 37, 44, 48, 50, 53, 54, 168

U United Kingdom (UK), 6, 52, 55, 77, 89, 91, 94–98, 125, 168 United Nations, 2–4, 14, 22, 27, 36, 47, 137, 148 sustainable development goals (SDGs), 4, 89 United Nations Development Program (UNDP), 28, 78, 79, 81, 87, 88, 126, 137, 147, 150 United Nations Economic Commission for Europe Convention on Access to Information, Public Participation in Decision-Making and Access to Justice in Environmental Matters 1998. See Aarhus Convention United Nations Environment Program (UNEP), 2, 22–25, 27, 28, 30, 33–37, 56, 81, 146, 169. See also Gender United Nations Framework Convention on Climate Change (UNFCCC), 14, 78, 79, 133 United Nations Office for Disaster Risk Reduction, 80 United Nations System of Environmental–Economic Accounting, 46 United States of America, 28

V Values, 169, 170 Vivid Economics, 101, 159

INDEX

W Wales, 52, 91, 97, 145 Water, 7, 22, 25, 27, 50, 52, 54, 67, 68, 91, 93, 111, 129, 133, 151, 154, 156 Win–win, 8, 9 Win-win policies, 116, 128, 172

205

World Bank, 15, 36, 74–76, 78, 79, 132, 135, 137 carbon pricing, 73, 80 climate change, 79, 137 World Economic Forum, 2, 12, 76 World Resources Institute, 101, 147, 152 World Wildlife Fund, 2, 99, 147