Monday 14 February 2022
IMF staff have defined ‘green PFM’ “as the integration of an environment and/or climate-friendly perspective into PFM practices, systems and frameworks”.1
A large proportion of the policies adopted by the public sector impact directly or indirectly on the environment. Public expenditure typically comprises some 30% to 60% of national economies: how the public finances are managed can therefore exert significant impact on countries’ responses to environmental challenges. The key objectives are to change behaviours, of public and private sector entities and crucially of individual citizens, in order to better achieve environmental outcomes.
The PFM cycle comprises of four major phases-planning and policy development, budget formulation, budget execution, and financial reporting and audit/assurance. Environmental considerations can – and should be - be embedded in each of these elements.
While the first few examples of green PFM practices date back more than 30 years, it is only over the last decade or that PFM practices have more fully embraced green aspects.
The publication of the World Bank’s ‘Moving Toward Climate Budgeting’  and the establishment of the Organisation for Economic Co-operation and Development (OECD) (the Paris Collaborative on Green Budgeting ) have been instrumental in informing aspects of green PFM.
Recognition of the important role that public finance can play in addressing climate change was demonstrated in 2019 by the adoption of the ‘Helsinki Principles’ by the Coalition of Finance Ministers for Climate Action. These promote national climate action through fiscal policy and the use of public finance. World Bank CEO, Kristalina Georgieva recognised that “finance ministries have a crucial role to play in accelerating the global shift to a low-carbon, climate-resilient growth model”2. 67 countries have endorsed the principles.
The Public Expenditure and Financial Accountability (PEFA) program has also recognised the key role of central finance agencies in addressing climate change, by developing a framework for assessing climate responsive PFM - the PEFA Climate framework - a set of indicators that builds on the PEFA framework “to collect information on the extent to which a country’s PFM system is ready to support and foster the implementation of government climate change policies”.3
While the importance of green PFM is increasingly being recognised, green PFM practices, however, remain nascent in most countries. Only 14 countries are currently implementing some form of green budgeting, and only two countries adopt a green perspective in their performance budgeting framework (Ireland, United Kingdom). About one-quarter of the 31 countries that have undertaken the IMF’s Fiscal Transparency Evaluation publish quantitative information about environmental and climate risks.’1
While there is wide acceptance of the need for public policies that protect the environment, this is not always the case, particularly where a policy results in a detriment to one or more specific groups in society. Pushback against policies designed to address environmental challenges have resulted in governments being voted out of office in some counties and mass public protests in others. Governments are increasingly looking to reduce the risk of pushback by developing a range of mitigation policies, including border adjustment taxes to reflect the regulatory costs borne by domestically produced carbon-intensive products but not by foreign-produced products imports, and ‘just transition’ policies to reduce the impact of adopting environmentally friendly policies on the vulnerable and ensure social equity.
Therefore, while governments are increasingly aware that green PFM can be a powerful tool to pursue and achieve environmental policies, to be effective, further steps are required to implement the required practices and to mitigate the risks of pushback from groups within society that are negatively affected by green policies.
Dr Tim Thorogood is a former public and third sector chief executive now researching green finance at Cardiff Busines School and teaching business studies at the Open University Business School.
Join Tim on his next IASeminars course, Green Public Financial Management, being held virtually on 23rd – 24th March. For more information or to book, please go here.
1Gonguet, Wendling Aydin and Battersby, Climate -Sensitive Management of Public Finances – ‘Green PFM’ IMF staff climate notes
3 Public Expenditure and Financial Accountability Climate Responsive Public Financial Management Framework (PEFA Climate) https://www.pefa.org/sites/pefa/files/resources/downloads/PEFA%20Climate%20Framework%20from%20August%204%202020%20Final.pdf