Module 6 - Budget - Global Climate Change Alliance

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Global Climate Change Alliance:

Intra-ACP Programme

Training Module

Mainstreaming Climate Change

Module 6

Mainstreaming climate change in the budgetary process

Ms Isabelle Mamaty

Senior Expert

Climate Support Facility

An initiative of the ACP Group of States funded by the European Union

Mainstreaming climate change in the budgetary process

Learning objectives

: o

To better understand the budget formulation process o

To learn about the best entry points for integrating climate change into the budgetary process at national level o

To provide a brief introduction of existing external sources of finance

Expected outcomes:

o

Increased knowledge on potential entry points for mainstreaming climate change into the national budget process o

Increased awareness on importance of ensuring that climate change is included in the budget according to national policy

2

Why mainstreaming climate change in the budgetary process ?

3

Budget consolidation

Domestic

Revenues

External

Revenues including

Subsidies and Loan

Revenues

Investmentconsolidated budget

4

Expenditures

Debt

Salaries

Operational

Transfer including

International dotations

Why mainstreaming climate change into budget process ?

Climate change is a cross cutting issue and will impact on all sectors

 any prevention measure in the national budget will have major economic benefits while the cost of inaction may be very high and set back national economies for many years or even decades

 avoiding the costs associated with climate change impacts liberates national budgets for other development priorities such as education, health…

……However for that to happen there is a need to:

 raise awareness of all the ministries on the importance of climate change impacts

Inform all the ministries on how to define the costs of climate change related measures to be submitted to the budget office

5

Why mainstreaming climate change in the budgetary process? (2)

Mainstreaming CC in the budgetary process allows to: o ensure that adequate resources are allocated to high priority mitigation and adaptation measures; o raise additional revenues from taxes, tariffs, and pollution charges related to climate change response measures; o ensure that the unintended effects of budgeted activities in non-environmental sectors don

’t exacerbate climate change problems; o balance internal and external sources of funding for climaterelated activities

6

Examples of Climate-related policies and measures

 increasing or introducing climate-based taxes and charges (like a carbon tax or pollution charges); increasing climate-based subsidies (e.g. for investment in renewable energy) and budget allocations for those subsidies; removing or redesigning perverse taxes and subsidies that exacerbate climate change; increasing budget allocations and tax rebates for activities with favourable climate effects; stipulating climate-based limits or goals as budget rules to govern resource allocation

7

Implications of climate-related policies and measures for public revenue and expenditure

8

Implications of climate change integration on the revenue side

+

-

Carbon tax

/ Taxes on highemission activities

Taxes on economic activities related to climate adaptation

R

& mitigation

E measures

V

Foreign grants & other financial transfers related to adaptation & mitigation activities that

E

Reduced taxes on

N

U shrink or fail to

E develop as a result

S of adaptation or mitigation policies

Growth effects from increased competitiveness

Revenues

9

Implications of climate change integration on the expenditure side

+

-

Subsidies for adaptation & mitigationrelated activities

Reduced subsidies for fuel consumption and other highemission activities

Current expenditures in relation to adaptation &

R

E maintenance

E

Public investment

(capital expenditure) in adaptation and/or mitigation-related infrastructure

Expenditures result of successful adaptation measures

10

Linking the budget to policy objectives and expected results

11

Key stages in the budget preparation

Formulation

Macro-economic basis

Budget policy outline

Adoption

Execution

Preparation of revenue and expenditure targets

Submission of sector plans within those ceilings

By Parliament

By sector Ministries

Control, audits

Auditor general or similar agencies

12

Linking spending to policy and results, with a medium-term outlook

National objectives and strategies

Medium-term sector plans

Medium-term budget perspective or expenditure framework

Annual budget

Implementation & service delivery

Performance monitoring

13

The medium-term expenditure framework (MTEF)

A forward-looking budgetary planning tool covering a 3 to 5-year period o systematically links strategic objectives (national/sectoral) and related outputs/outcomes with actions required to achieve them, corresponding expenditures and resources o supports the prioritisation of expenditures and the predictability of resources o facilitates performance monitoring

Can be established at the national level

(intersectoral allocations) as well as the sectoral level

(intra-sectoral allocations)

14

In practice

MTEFs are rather sophisticated tools, and few countries have full-fledged MTEFs

The preparation of medium-term projections of national and/or sector expenditures is a good starting point

The uncertainties associated with projections and forecasts should be recognised

What is the practice in your respective countries?

15

Entry points for climate change mainstreaming

16

Guiding questions for engaging in the budgetary process

Are budget planning and expenditures being directed toward the appropriate priorities in view of adaptation and mitigation?*

Do recent changes in budget allocations and expenditures provide evidence of increased attention to adaptation to climate variability, disaster preparedness, low-emission development options?

Do public investment decisions consider geographical distribution of climate risks and vulnerabilities?**

How can the revenue-generating, budget planning and allocation, and expenditure management systems be improved and/or revised to enhance the contribution of relevant economic sectors to adaptation, climate-resilient and low-emission development while supporting poverty reduction?

Source: UNDP-UNEP (2011) & World Bank (2008)

17

Climate change at the resource allocation stage

The mainstreaming of climate change requires: o reallocating funding to more vulnerable and/or priority sectors and regions o providing funding for adaptation- and/or mitigationspecific plans or activities o adding climate change considerations to the criteria for screening and selecting projects and investments o making room for

‘cross-sectoral’ activities (e.g. DRR)

This process typically involves a mix of topdown and bottom-up processes

Source: OECD (2009a)

18

Key stages in budget preparation and related entry points (1)

Key stages

1. Determination of macroeconomic outlook

2. Multi-year strategic planning: medium-term fiscal strategy, medium-term expenditure framework

3. Determination of next year

’s:

-expected revenues

-acceptable level of deficit

-global level of expenditures

Impacts of CC on economic activity & growth

Key actors

Impacts of CC

Min. of Finance/Planning, statistical office, central bank

Cabinet, Min. of Finance

Extra costs of adaptation / mitigation measures

Extra resources required / pledged

Min. of Finance (Budget Dept,

resulting from adaptation/mitigation

4. Pre-allocation of expenditures among line ministries, according to policy priorities

Dept)

support of adaptation/ mitigation objectives

Key stages in budget preparation and related entry points (2)

Key stages

5. Preparation/Circulation of budget circular & expenditure ceilings

Key actors

Instructions on costing

Min. of Finance (Budget Dept)

measures

6. Costing of sectoral policies, submission of bids

7. Review of sectoral bids, testing of cost estimates, finalisation of budget estimates

8. Negotiations, followed by endorsement of budget

9. Preparation of appropriation bill and budgetary documents

10. Submission of budget to

Parliament

– Discussion & adoption

Costing & integration of adaptation/mitigation

agencies

Min. of Finance (Budget Dept),

Cabinet

screening procedures

Prioritisation of adaptation/mitigation

Min. of Finance, other

Ministries/agencies, Cabinet

Min. of Finance (Budget Dept)

Discussion of adaptation/mitigation

Keeping track of climaterelated expenditures

During budget preparation, implementation, monitoring and reporting,

‘keep track’ of main climate-related public expenditures o o

Adapt the budget classification

‘Flag’ incremental climate-related expenditures embedded in

‘non-climate’ programmes

This is important for: o monitoring the implementation of climate-related measures in national and sector strategies o reporting to the UNFCCC (national communications) o securing eligibility for funding from specific climate adaptation/mitigation funds

21

Monitoring climate-related finance: climate markers

Statistical codes developed by the OECD

(DAC) to monitor the amount of aid resources targeted at adaptation and mitigation

Could be adapted for application to the national budgets of OECD and non-OECD countries

22

Source: OECD-DAC (2011)

Climate markers: eligibility criteria

– Adaptation

An objective of adaptation to CC is explicitly mentioned in the intervention documentation;

and

The intervention contains specific measures targeting the following definition:

Adaptation intends to reduce the vulnerability of human or natural systems to the impacts of climate change and climate-related risks, by maintaining or increasing adaptive capacity and resilience. This encompasses a range of activities from information and knowledge generation, to capacity development, planning and the implementation of climate change adaptation actions.

Climate markers: eligibility criteria

– Mitigation

The intervention contributes to: o the mitigation of climate change by limiting anthropogenic emissions of GHGs, including gases regulated by the

Montreal Protocol;

or

o the protection and/or enhancement of GHG sinks and reservoirs;

or

o the integration of climate change concerns with the recipient countries’ development objectives through institution building, capacity development, strengthening the regulatory and policy framework, or research;

or

o developing countries’ efforts to meet their obligations under the Convention.

24

Climate markers: decision tree

Do any of the intervention’s stated objectives match “criteria for eligibility” of

Rio Markers?

Yes

Would the activity have been undertaken without this objective?

No

Yes

2

CC = principal objective

1

CC = significant objective

25

No

0

CC not targeted

Public expenditure reviews (PERs)

26

Public expenditure reviews (PERs)

A tool for analysing how budget resources are planned, allocated and actually spent across competing claims, objectives and priorities

PERs can be used as a tool for supporting the mainstreaming of climate change o

Track adaptation- and mitigation-related expenditures o

But also, importantly: focus on public expenditure

’s overall contribution to climate-resilient, low-emission development outcomes

27

Entry points for mainstreaming climate-related aspects in a PER

Aspect

Budget planning process

Expenditure trends and categories

Budget financing

Issues to consider

Role of climate-related considerations in allocation decisions

Actual spending on

vs.

allocations to:

* adaptation- and mitigation-friendly measures

* development programmes with a focus on climate risk management, climate-resilient / low-emission development

Availability of recurrent funding

vs.

capital investment for climate risk monitoring and management

Level of and trends in allocations to climate-relevant sectors and agencies

Origin of such allocations (internal

vs.

external funding)

Possibility of increasing resources for climate-resilient development

Sources: UNDP-UNEP (2011), World Bank (n.d.) GN4

28

Turning words into action

29

Discussion

Questions and answers

Mainstreaming climate change in the budgetary process

Using Public Expenditure Reviews

What are the opportunities to mainstream climate change in the budgetary process in your sector or at your level and what are the institutional and capacity needs in your organisation to do so?

30

Presentation of case studies

Presentation of case studies: identification of best practices of mainstreaming climate change into national budget

31

Learning process exercise:

Working group

Exercise: Examination of a real world budget statement and analysis of the extent to which climate change is mainstreamed in relation to national policy

32

Securing additional financial resources:

External resources and public-private linkages

33

Why additional financial resources ?

Climate finance can play a crucial role in assisting developing countries in facing climate change impacts and making the transition to low carbon economies

The estimates of climate change financing needs of developing countries are as follow *

: o mitigation : $500 billion to 1100 billion/year

(UNFCC, 2009; World

Bank report 2010; UNDESA (WESS, 2010) o

Adaptation : 100$ billion to $ 450 billion/year

(UNFCC 2007;

World Bank 2010; Parry et al. (2009)

Copenhagen Accord (2009) includes** :

Short term finance of $ 30 billion equally allocated to mitigation and adaptation for 2010-2012 (Fast start)

Commitment by developed countries of up to $100 billion for 2013-2020 to address developing countries needs

Set up of a Green Climate Fund to help mobilize the committed funding

34

Mobilisation of external financial resources

In order to mobilize the existing resources, governments should:

o

Become familiar with all sources of climate change related funds and set resource mobilization targets for the most promising funds; o

Conduct (or request) workshops/seminars on the new sources of funds and the application processes for different ministries; o

Consider locating the focal points for external sources of climate funds (such as GEF) in the Ministry of Finance or Planning rather than in a Ministry of Environment; o

Issue detailed information to sector ministries on the available funding sources, including accessibility conditions *; and o

Ensure that external funds are fully incorporated into national planning processes and not processed as standalone projects.

35

Main sources of external financing (1)

Source of funding

Development cooperation programmes

Activities supported

Adaptation and mitigation with a focus on development

Preparation and implementation of NAPAs Least Developed Countries Fund

Special Climate Change Fund Adaptation (priority objective), technology transfers, mitigation in high-potential sectors

GEF Trust Fund’s climate change focal area Mitigation projects, adaptation demonstration projects and ‘enabling activities’

Adaptation Fund Projects and programmes that reduce the vulnerability of communities and sectors to CC

Green Climate Fund

(operations not yet started)

Clean Technology Fund

Channel for future multilateral funding for adaptation and mitigation

Demonstration, deployment and transfer of lowemission technologies

Strategic Climate Fund (SCF) - Pilot

Program for Climate Resilience

Climate risk and resilience mainstreaming in development planning

Main sources of external financing (2)

Source of funding

SCF-

Forest Investment Program

SCF - Program for Scaling Up Renewable

Energy in Low-Income Countries

Activities supported

REDD- related activities, sustainable forest management

Deployment of renewable energy sources

REDD+ (various streams of funding incl.

UN-REDD, which promotes the mainstreaming of REDD strategies in national development)

Prototype Carbon Fund

BioCarbon Fund

Preparation, pilot implementation and deployment of national strategies for reducing emissions from deforestation/forest degradation

Pioneering approaches to mitigation that contribute to sustainable development

Carbon sequestration projects in forests and agroecosystems

37

Main sources of external financing (3)

Source of funding

Forest Carbon Partnership Facility

Carbon Partnership Facility

Global Energy Efficiency and Renewable

Energy Fund

Global Climate Change Alliance

Activities supported

Preparation of national REDD strategies, pilot financial transfers based on verified emission reductions from REDD

Long-term, post-2012 mitigation projects

Energy efficiency and renewable energy projects

MDG Achievement Fund, ‘environment and climate change’ thematic area

Clean Development Mechanism

Voluntary carbon markets

Mainstreaming of CC in poverty reduction and national development strategies

Adaptation, DRR, participation in REDD/CDM

Mainstreaming of environmental issues in national and sub-national policies, planning and investment frameworks

Mitigation projects in developing countries

Mitigation projects

Budget support

The transfer of financial resources of an external financing agency to the National Treasury

Provides extra resources for the national budget o either grants (e.g. EC) or loans (e.g. World Bank)

National procedures apply to the commitment and disbursement of funds o implementation via the national Public Financial

Management system => reduced transaction costs, increased ownership

39

Overview of EC budget support modalities (1)

Budget support is provided in the form of: o good governance and development contracts -> support for core government systems and broader reforms o sector reform contracts -> support for sector policies and reforms o state building contracts -> support transition processes towards development and democratic governance

Joint budget support operations are conducted with other donors where such initiatives exist

Usually 3-4 year programmes with annual disbursements

40

Overview of EC budget support modalities (2)

General eligibility conditions:

1) A well-defined national or sectoral development or reform policy and strategy to which the budget transfer will contribute

2) Stability-oriented macroeconomic framework

3) Credible and relevant programme to public financial management

4) Transparency and oversight of the budget

41

Overview of EC budget support modalities (3)

Annual disbursements include two types of

‘tranches’ o fixed tranche: paid in full as long as eligibility conditions are maintained

 provides an element of predictability o variable tranche: paid in full or in part based on actual performance against an agreed set of criteria and targets (as long as eligibility conditions are maintained)

 criteria/targets in principle taken from the PAF associated with the supported policy or strategy

 provides a results-oriented performance incentive

42

National climate funds

Several countries have now established a

‘national climate fund’ (trust fund) to: o channel and manage external funding related to CC o leverage existing funds and initiatives (incl. those financed with national resources) o support the mainstreaming of climate-related programmes and projects into national development strategies

Expected benefits: o

Alignment of external funding with national priorities o

Building of national capacities and institutions o

Scaling up

of the response to climate change

43

Private-public Linkages

Many climate change responses, especially in relation to mitigation will involve the private sector (exp. Energy efficiency), therefore government should:

Involve private sector representatives to the climate change task-force and/or other national committees/councils;

Involve the private sector in setting amended national standards and codes to respond to the challenge of climate change;

Assist the private sector to take up climate change responses by providing incentive schemes, and by initiating public-private partnerships

Identify and seek the support of private enterprise in national climate change initiatives and in particular, the Clean Development Mechanism.

44

Turning words into action

45

Discussion

Accessing external resources to support climate change mainstreaming

Setting-up public-private partnerships

Using budget support

What are the opportunities for accessing external resources to support climate change mainstreaming in your sector? Have you being able to set up public-private partnerships? Have you being able to use budget support? and what are the institutional and capacity needs in your organisation to do so?

46

Recap

– Key messages

Climate-related policies and measures can impact the national budget in multiple ways

There are entry points for mainstreaming climate change at practically all stages of the budgetary process

– including at the stage of

ex post

evaluation (PERs)

It is recommended to set up systems to keep track of adaptation- and mitigation-related expenditures

Multiple sources of funding exist to support adaptation and mitigation

– focus on eligibility and objectives

Where conditions are met, budget support is a suitable modality for supporting CC mainstreaming efforts

47

Key references

Mickwitz et al. (2009) climate policy integration coherence and governance, PEER Report N

°

2

OECD (2009a)

Integrating Climate Change Adaptation into Development Co-operation: Policy guidance

. OECD Publishing, Paris. [Read-only, browse-it edition] Available from: http://browse.oecdbookshop.org/oecd/pdfs/browseit/4309171E.PDF

OECD-DAC (2011)

Handbook on the OECD-DAC Climate Markers

. Organisation for Economic

Cooperation and Development, Paris. Available from: http://www.oecd.org/dataoecd/56/18/48785310.pdf

Petkova N. (2009)

Integrating Public Environmental Expenditure within Multi-year Budgetary

Frameworks

. Available from: http://www.oecd.org/dataoecd/60/6/42898831.pdf

OECD Environment Working Papers no. 7. OECD Publishing, Paris

UNDP-UNEP (2011)

Mainstreaming Adaptation to Climate Change into Development Planning: A

Guide for Practitioners

. UNDP-UNEP Poverty-Environment Initiative. Available from: http://www.unpei.org/knowledge-resources/publications.html

ODI (Oversees Development Institute),

Implementing a Medium-Term Perspective to Budgeting in the

Context of National Poverty Reduction Strategies

, Good Practice Guidance Note, ODI, London.

World Bank (2009) The Costs to Developing Countries of Adapting to Climate Change: New Methods and Estimates. The Global Report of the Economics of Adaptation to Climate Change Study,

Consultation Draft. World Bank, Washington DC.

useful websites:

Carbon Finance website of the World Bank: www.carbonfinance.org

Climate Funds Update: http://www.climatefundsupdate.org/

Thank you

Contact: Dr. Pendo MARO, ACP Secretariat pendomaro@acp.int or +32 495 281 494 www.gcca.eu/intra-acp

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