Climate   tagging  of budgets, one of the important ways to integrate and channelise green finance in the domestic budgetary system of countries, is a government-led process of identification, measurement, and monitoring of climate-relevant public expenditures. Since the introduction of the climate expenditure tagging systems in Nepal in 2011, many  countries are increasingly falling in line to develop climate budget tagging methodologies. However, tagging is still an emerging international practice; most  countries that currently tag their climate change-related expenditures started doing so only in the last five years. 

The World Bank’s “Climate Change Public Expenditure Institutional Review Sourcebook” (World Bank 2014) outlines early experience with tagging . More recent publications provide insight into climate expenditure tagging from the perspective of development practitioners . A United Nations Development Programme (UNDP) guidance outlines the process of setting up a national climate tagging system and provides a  summary of several methodologies .[i]

International reporting frameworks

 Five international reporting frameworks for climate financial information are well known in the literature.. These frameworks are (i)The OECD’s Rio markers applied to official development assistance;(ii) the European Union’s (EU) methodology for monitoring climate expenditure under the European Structural and Investment Funds; (iii)the multilateral development banks’ (MDBs) joint methodology for tracking climate mitigation finance;(iv) the United Nations Framework Convention on Climate Change (UNFCCC) reporting requirements; (v)the UN’s System of Environmental Economic Accounting. Although there are common elements to these reporting frameworks, they have developed around the same time   to serve different purposes and  do not generate information that is directly comparable. The Rio markers and the MDB methodologies have influenced the design of national climate budget tagging systems, notably through UNDP and World Bank work on Climate Public Expenditure and Institutional Reviews. Developments in international reporting on climate change finance will continue to influence the design of national  budgeting systems in the context alignment with the Paris Agreement.[ii]

Evolution of climate change budget tagging

(i)Country CPEIR (year) (ii)Tagging Supported by Fiscal Years Budget (iii)Tagging Applied Application

(i)Nepal 2011(ii) UNDP 2013–(iii)present Budget

(i)Cambodia 2012 (ii)UNDP 2013–(iii)present Review

(i)Indonesia 2012 (ii) World Bank Group(WBG) 2014–(iii)present Budget

(i)Philippines 2013 (ii)WBG 2015–(iii)present Budget

(i)Ecuador 2017 (ii)UNDP 2016–(iii)present Budget

(i)Ghana 2015 (ii)UNDP 2016–(iii)present Budget

(i)Moldova 2017 (ii)UNDP (iii)Not yet applied Budget

(i)Colombia 2018 (ii)World Resources Institute (WRI )2017(iii) Review

(i)Ethiopia 2014(ii) WBG 2017(iii) Review

(i)Honduras 2016 UNDP, (ii)Global Environment Facility(GEF) 2017–(iii)present Budget

(i)Pakistan 2015 and 2017 (ii)UNDP 2017–(iii)present Budget

(i)Kenya 2016 UNDP, (ii)UNEP 2017–(iii)present Budget

(i)Bangladesh 2012 (ii)UNDP 2018–(iii)present Budget

(i)Ireland 2019–(iii)present Budget

(i)Uganda 2013 (ii)WBG 2019–(iii)present Budget

(i)Odisha (India) (iii)2020 Budget

(i)France (iii)2021 Budget

(i)Mexico (iii)2021 Budget

The objectives of climate budget tagging vary across countries, though for many developing countries resource mobilization figures prominently among their motivations. The stated objectives generally include some combination of various objectives : raising  awareness and communicate climate change policy; align budget allocations with climate change policy priorities by integrating climate change in planning and budgeting; enhance accountability and transparency by reporting on climate-related expenditures; identify financing gaps and investment opportunities; mobilize domestic and international finance; and report on climate finance in the context of international commitments (World Bank 2014; UNDP 2015. Many of the countries reviewed by the global financial institutions  state  that they in-tend to use climate budget tagging to support resource mobi-liization.  It is reported that only Indonesia has used the climate budget tagging system as the basis for a sovereign green bond (SGB) and green sukuk, and Mexico has used its SDG tagging system to support the issuance of an SDG bond. [iii]

Key pillars of the climate finance system

(i)Domestic resource mobilisation (DRM)

Sixty per cent of the estimated investment financing required (and 55% of the incremental need) is expected to come from domestic resource mobilisation.Emerging market Developing Countries(  EMDCs) will need to mobilise domestic resources by an additional 2.7 percentage points of GDP to meet the spending gap by 2030, which is broadly achievable given potential tax capacity and scope for domestic private mobilisation. Fiscal policy will play a critical role.Countries will need to implement a mix of policies to raise domestic revenues and improve spending efficiency. There is significant scope to increase tax revenues in many EMDCs.

(ii)International tax cooperation needs to play an important supportive role.

(iii)Carbon pricing can also be significant in raising public revenues and providing incentives to decarbonise, but its implementation is politically challenging. Countries are likely to use a combination of pricing and non-pricing interventions to accelerate the net zero transition.

(iv)Harmful subsidies globally remain quite large and continue to expand. They weigh heavily on government resources and cause environmental damage. Explicit and implicit fossil fuel subsidies amounted to 7% of global GDP in 2022.

(v)Measures to improve the efficiency of public spending provide opportunities to enhance fiscal space. Evidence shows that countries lose on average about one-third of their infrastructure spending due to inefficiencies.

(vi)The role of finance ministers will be crucial in all of these areas and more broadly on the policy and institutional framework to drive the transition to a low-carbon, climate-resilient economy.[iv]

Sources of climate finance in India

Domestic public finance is the most prominent source of climate finance in India. The government finances climate action through direct budgetary allocations, taxes, subsidies, market mechanisms to leverage private finance, and by facilitating and supplementing climate funds. Climate funds are generally  associated with national climate missions and receive finances from cess collections besides direct budgetary allocations. In 2017–18, 85 per cent of total green finance in India came from domestic sources, with budgetary outlays forming 18 per cent

and Public Sector Undertakings (PSUs) funding accounting for 12 per cent of the total tracked green finance . In 2019 and 2020, green finance tracked across three sectors – clean energy, energy efficiency and

clean transport - was USD 44 billion per annum . Around 87per cent and 83 per cent of this finance was raised domestically in 2019 and 2020, respectively . Of this 60 per cent came from private finance and 40 per cent from public finance through budgetary allocations and PSUs.Trends in government climate finance flows from 2014 onwards show a steady focus on climate mitigation through renewable energy and rural electrification . Climate adaptation has been supported through interventions in agriculture and water sectors, through increased allocation to the budgetary outlays of  Ministry of Environment, Forests, and Climate Change (MoEFCC). [v].

Budgetary response to climate change – 2014 – 23

Year Mitigation Adaptation Others

 The central government’s efforts to finance climate action began in 2010 with a coal cess as a form of carbon pricing. The cess increased from USD 0.71 per tonne in 2010 to USD 5.71 per tonne in 2016. A new Clean Energy Cess was introduced in 2015 after India announced its commitments towards the Paris Agreement. When introduced, the cess was intended  to fund research and development in clean energy. Between 2010 and 2018, about USD 12.35 billion of

cess was collected. With the introduction of the Goods and Services Tax (GST) Compensation Cess in 2017, the Clean Energy Cess was replaced . The GST Compensation Cess has been used to fill state budgetary deficits and fund regional development needs rather than clean energy initiatives. The unspent balance from the NCEEF is also being transferred to the State GST Compensation Fund to compensate the states for loss of revenue.

Market –based mechanisms

Apart from direct budgetary allocations, the government also finances climate action through market-based mechanisms, which have facilitated large-scale renewable energy deployment. Regulatory schemes like the Perform Achieve and Trade (PAT), Renewable Energy Certificates (REC), Renewable Purchase Obligations (RPO) and  Feed-in-Tariffs (FIT) have improved energy efficiency and supported investments in low-carbon generation.

Other financial instruments

These include the tax-free infrastructure bonds of USD 794 million, introduced in 2015 to support renewable energy projects. Such market based policies have reduced tariffs of solar and wind energy and

improved the competitiveness of renewable energy.

Domestic commercial banks contributed nearly 40 per cent of the total tracked finance in 2017–18. Private climate finance included loans, private equity finance, venture capital, partial risk guarantees and green bonds .It was  found that the majority of private finance in 2017–18 consisted of debt,followed by equity. Non-Banking Financial Companies (NBFCs) provided debt financing mainly for the renewable energy generation sector, and Indian banks are increasingly supporting low-carbon transition projects. In 2017, SBI availed a USD 625 million loan from the World Bank to support grid-connected solar capacity (World Bank, 2017).

Many banks like Yes Bank, Exim Bank and SBI have also issued green bonds, but most money raised through this instrument is by government companies like IREDA and NTPC, followed by domestic power producers. Majority of proceeds of the green bonds in the country are being utilised in the renewable energy sector.[vi].

Multidimensional Vulnerability Index

Many island nations  like Samoa which are also on the frontlines of the climate crisis have  had to  rely on borrowing from international lenders at higher rates than the world’s poorest nations, which has effectively prevented them from accessing the funds they need to help themselves.To address these  structural inequalities in international finance, the UN has worked with Small Island Developing States (SIDS) and come out with a new measurement of national income – the Multidimensional Vulnerability Index (MVI) – so that these countries have a basis  to access  funding  they require urgently  for sustainable development   [vii]

There is  a strong case to develop MVI for all countries of South Asia based on climate  and other vulnerability indicators so that  these countries could  access  and channelise green finance  to fulfil their SDG goals.

Green finance taxonomy

A taxonomy for climate finance  will be developed by  India for enhancing the availability of capital for climate adaptation and mitigation. This will support achievement of the country’s climate commitments and green transition.[viii]Experts feel that the taxonomy would be  crucial for channelsing capital towards climate resilient infrastructure and practices.It would facilitate investments in sectors such as shipping ,aviation,iron and steel,and chemicals which are undergoing a transition with their thrust on transiting from  energy efficiency targets to energy reduction targets.

Climate taxonomy  is also expected to  direct funding  towards  green projects by setting clear standards and helping investors decide what is genuine green investment. Countries like China, Sri Lanka and Malaysia already have such green taxonomies to facilitate green investments.The International Finance Commision (IFC) estimates that India would require $10.1 Trillion by 2070 to achieve netzero targets[ix]

While the number estimated by the IFC  is  indeed daunting and the prospects of mobilising green funds will to a large extent depend on what is their actual requirement, which in turn would depend on the basis of estimating the country’s genuine requirement. Climate tagging of budget accompanied with the construction of the MVI along with the presence of a green finance taxonomy are likely to give the much needed clarity for such estimates  and the confidence to investors to make  investments in green projects in order to ensure that India reaches the net- zero targets by 2070  in a sustainable manner.

 (The writer is a retired special secretary, Government of India, and a commentator on economic issues. Views are personal. He can be reached at ppmitra56@gmail.com)