Aligning
Public Finance
Aligning
Public Finance
Ensuring that public funds support climate goals is key to successfully funding an NDC. For many countries, domestic financial flows are the largest source of finance for achieving their climate goals.
Relevant financing flows include a country’s revenue, expenditures and debt load. They can include anything that flows through government and/or state-owned enterprises and national development banks. The following instruments and policies put the might of public finance and its massive throughput behind climate action. They ensure that public expenditures align with climate solutions, and that NDCs are not undermined in other parts of the budget at all levels of government.
Greening public investment is a key step for governments seeking to align their public expenditures with their climate goals.
What Does It Mean to Green Public Investment?
Greening public investment means that governments make direct investments in green projects that align with climate targets. Public funds are used to directly support climate initiatives, or to integrate climate into projects in other sectors. Focusing on climate-smart infrastructure, climate-smart technologies, climate-linked social welfare programs and other climate investments can help governments boost new and growing industries while phasing out support for initiatives that conflict with climate goals.
By mainstreaming climate into public budgets and related decision making, governments can incentivize and guide the flow of public resources into effective climate action. Through the budget preparation process, they can spell out annual and medium-term priorities that integrate climate. They can also provide guidance to sub-national governments and semi-public entities, such as state-owned enterprises. Additional tools, such as spending requirements for climate impact assessments and climate-sensitive cost-benefit analysis, can help to green government-funded initiatives.
What Are Some Examples of Green Public Investment and Spending Incentives?
There are many ways in which governments can work to channel public funds toward climate initiatives. These include specifically identifying and funding climate projects or requiring analysis in public spending measures.
Table 1 | Examples of Mainstreaming Climate Into Public Investment
| Examples of mainstreaming | Description | Example |
|---|---|---|
| Directly fund climate-focused initiatives | Government pays for programs that specifically aim to support climate goals | The United States Infrastructure Investment and Jobs Act has committed $15 billion for low-carbon transportation. |
| Provide budget guidance that calls for integration of climate goals | Budget circular provides guidance to sub-national governments on climate requirements they will need to meet to gain access to certain lines of funding | In India, the Finance Commission considers forest cover as a criteria for revenue-sharing between federal and state governments. |
| Require climate-related analysis in public spending | Regulations require governments to conduct climate impact assessments, cost-benefit analyses or similar on major projects or programs | The UK’s Green Book establishes requirements for project development, including options analysis and cost-benefit analysis. It includes climate mitigation and adaptation. |
Sources: WRI authors, Strengthening Infrastructure Governance for Climate-Responsive Public Investment (imf.org)
What Are the Benefits of Greening Public Investment?
Using public funds to invest in climate action can boost finance available for climate solutions. National, subnational and local governments make significant investments in public works and government programs, from roads to schools and social protection schemes. Ensuring that this funding is spent on activities that support climate action can have a significant positive impact.
Greening public investment helps avoid inconsistencies in government policies and action. By integrating climate change into public budgets and investment decisions, governments can make sure that investments support rather than undermine the nation’s climate resilience and emission reduction efforts. Such actions can also provide clarity and coherence to public climate efforts and enable collaboration between different parts of the government.
What Are the Challenges of Greening Public Investment?
Effective mainstreaming of climate within government budgets requires strong cooperation. This includes collaboration by stakeholders across all sectors and levels of government. For subnational governments, regional economic and political dynamics could be at play, which can be at odds with elements of the national government’s climate action plan.
Mainstreaming climate into investments calls for new skills and data. Investments in new technical expertise and technologies, as well as new types of stakeholder engagement processes, may be needed. To integrate climate into project or program development, governments must also grapple with climate uncertainties, potentially applying “no regret” planning approaches.
Tensions between climate incentives and high-emission sectors must be resolved. It will inevitably be more difficult to integrate climate considerations into some sectors than others. Economic and political realities can complicate efforts to green government budgets and revamp historic, entrenched systems of spending.
Conclusion
Integrating climate change into public budgets and investing in climate initiatives is essential to increase climate finance interventions nationally and sub-nationally. A variety of tools are available to governments as they seek to develop and mainstream climate spending. These tools range from integration of climate into budget circulars to implementation of mandatory climate impact assessments for government-funded investment projects and programs. Most countries will benefit from implementing a range of policies, regulations and guidance to ensure that public investments consider and prioritize climate action.
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Public sustainable procurement standards can drive government and private sector stakeholders to align their actions with climate goals.
What Is Sustainable Procurement?
Public procurement is a large contributor to the global economy; the World Bank estimates that it makes up about 12% of global GDP. As large purchasers of goods and services, governments can make a significant difference by setting standards and norms that integrate climate mitigation and adaptation considerations.
Sustainable procurement, also referred to as green procurement, is the process of ensuring that government purchases support sustainable goods and services. A sustainable procurement process allows governments to ensure that public spending is in line with government priorities, and also encourages private sector adoption of sustainability standards. Through it, the public sector purchases goods, works, services and utilities in a way that promotes sustainability goals, including climate mitigation and adaptation. These standards are changing the way governments engage with supply chains, suppliers and service providers.
What Are Some Examples of Sustainable Procurement Standards?
Many countries have started to implement sustainable procurement standards (see Figure 1). In the EU, for example, the Green Public Procurement policy of the European Commission bans public purchase of some high-emission vehicles, inefficient light bulbs and some electric appliances. The United States’s Federal Buy Clean Initiative promotes the public purchase of construction materials and products with lower embodied greenhouse gas (GHG) emissions. Smaller economies are also making progress on sustainable procurement standards. Uruguay’s Advisory Council on Sustainable Public Procurement, established in 2018, includes members from a variety of ministries, including environment, finance and energy, and is responsible for determining public procurement criteria.
Several international and regional initiatives support climate standards in procurement. These have a particular focus on hard-to-abate sectors such as steel and cement. Such initiatives often bring together the public and private sectors to determine government procurement standards. The Sustainable Public Procurement (SPP) approach, proposed by the UN Environment Programme, helps countries advance from planning to implementation of procurement policies. In addition, the Industrial Deep Decarbonization Initiative by the United Nations Industrial Development Organization works with governments and others to standardize carbon assessments through the lifecycle of key industrial products and establish targets.
Box 1 | Austria’s sustainable procurement policy
The government of Austria recently introduced the Federal Act for Public Procurement and National Plan on Sustainable Procurement. It includes 14 product groups, from buildings to waste collection, which follow the EU’s ecolabel standards. The city of Vienna has established Ecobuy, a green procurement program which is reducing CO2 emissions by about 15,000 tons annually.
Sources: Global Efficiency Intelligence
What Are the Benefits of Sustainable Procurement?
Sustainable procurement standards that are climate-sensitive allow governments to walk the talk by aligning their investments with stated climate goals. Using these funds to support purchases that align with climate policy can have a noticeable impact on a country’s attempts to reach its target.
Public procurement impacts the private sector as well as the public. Sustainable procurement standards drive private sector climate action by ensuring a market for sustainable goods from the government. By ensuring sustainable procurement, investments in infrastructure, energy, buildings and other industries tend to become cleaner, since companies delivering goods and services to the public sector have more incentives to transform their business models and align with climate goals.
What Are the Challenges of Sustainable Procurement?
Establishing credible standards for sustainable procurement and securing commitments from government stakeholders can be a difficult and lengthy process. Many different government ministries and stakeholders are involved in the development and adoption of sustainable procurement standards, since all areas of government procure goods from the private sector. Market studies and pilot tenders can be expensive and time-consuming.
Sustainable goods may not yet be available in the quantities needed or from traditional government suppliers. Implementing new procurement standards may require a transition period while suppliers adjust their operations and supply chains to comply with the new standards. Products may also be more costly, at least initially, until production is ramped up.
Monitoring and verification of how sustainable procurement policies are implemented can require complex institutional arrangements. Once the sustainable procurement policy is implemented, it is essential for the government to monitor and report on how rules and guidelines are being followed.
Box 2 | Steps for setting up procurement standards
Getting started. Perform a stakeholder mapping exercise and a national legal review for public procurement. Define a governance structure.
Commit. Identify sustainable procurement policies and draft a policy statement.
Plan. Prepare an action plan, including main actors and the sequence of actions and objectives. Define specific criteria for sustainability, monitoring and evaluation.
Pilot. Launch pilot tenders with the purpose of testing priority products.
Implement. Implement full procurement policy. Monitor and adjust as needed.
Conclusion
Sustainable procurement standards are strong mechanisms that governments can use to drive sustainable and climate-aligned private investments. By setting up the rules of the game, governments commit to a new way of doing business in an impactful area that involves supply chains, infrastructure, energy sources and other large GHG contributors. Many countries have successfully implemented sustainable procurement policies, with 69% of OECD countries now implementing and measuring Green Public Procurement. Despite this progress, there is still a long way to go, but the opportunities are significant and worth the effort.
Phasing out fossil fuels is a complex political and fiscal process that can help governments achieve climate goals.
What Are Fossil Fuel Subsidies?
Fossil fuel subsidies are economic incentives intentionally or unintentionally provided by the government that result in benefits to the fossil fuel industry. These subsidies sustain national industries and energy consumption patterns, often by artificially decreasing the cost of energy. They impact energy investments and usage in households’ industry, transportation, infrastructure, agriculture and more.
Fossil fuel subsidies can be explicit or implicit. According to the IMF, most subsidies are implicit. These take the shape of air and water pollution, climate impacts and similar externalities for which the fossil fuel industry does not pay. Explicit subsidies are actions the government takes to deliberately reduce the cost of energy (electricity, fuels, etc.). Fossil fuel subsidy reform typically involves tackling these explicit subsidies.
Explicit subsidies can take different forms. Subsidies often show up as tax breaks for the fossil fuel industry. Historically, they were designed to lower the cost of fossil fuel production and incentivize new domestic energy sources. Subsidies also take the form of direct government payments to reduce the cost of fuel to consumers.
According to the International Energy Agency (IEA), explicit fossil fuel subsidies more than doubled from 2021 to 2022, reaching $1 trillion. These subsidies grew despite an emphasis in the Glasgow Climate Pact that the goals of the Paris agreement could not be reached without a phase-out of these subsidies, as well as a commitment from 197 countries at COP26 to accelerate efforts to remove inefficient subsidies.
What Is Fossil Fuel Subsidy Reform?
Subsidy reform aims to phase out fossil fuel subsidies and their impact on a country’s national energy matrix. Its objective is to stop support for fossil fuel production that not only costs the government money but also undercuts climate goals. Reforms typically help to reduce government subsidization of fossil fuels gradually, until a total phase out by a specific deadline. They are constructed using baseline and NDC scenarios at a national level. While fossil fuel subsidy reforms have advanced in certain places (see Table 1), countries still show an overall increase in subsidies for fossil fuel production and consumption.
Table 1 | Examples of Fossil Fuel Subsidy Reforms
| Country | Fossil fuel subsidy reform policies |
|---|---|
| Indonesia | With a roadmap to achieve net zero by 2060, Indonesia has focused on a people-centered transition and a fossil fuel phase-out. This is an update from the country’s NDC, which had set a fossil fuel share reduction to 69% by 2050. In 2014, Indonesia approved reforms to remove subsidies from fossil fuels, including gasoline. These funds are being reallocated to welfare and infrastructure projects in regions and villages. |
| India | Despite economic constraints, the Indian government has made progress in cutting fossil fuel subsidies, applying a tax on coal, and significantly increasing subsidies to renewable energy. In 2015-2016, 24% of the new tax on coal went to the National Clean Energy and Environment Fund (NCEEF). In 2017, as state-level budgets experienced large deficits revenue from the tax was reprioritized from funding the NCEEF to meeting funding shortfalls. |
Sources: WRI authors, IISD 2016, IISD 2018
What Are the Benefits of Fossil Fuel Subsidy Reform?
One key benefit of subsidy reform is an evening of the playing field between fossil fuels and other sources of energy. Reducing fossil fuel subsidies can make renewable energy prices more competitive and thus boost investments in renewable energy, resulting in reduced emissions.
Reducing fossil fuel subsidies can also create additional financial resources for the government. These resources can now be used for other purposes, including mitigating negative impacts for poorer populations—for example, providing direct payments to households to make up for increased transportation costs.
What Are the Challenges of Fossil Fuel Subsidy Reform?
Removing subsidies for fossil fuels is often a complex process. Even with financing and economic plans in place, phasing out fossil fuel subsidies is a delicate matter. Subsidies for both production and consumption may be supported by strong political constituencies.
Without plans to mitigate the effects, subsidy reforms can lead to higher prices, creating a lack of political and public support. Remedies and equity considerations must be put in place to offset these impacts through redistribution of any resulting new revenue sources from the fossil fuel industry when subsidies are removed.
Fossil fuel subsidies are still expected to constitute large parts of national economies in the coming years. Phasing out fossil fuels will affect many countries’ economies, since large infrastructure projects have already been initiated and many employees will be affected.
Conclusion
Fossil fuel subsidies are large contributors to the global economy, but they are also major contributors to climate impacts that undermine global growth and public health. Many countries’ development pathways remain reliant on government incentives provided to households and the fossil fuel industry. Despite the complexities of fuel subsidy reform, the momentum to reform subsidies is growing, and many countries have begun to take gradual and realistic steps toward this goal.
If structured correctly, subsidy reforms can have a positive impact on development and equality. Reducing fossil fuel subsidies and, by extension, the use of fossil fuels can have a positive impact on the health and well-being of people around the world. Saved financial resources can be used to help support socially beneficial programs, including efforts to counteract negative effects resulting from shifts in subsidies.