Towards a new era of tracking climate expenditure?

AUTHOR: Thorfinn Stainforth

Governments around the world have pledged huge sums toward recovery from the COVID-19 pandemic. In some cases, this recovery funding aims to build back better by addressing the climate crisis. But how do governments count public spending toward climate action?

Review of approaches to tracking climate expenditure (IEEP 2021)

Recent years have seen important innovations and calls for more accurate ways of tracking climate spending in public budgets. A new IEEP report, drafted for the National Audit Office of Finland, examines examples of innovations in climate and sustainability tracking in public budgets around the world and discusses some of the methodological challenges behind them.

The very first method for tracking climate-related expenses was developed in 1998 by the OECD through the Rio Marker system. Since then, variants of this system have been implemented in many countries and through the Multilateral Development Institutions (MDIs), several of which are examined in our new report. A system based roughly on the Rio Markers has underpinned the EU tracking methodology since it was introduced in 2014. A similar approach is now also being used by the EU to track biodiversity spending.

Limitations of existing methodologies

However, as climate action has risen in political priority, and especially as increasingly large budgets are being allocated to it, calls for improving the accuracy, comprehensiveness and transparency of existing tracking systems have grown. The relatively simple systems deployed until now cannot easily answer questions about the types of climate action funded, the actual quantitative effect on GHG emissions, or take into account spending with negative effects.

In addition, estimates of climate relevance are often rather crude and may lead to significant over- or under-counting of climate-relevant spending. For example, the European Court of Auditors and IEEP, separately, have made the point that the current EU methodology over-estimates climate-related expenditures, sometimes very significantly, particularly in agricultural policy. However, many other jurisdictions may not systematically account for climate-related expenditures in areas outside of programming explicitly designated as climate-relevant, thus potentially under-reporting.

Pioneering higher ambition

Another challenge has been to estimate the gap between actual or projected spending and spending needed to achieve a government’s climate objectives. Until now, there has been no official attempt to do so by any jurisdiction, which is why a March 2021 report by the European Parliament’s Committee on Economic and Monetary Affairs, calling on the Commission to “start working on the creation of a climate indicator to assess the discrepancy between the structure of Member States’ budgets and the Paris-aligned scenario for each of their national budgets”, is a potentially significant development.

Such an indicator will presumably need to build on some of the innovative work being done in the EU Member States, the OECD, and beyond to track climate spending more comprehensively. Member State budgets dwarf the EU’s; mainstreaming green budgeting concepts across the continent would significantly enhance transparency and accountability.

The most ambitious new systems are the French and Norwegian

The OECD’s Paris Collaborative on Green Budgeting is an important initiative to advance and coordinate efforts toward better “green” budgeting internationally, and it has contributed to several countries, including Ireland and Mexico, revamping their budget tracking procedures, as outlined in IEEP’s report.

The most ambitious new systems are the French and Norwegian. The French system tracks both positive and negative spending across six different areas of environmental sustainability, including biodiversity, using a tagging system. While the details of what specifically is counted under different areas may need refinement, the framework is an important improvement. The Norwegian government has started a process to develop a methodology capable of making quantitative estimates of the effect of the national budget on greenhouse gas emissions, considering negative and positive and indirect effects. While the Norwegian system is still under development it should provide valuable insights into efforts to make direct links between public spending and emissions reductions or increases.

New Elements in the EU Tracking Methodology

Although the EU has made an effort to track climate spending more systematically than most governments, and this tracking methodology has been an explicit tool of climate policy, the EU methodology is – in comparison to some of the new methods – relatively simplistic and likely significantly over-counts climate-related spending.

Although the EU has made an effort to track climate spending, its methodology is relatively simplistic and likely significantly over-counts climate-related spending

The methodology used for the EU’s Recovery and Resilience Facility (RRF) has been updated to reflect definitions from the EU’s sustainable finance taxonomy and the addition of the “do no significant harm” principle is an important improvement. However, despite, significant concerns about what is counted as climate spending, the methodology has remained broadly the same. 

While the EU should be given credit for advancing the practical implementation of climate tracking in its budget there are now models showing how the system could be improved to enhance transparency, effectiveness and accountability around important policy goals such as the 37% climate-related spending target in the RRF. Since the climate tracking methodology is being used as a template for biodiversity tracking, and explicit spending targets are increasingly mobilised as a policy tool, it is vitally important to ensure that best practices are employed in this area.

Incremental evolution in the EU’s tracking methodology, political pressure and technical support for broader use internationally, and bold innovations in France and Norway are driving recent changes in the tracking of public spending on climate action. This supporting administrative architecture is an important component of achieving global climate policy goals effectively, accountably and on time. Political pressure should be applied now to ensure that best practices in this field are deployed as recovery packages and the next round of commitments under the Paris Agreement are agreed upon.

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