[Co-authored with Amandeep Kaur]
A climate responsive budgeting (CRB) for both adaptation and mitigation is a dynamic process in environmental federalism.* A promising framework for CRB has been evolving within the purview of the Public Financial Management (PFM) over the years across selected Asian and African countries including Morocco, Cambodia, China, Nepal, Philippines, Indonesia, Vietnam, Bangladesh, Ethiopia, Uganda, Burkina Faso, Tanzania, Samoa and Thailand. However, India does not have a CRB yet.
India has a National Action Plan on Climate Change. At the international level, along with Mexico, Brazil, and China, India have already developed low-carbon development plans. These development plans mark a milestone in climate change agenda. It is high time these development plans are translated into sustainable financing commitment through budgetary allocations. In this article, we focus on the plausibility of integrating CRB within the PFM in India.
Integrating Climate Financing and PFM
The CRB is a tool for effective application of a “public finance lens” to the climate action strategies, and effectively translates these climate change commitments into budgetary commitments. Methods to integrate CRB within Ministry of Finance can be done by processes of Climate Change Public Expenditure and Institutional Review (CPEIR). Similar to PFM, CPEIR adopts an analytical framework which encompasses six aspects; (i) fiscal rules and sustainability, (ii) strategic resource allocation, (iii) the role of government, (iv) the efficiency and effectiveness of public expenditure, (v) the benefit incidence of public spending (in this case climate sensitive spending) and (vi) the capability of institutions and alignment of incentives. This climate-Public Financial Management (c-PFM) framework tests the consistency between intended and actual outcomes (i.e. the socio-economic and environmental impact of public expenditure policies).
Since National Action Plan on Climate Change has provided a tangible framework to increasingly integrate the United Nations Framework Convention on Climate Change (UNFCCC) requirements into national planning processes and “Intended Nationally Determined Contributions” that are expected to form the basis for climate planning and investment after 2020, the role of the Ministry of Finance in initiating CPEIR is crucial as it ensures transparency and accountability to climate-related public expenditure. This “owning” of CPEIR by Ministry of Finance would also strengthen the Climate Change Plan (Finance) links in the long term and in turn would improve public expenditure efficiency, effectiveness and accountability. In many countries including India the finance and climate ministries work in silo and therefore, climate financing strategies are deeply fragmented across sectors. The CRB can provide an overarching framework for mainstreaming climate finance into public finance and budget management processes in India.
The research bodies such as the Climate Policy Initiative (CPI), OECD and multilateral development banks (MDBs) including the World Bank have accepted a working definition of climate financing as “the capital flows that specifically target low-carbon and climate-resilient development with direct or indirect greenhouse gas mitigation or adaptation objectives or outcomes”. Given the tightened fiscal space, because of FRBM, prioritization of public spending on climate change and on other priorities, and within climate action, on investing in mitigation or adaptation measures stand significant. The challenges of CPEIR are the need for multi-sectoral analytical matrices to capture the climate-related expenditure, the institutional frameworks to design public spending to meet the national commitments in mitigating global emissions and the uncertainty around future climate damages.
A Plausible Roadmap for CRB within FinMin and the Parliamentary Processes
- Inclusion of a chapter in next Economic Survey, the document to be tabled in the Parliament a day prior to Budget, on the plausibility of CRB using the methodology of CPEIR in India.
- Appointment of Expert Group Committee on CRB by the Ministry of Finance, (preferably three months committee), to frame the analytical matrices for CRB and design the institutional mechanisms for implementing it.
- Announcement to be made by the Finance Minister in the next Budget Speech about India’s plausible commitment to conduct the CRB, integrating the recommendations of the expert group committee.
- Reporting of climate responsive spending to be made mandatory by all ministries and agencies, in the following year onwards, in the Budget Circular (which is issued to the line ministries with instructions and policy guidance for the resource allocations).
- Preparation of climate responsive public expenditure matrices using the analytical matrices format provided by the Ministry of Finance by all the spending agencies.
- Consolidation of the matrices on climate spending of the spending agencies by the Ministry of Finance and preparation of a statement on “CRB”, to be opened in the Expenditure Budget, Volume 1.
- Assessment and analysis of the “CRB” Statement, co-opting experts on the subject to the Standing Committees, by the Parliamentary Standing Committees, when parliament goes to recess after the Budget Speech. This will help parliamentarians to initiate an informed debate in the parliament during Vote on Account session when parliament returns after the recess.
* In India, within the federal set up, environmental quality related policy decisions have been taken within the intergovernmental fiscal transfer mechanism by incorporating a terms of reference on climate change in the Thirteenth and Fourteenth Finance Commission, constituted by the President of India. Along with the intergovernmental fiscal transfer mechanisms, the national and subnational budgets should also begin integrating climate change concerns within their own budgetary resources.