Authors

• Sudharshan Canagarajah, Global Practice Manager, Climate Strategy, The World Bank
• Martin Brownbridge, Independent Consultant

Abstract

In most low-income countries (LICs) and lower middle income countries (LMICs), the vast majority of expenditures on climate action are funded from public resources. As such, the government budget plays a central role in the implementation of climate action investments and policies. In economies with very limited fiscal space, it is essential to fully integrate (mainstream) climate action into the budget policy and planning process to ensure that expenditures on climate action are prioritized, cost effective, complement broader developmental objectives and do not undermine long term fiscal and macroeconomic sustainability.

The paper sets out a strategy for mainstreaming climate action into the budget process, building on the foundation of policy based budgeting and medium-term budget frameworks (MTBF) which have been adopted in many LICs and LMICs. The strategy should comprise four components.
First, a top-down medium-long term macro-fiscal framework which determines the projected available resources for aggregate budget expenditures, including those for climate change mitigation and adaptation.
Second, detailed Long Term Mitigation Strategies (LTS) and National Adaptation Plans (NAP) which are consistent with the long-term budget resource constraints and include fully costed priority projects which can be considered for inclusion in the budget; the LTS and NAP should be multi-sector collaborative exercises given that multiple line ministries will be responsible for implementing different climate action projects and programs.
Third, an institutional process, which commands political support, for determining how large a share of scarce budget resources can be allocated to climate action and, within climate action, what the budget priorities should be (e.g. the balance between mitigation and adaptation).
A fourth component is for the Ministry of Finance to incorporate the fiscal risks of climate change (physical and transition risks) into fiscal risk analysis and draw up a strategy for managing these risks.

Read the paper

To read the the full policy note, download the document below.