Global Climate Change Alliance: Intra-ACP Programme Training Module Mainstreaming Climate Change

1. Global Climate Change Alliance: Intra-ACP Programme Training ModuleMainstreaming Climate Change Module 6Mainstreaming climate change in the budgetary process Ms Isabelle MamatySenior ExpertClimate Support Facility

2. Mainstreaming climate change in the budgetary process • Learning objectives: • To better understand the budget formulation process • To learn about the best entry points for integrating climate change into the budgetary process at national level • To provide a brief introduction of existing external sources of finance • Expected outcomes: • Increased knowledge on potential entry points for mainstreaming climate change into the national budget process • Increased awareness on importance of ensuring that climate change is included in the budget according to national policy

3. Why mainstreaming climate change in the budgetary process ?

4. Budget consolidation Revenues Expenditures Debt Domestic Revenues Salaries Operational External Revenues including Subsidies and Loan Transfer including International dotations Investment- consolidated budget

5. Why mainstreaming climate change into budget process ? • Climate change is a cross cutting issue and will impact on all sectors • any prevention measure in the national budget will have major economic benefits while the cost of inaction may be very high and set back national economies for many years or even decades • avoiding the costs associated with climate change impacts liberates national budgets for other development priorities such as education, health… ……However for that to happen there is a need to: • raise awareness of all the ministries on the importance of climate change impacts • Inform all the ministries on how to define the costs of climate change related measures to be submitted to the budget office

6. Why mainstreaming climate change in the budgetary process? (2) • Mainstreaming CC in the budgetary process allows to: • ensure that adequate resources are allocated to high priority mitigation and adaptation measures; • raise additional revenues from taxes, tariffs, and pollution charges related to climate change response measures; • ensure that the unintended effects of budgeted activities in non-environmental sectors don’t exacerbate climate change problems; • balance internal and external sources of funding for climate-related activities

7. Examples of Climate-related policies and measures • increasing or introducing climate-based taxes and charges (like a carbon tax or pollution charges); • increasing climate-based subsidies (e.g. for investment in renewable energy) and budget allocations for those subsidies; • removing or redesigning perverse taxes and subsidies that exacerbate climate change; • increasing budget allocations and tax rebates for activities with favourable climate effects; • stipulating climate-based limits or goals as budget rules to govern resource allocation

8. Implications of climate-related policies and measures for public revenue and expenditure

9. Implications of climate change integration on the revenue side Taxes on economic activities related to climate adaptation & mitigation measures Carbon tax / Taxes on high-emission activities Foreign grants & other financial transfers related to adaptation & mitigation Growth effects from increased competitive-ness R E V E N U E S + - Revenues Reduced taxes on activities that shrink or fail to develop as a result of adaptation or mitigation policies

10. Implications of climate change integration on the expenditure side Subsidies for adaptation & mitigation-related activities Current expenditures in relation to adaptation & mitigation activities & specific infrastructure maintenance Public investment (capital expenditure) in adaptation and/or mitigation-related infrastructure R E V E N U E S + - Reduced subsidies for fuel consumption and other high-emission activities Reduced spending on health care, infrastructure replacement etc. as a result of successful adaptation measures Expenditures

11. Linking the budget to policy objectives and expected results

12. Key stages in the budget preparation Formulation Macro-economic basis Budget policy outline Preparation of revenue and expenditure targets Submission of sector plans within those ceilings Adoption By Parliament Execution By sector Ministries Control, audits Auditor general or similar agencies

13. Linking spending to policy and results, with a medium-term outlook National objectives and strategies Medium-term sector plans Medium-term budget perspective or expenditure framework Annual budget Implementation & service delivery Performance monitoring

14. The medium-term expenditure framework (MTEF) • A forward-looking budgetary planning tool covering a 3 to 5-year period • systematically links strategic objectives (national/sectoral) and related outputs/outcomes with actions required to achieve them, corresponding expenditures and resources • supports the prioritisation of expenditures and the predictability of resources • facilitates performance monitoring • Can be established at the national level (inter-sectoral allocations)as well as the sectoral level (intra-sectoral allocations)

15. In practice What is the practice in your respective countries? • MTEFs are rather sophisticated tools, and few countries have full-fledged MTEFs • The preparation of medium-term projections of national and/or sector expenditures is a good starting point • The uncertainties associated with projections and forecasts should be recognised

16. Entry points for climate change mainstreaming

17. Guiding questions for engaging in the budgetary process • Are budget planning and expenditures being directed toward the appropriate priorities in view of adaptation and mitigation?* • Do recent changes in budget allocations and expenditures provide evidence of increased attention to adaptation to climate variability, disaster preparedness, low-emission development options? • Do public investment decisions consider geographical distribution of climate risks and vulnerabilities?** • How can the revenue-generating, budget planning and allocation, and expenditure management systems be improved and/or revised to enhance the contribution of relevant economic sectors to adaptation, climate-resilient and low-emission development while supporting poverty reduction? • Source: UNDP-UNEP (2011) & World Bank (2008)

18. Climate change at the resource allocation stage • The mainstreaming of climate change requires: • reallocating funding to more vulnerable and/or priority sectors and regions • providing funding for adaptation- and/or mitigation-specific plans or activities • adding climate change considerations to the criteria for screening and selecting projects and investments • making room for ‘cross-sectoral’ activities (e.g. DRR) • This process typically involves a mix of top-down and bottom-up processes Source: OECD (2009a)

19. Key stages in budget preparation and related entry points (1) Impacts of CC on economic activity & growth Impacts of CC adaptation/mitigation on economic activity & growth Extra costs of adaptation / mitigation measures Extra resources required / pledged Extra revenues / cost savings resulting from adaptation/mitigation Re-allocation of funds in support of adaptation/ mitigation objectives

20. Key stages in budget preparation and related entry points (2) Instructions on costing adaptation/mitigation policies & measures Costing & integration of adaptation/mitigation policies & measures Use of climate risk screening procedures Prioritisation of adaptation/mitigation policies & measures Discussion of adaptation/mitigation policies & measures

21. Keeping track of climate-related expenditures • During budget preparation, implementation, monitoring and reporting, ‘keep track’ of main climate-related public expenditures • Adapt the budget classification • ‘Flag’ incremental climate-related expenditures embedded in ‘non-climate’ programmes • This is important for: • monitoring the implementation of climate-related measures in national and sector strategies • reporting to the UNFCCC (national communications) • securing eligibility for funding from specific climate adaptation/mitigation funds

22. Monitoring climate-related finance: climate markers • Statistical codes developed by the OECD (DAC) to monitor the amount of aid resources targeted at adaptation and mitigation • Could be adapted for application to the national budgets of OECD and non-OECD countries Source: OECD-DAC (2011)

23. Climate markers: eligibilitycriteria – Adaptation Adaptation intends to reduce the vulnerability of human or natural systems to the impacts of climate change and climate-related risks, by maintaining or increasing adaptive capacity and resilience. This encompasses a range of activities from information and knowledge generation, to capacity development, planning and the implementation of climate change adaptation actions. • An objective of adaptation to CC is explicitly mentioned in the intervention documentation; and • The intervention contains specific measures targeting the following definition:

24. Climate markers: eligibility criteria – Mitigation • The intervention contributes to: • the mitigation of climate change by limiting anthropogenic emissions of GHGs, including gases regulated by the Montreal Protocol; or • the protection and/or enhancement of GHG sinks and reservoirs; or • the integration of climate change concerns with the recipient countries’ development objectives through institution building, capacity development, strengthening the regulatory and policy framework, or research; or • developing countries’ efforts to meet their obligations under the Convention.

25. Climate markers: decision tree Do any of the intervention’s stated objectives match “criteria for eligibility” of Rio Markers? Yes Would the activity have been undertaken without this objective? No Yes No 2 CC = principal objective 1 CC = significant objective 0 CC not targeted

26. Public expenditure reviews (PERs)

27. Public expenditure reviews (PERs) • A tool for analysing how budget resources are planned, allocated and actually spent across competing claims, objectives and priorities • PERs can be used as a tool for supporting the mainstreaming of climate change • Track adaptation- and mitigation-related expenditures • But also, importantly: focus on public expenditure’s overall contribution to climate-resilient, low-emission development outcomes

28. Entry points for mainstreaming climate-related aspects in a PER Sources: UNDP-UNEP (2011), World Bank (n.d.) GN4

29. Turning words into action

30. Discussion What are the opportunities to mainstream climate change in the budgetary process in your sector or at your level and what are the institutional and capacity needs in your organisation to do so? • Questions and answers • Mainstreaming climate change in the budgetary process • Using Public Expenditure Reviews

31. Presentation of case studies • Presentation of case studies: identification of best practices of mainstreaming climate change into national budget

32. Learning process exercise: Working group • Exercise: Examination of a real world budget statement and analysis of the extent to which climate change is mainstreamed in relation to national policy

33. Securing additional financial resources: External resources and public-private linkages

34. Why additional financial resources ? • Climate finance can play a crucial role in assisting developing countries in facing climate change impacts and making the transition to low carbon economies • The estimates of climate change financing needs of developing countries are as follow *: • mitigation : $500 billion to 1100 billion/year (UNFCC, 2009; World Bank report 2010; UNDESA (WESS, 2010) • Adaptation : 100$ billion to $ 450 billion/year (UNFCC 2007; World Bank 2010; Parry et al. (2009) • Copenhagen Accord (2009) includes** : • Short term finance of $ 30 billion equally allocated to mitigation and adaptation for 2010-2012 (Fast start) • Commitment by developed countries of up to $100 billionfor 2013-2020 to address developing countries needs • Set up of a Green Climate Fund to help mobilize the committed funding

35. Mobilisation of external financial resources • In order to mobilize the existing resources, governments should: • Become familiar with all sources of climate change related funds and set resource mobilization targets for the most promising funds; • Conduct (or request) workshops/seminars on the new sources of funds and the application processes for different ministries; • Consider locating the focal points for external sources of climate funds (such as GEF) in the Ministry of Finance or Planning rather than in a Ministry of Environment; • Issue detailed information to sector ministries on the available funding sources, including accessibility conditions *; and • Ensure that external funds are fully incorporated into national planning processes and not processed as standalone projects.

36. Main sources of external financing (1)

37. Main sources of external financing (2)

38. Main sources of external financing (3)

39. Budget support • The transfer of financial resources of an external financing agency to the National Treasury • Provides extra resources for the national budget • either grants (e.g. EC) or loans (e.g. World Bank) • National procedures apply to the commitment and disbursement of funds • implementation via the national Public Financial Management system => reduced transaction costs, increased ownership

40. Overview of EC budget support modalities (1) • Budget support is provided in the form of: • good governance and development contracts-> support for core government systems and broader reforms • sector reform contracts-> support for sector policies and reforms • state building contracts-> support transition processes towards development and democratic governance • Joint budget support operations are conducted with other donors where such initiatives exist • Usually 3-4 year programmes with annual disbursements

41. Overview of EC budget support modalities (2) 1) A well-defined national or sectoral development or reform policy and strategy to which the budget transfer will contribute 2) Stability-oriented macroeconomic framework 3) Credible and relevant programme to public financial management 4) Transparency and oversight of the budget • General eligibility conditions:

42. Overview of EC budget support modalities (3) • Annual disbursements include two types of ‘tranches’ • fixed tranche:paid in full as long as eligibility conditions are maintained • provides an element of predictability • variable tranche: paid in full or in part based on actual performance against an agreed set of criteria and targets (as long as eligibility conditions are maintained) • criteria/targets in principle taken from the PAF associated with the supported policy or strategy • provides a results-oriented performance incentive

43. National climate funds • Several countries have now established a‘national climate fund’ (trust fund) to: • channel and manage external funding related to CC • leverage existing funds and initiatives (incl. those financed with national resources) • support the mainstreaming of climate-related programmes and projects into national development strategies • Expected benefits: • Alignment of external funding with national priorities • Building of national capacities and institutions • Scaling up of the response to climate change

44. Private-public Linkages Many climate change responses, especially in relation to mitigation will involve the private sector (exp. Energy efficiency), therefore government should: • Involve private sector representatives to the climate change task-force and/or other national committees/councils; • Involve the private sector in setting amended national standards and codes to respond to the challenge of climate change; • Assist the private sector to take up climate change responses by providing incentive schemes, and by initiating public-private partnerships • Identify and seek the support of private enterprise in national climate change initiatives and in particular, the Clean Development Mechanism.

45. Turning words into action

46. Discussion What are the opportunities for accessing external resources to support climate change mainstreaming in your sector? Have you being able to set up public-private partnerships? Have you being able to use budget support? and what are the institutional and capacity needs in your organisation to do so? • Accessing external resources to support climate change mainstreaming • Setting-up public-private partnerships • Using budget support

47. Recap – Key messages • Climate-related policies and measures can impact the national budget in multiple ways • There are entry points for mainstreaming climate change at practically all stages of the budgetary process – including at the stage of ex post evaluation (PERs) • It is recommended to set up systems to keep track of adaptation- and mitigation-related expenditures • Multiple sources of funding exist to support adaptation and mitigation – focus on eligibility and objectives • Where conditions are met, budget support is a suitable modality for supporting CC mainstreaming efforts

48. Key references • Mickwitz et al. (2009) climate policy integration coherence and governance, PEER Report N°2 • OECD (2009a) Integrating Climate Change Adaptation into Development Co-operation: Policy guidance. OECD Publishing, Paris. [Read-only, browse-it edition] Available from: http://browse.oecdbookshop.org/oecd/pdfs/browseit/4309171E.PDF • OECD-DAC (2011) Handbook on the OECD-DAC Climate Markers. Organisation for Economic Cooperation and Development, Paris. Available from: http://www.oecd.org/dataoecd/56/18/48785310.pdf • Petkova N. (2009) Integrating Public Environmental Expenditure within Multi-year Budgetary Frameworks. Available from: http://www.oecd.org/dataoecd/60/6/42898831.pdfOECD Environment Working Papers no. 7. OECD Publishing, Paris • UNDP-UNEP (2011) Mainstreaming Adaptation to Climate Change into Development Planning: A Guide for Practitioners. UNDP-UNEP Poverty-Environment Initiative. Available from: http://www.unpei.org/knowledge-resources/publications.html • ODI (Oversees Development Institute), Implementing a Medium-Term Perspective to Budgeting in the Context of National Poverty Reduction Strategies, Good Practice Guidance Note, ODI, London. • World Bank (2009) The Costs to Developing Countries of Adapting to Climate Change: New Methods and Estimates. The Global Report of the Economics of Adaptation to Climate Change Study, Consultation Draft. World Bank, Washington DC. useful websites: • Carbon Finance website of the World Bank: www.carbonfinance.org • Climate Funds Update: http://www.climatefundsupdate.org/

49. Thank you Contact: Dr. Pendo MARO, ACP Secretariat pendomaro@acp.int or +32 495 281 494www.gcca.eu/intra-acp