Governments have a mandate to responsibly manage fiscal and financial sustainability. National budgets are a primary tool for governments to demonstrate their plans for achieving economic and development goals and priorities. Generally, budgeting in most countries focuses on preparing annual plans for revenues and spending.
Governments, typically through ministries of finance, use various budgetary frameworks, policies and tools to manage national budgets. Mainstream budgetary tools, however, lack consideration of climate, nature and equity dimensions, despite the potential for devastating impacts on national spending and revenues from climate change, nature and biodiversity loss, and rising inequalities on a country’s spending needs, and the need for expenditures to support decarbonization efforts.
Increasingly, countries are starting to realize the value of improving budgetary and fiscal frameworks, policies and practices through green budgeting measures. Green budgeting, according to the OECD, “refers to the use of budgetary policy-making tools to better understand environmental impact of spending choices, and ensure public budgets are aligned with climate and environmental objectives.” Green budgeting tools include using the shadow price of carbon in budgeting, green budget tagging, regular reviews of environmentally harmful tax expenditure and subsidies, green spending reviews and environmental impact assessments.
As of 2022, 24 out of 36 OECD countries surveyed were implementing green budgeting practices. Only 20 of these countries were implementing green budgeting in line with their national climate or environmental strategies, and 16 of them aligned with their nationally determined contributions at the time. Additionally, most countries were implementing green budgeting through administrative practices like budget circulars, while very few required green budgeting through legal requirements (11 countries) or constitutional requirements (0 countries).