PFM blog

Tracking the climate relevance of expenditure: key choices countries must make

17 November 2021
Alta Folscher 1

Alta Folscher is a PFM and Institutional Specialist at Mokoro. The blog is based on her presentation at the IBFCCA peer learning and exchange event on the integration of climate change into budgeting and finance. Alta is currently supporting the National Treasury of South Africa with designing and piloting their climate budget tagging reform.

Increasingly, governments worldwide are implementing climate expenditure tracking methodologies to identify, quantify, classify, and tag the relevance of their public expenditure for addressing the causes and effects of climate change.[1]

Countries’ choice of main instrument to track climate expenditures should be determined by what they primarily hope to achieve. If the main objective is to report against country and global commitments, periodic discrete analytical exercises could estimate climate public expenditure. Since 2010, ten African countries[2] have undertaken Climate Expenditure and Institutional Reviews (CPEIRs) assessing the integration of climate policies and strategies into expenditure and associated institutional arrangements. While these studies generally have not been repeated, in principle, regular implementation would provide sufficient information to report against commitments.

Countries that are also interested in budget allocations taking better account of climate change, may opt to imbed climate budget tags (CBTs) in their annual budget cycle processes and systems to generate real-time information in the budget process. In Africa Cape Verde, Ethiopia, Kenya, Nigeria, Rwanda, South Africa and Uganda all already either have climate tags in place, or are in the process of designing, piloting and implementing tags in their budget systems. In many cases, such as in Ghana, Kenya and Uganda, CPEIRs paved the way for CBT systems, providing necessary diagnostic assessments for more suitable CBT systems.

Countries that want to improve the design of expenditure programmes aimed at climate change, could in addition (or only) undertake climate change impact appraisals (CCIAs) of selected sectors and programmes. These in-depth studies assess the implications of climate change for the effectiveness of expenditure. Thailand, for example, assesses the implications of climate change for expenditure effectiveness in priority climate change programmes.

Whichever instrument is selected, countries need to make a series of methodological choices about the coverage and the technical design of their tracking exercise.

Countries must first decide which expenditures they want to track. Most countries assess both operational and investment expenditures (e.g. Ghana, Kenya, Uganda). Many however limit tracking to the most relevant climate change sectors or opt for piecemeal extension of coverage (e.g. Ethiopia). Covering central government expenditures (for the sectors covered), including earmarked climate-relevant transfers to subnational levels, is standard in most systems. In addition, some countries tag sub-national expenditure (e.g. Kenya, South Africa). and/or assess transfers to public enterprises for climate relevance (Philippines). Not one country yet assesses the expenditure of public agencies and enterprises in full, but South Africa is considering whether and how it could be done in its CBT design and piloting exercise.

A second series of decisions concerns how broadly or narrowly countries define climate relevance and how precise their estimates of climate expenditure are. Countries may say that expenditures are only climate relevant if they clearly finance the climate strategy. This approach is used in Ghana. Alternatively, countries may want to cast a broader net so that their information is comparable over different strategy periods. Then they would provide an overarching definition of climate adaptation and mitigation – often based on the OECD DAC definitions – with indicative lists of typical activities that could be marked (by sector), as in Kenya.[3] Countries that want to both catch all climate relevant expenditure and track policy and strategy implementation, can identify all expenditures that are relevant according to standing definitions, and then classify the tagged expenditures according to country policies, as in Uganda.

Countries may opt to simply tag all identified expenditures as climate relevant (a yes/no binary tag, used in Uganda). Countries wanting more precise information, need to estimate the share of an identified relevant expenditure that is specifically to climate change objectives (as opposed to other development objectives). In addressing this methodological challenge, many countries opt for an objective-based system, in which they assess the degree to which climate change mitigation or adaptation is (explicitly) part of the objectives of an expenditure. Many objective-based systems use the three Rio marker categories (assessing whether climate is the principal, a significant or a not targeted objective of expenditures); some systems add categories for more differentiation in the scoring of expenditures. Alternatively, countries can opt to assess the benefits of an expenditure taking climate change into account, versus the benefits in the absence of climate change. The net climate benefit then determines the share of expenditure that is assessed as specifically relevant for climate change.[4] In Africa, Malawi did rapid benefits-based assessments of spending in its CPEIR. In South-East Asia, the finance ministries of Thailand and Cambodia do ongoing benefits-based assessments of selected programmes or sectors.

Countries must thirdly decide whether and how they will imbed climate expenditure tracking in budget processes and systems. Hardcoding tags into standard chart of accounts and financial management systems is common where countries have modern integrated financial management systems and prepare budgets on-system, like Ghana, Kenya, and Uganda. Key other budget system choices are whether both budgets and outturns will be tagged and how, what reports will be produced and how information will be used for decision-making. Being clear on the latter, is key for the effectiveness of climate expenditure tracking systems, to address climate change and climate change impacts.

Finally, countries must decide where they will develop capacities to decide and verify tags and analyse the information. Issues to consider are the quality of assessments, the ownership of the tags, and the incentives that are created to integrate climate change into budgets across the system.

In this series of decisions countries should ask themselves what the primary purpose of tracking climate expenditures is and how institutionalisation needs limit choices. This is because there are obvious trade-offs between the complexity of a country’s approach and methodology, the coverage it wants to achieve and where the work gets done. Methodologies that produce more precise estimates of the relevance of the expenditure with much more detailed classification, require much stronger capacity to be rolled out to all sectors and multiple levels of government. For any set of choices, stress testing underlying system and human resource capacity through piloting is desirable.

[1] Some countries add a third category, of expenditure on climate-related response and recovery.

[2] Different to most of the other choices set out here, where for example a binary tag would not exclude adding more sophisticated options later or for only parts of the system, with some information comparability, objective-based and benefit-based assessment are mutually exclusive. Countries can switch from one to the other, but the information will not be comparable.

[3] See World Bank. 2021. Climate Change Budget Tagging: A Review of International Experience. Equitable Growth, Finance and Institutions Insight. World Bank, Washington, DC. link for a discussion of how different countries have designed expenditure tracking systems. Information on country cases is drawn from this study, from Mokoro/OneWorld, 2020, International Experience on CBT, unpublished; Mokoro/OneWorld, 2020, Options Report for CBT in South Africa, unpublished; and published country climate expenditure tracking guidelines and reports.

[4] Amongst other, Benin, Ethiopia, Kenya, Mozambique, Rwanda and Uganda.

Sign up to the CABRI Newsletter