1. Module 7 Mainstreaming in the budgetary process Country-led environmental and climate change mainstreaming

2. Implications of environment- and climate- related policies and measures for public revenue and expenditure 2

3. Implications of integration on the revenue side REVENUESREVENUES 3 Revenues + - Taxes on economic activities related to environmental and climate adaptation & mitigation measures Foreign grants & other financial transfers related to environment and climate change Growth effects from increased competitiveness Reduced taxes on activities that shrink or fail to develop as a result of environmental and/or climate change policies Environmental Fiscal Reform Payment for Environmental Services Carbon taxes / taxed on polluting and high- emission activities

4. Implications of integration on the expenditure side REVENUESREVENUES 4 Expenditures + - Subsidies for environmentally -sound and adaptation & mitigation- related activities Current expenditures in relation to environmental and climate change (adaptation/mitig ation) measures Public investment (capital expenditure) in environmental and/or climate change (adaptation/ mitigation) - related infrastructure Reduced subsidies for fuel consumption and other high- emission activities Reduced spending on health care, infrastructure replacement etc. as a result of successful adaptation and environmental measures Elimination on perverse subsidies that promote environmentally damaging activities

5. Linking the budget to policy objectives and expected results 5

6. Linking spending to policy and results, with a medium-term outlook National objectives and strategies Medium-term budget perspective or expenditure framework Medium-term sector plans Annual budget Implementation & service delivery Performance monitoring 6

7. 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) 7

8. In practice 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 8 What is the practice in your respective countries?

9. Entry points for environmental and climate change mainstreaming Entry points for environmental and climate change mainstreaming 9

10. Basic conditions for influencing the budget Understanding the budgeting process and finding the appropriate entry points Coordinating with related policy processes -engaging with the actors who drive the budget Mobilising civil society Coordinating with donors -potential under General Budget Support Advocacy of appropriate financing to sector and subnational bodies 10

11. Environment and climate change at the resource allocation stage Mainstreaming environment/climate change requires: -reallocating funding to more vulnerable and/or priority sectors and regions -providing funding to environmental measures -providing funding for adaptation- and/or mitigation-specific plans or activities -adding environmental and 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) 11

12. Key stages in budget preparation and related entry points (1) Key stagesKey actors 1. Determination of macroeconomic outlook Min. of Finance/Planning, statistical office, central bank 2. Multi-year strategic planning: medium-term fiscal strategy, medium-term expenditure framework Cabinet, Min. of Finance 3. Determination of next year’s: -expected revenues -acceptable level of deficit -global level of expenditures Min. of Finance (Budget Dept, Macroeconomic Dept), Cabinet 4. Pre-allocation of expenditures among line ministries, according to policy priorities Cabinet, Min. of Finance (Budget Dept) 12 Impacts of CC on economic activity & growth; Value of ecosystem services Impacts of enhancing state of environment + CC adaptation/mitigation on economic activity & growth Extra costs of measures Extra resources required / pledged Extra revenues / cost savings Re-allocation of funds in support of environmental and adaptation/mitigation objectives Green accounting

13. Key stages in budget preparation and related entry points (2) Key stagesKey actors 5. Preparation/Circulation of budget circular & expenditure ceilings Min. of Finance (Budget Dept) 6. Costing of sectoral policies, submission of bids All ministries & government agencies 7. Review of sectoral bids, testing of cost estimates, finalisation of budget estimates Min. of Finance (Budget Dept), Cabinet 8. Negotiations, followed by endorsement of budget Min. of Finance, other Ministries/agencies, Cabinet 9. Preparation of appropriation bill and budgetary documents Min. of Finance (Budget Dept) 10. Submission of budget to Parliament – Discussion & adoption Min. of Finance, Parliament 13 Instructions on costing environmental and cc (adaptation/mitigation) policies & measures Costing & integration of environmental and climate change policies & measures Use of environmental and climate risk screening procedures Prioritisation of environmental and climate change policies & measures Discussion of environmental and climate change policies & measures

14. Keeping track of environment- and climate-related expenditures During budget preparation, implementation, monitoring and reporting, ‘keep track’ of main environment- and climate-related public expenditures -Adapt the budget classification -‘Flag’ incremental environment- and climate-related expenditures embedded in ‘non-environment’ and ‘non- climate’ programmes This is important for: -monitoring the implementation of environment- and climate-related measures in national and sector strategies -reporting to the UNFCCC (national communications) -securing eligibility for funding from specific climate adaptation/mitigation and environmental funds 14

15. Monitoring environment and climate finance: environment and climate markers Statistical codes developed by the OECD (DAC) to monitor the amount of aid resources targeted at environment and climate change Could be adapted for application to the national budgets of OECD and non-OECD countries e.g. Kenya is introducing an Electronic Projects Monitoring System (e-PROMIS) for capturing more ‘comprehensive and structures project information’ that will make it easier to identify climate change finance 15 Sources: OECD-DAC (2011); Norrington-Davies and Thornton (2011)

16. Public Expenditure Review (PER) Public Environmental Expenditure Review (PEER) Climate Public Expenditure and Institutional Review (CPEIR) Public Expenditure Review (PER) Public Environmental Expenditure Review (PEER) Climate Public Expenditure and Institutional Review (CPEIR) 16

17. 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 For environmental spending, it can take the form of a Public Environmental Expenditure Review (PEER) 17

18. Public Environmental Expenditure Review (PEER) Common aspects addressed: 1.Levels and trends in environmental expenditure 2.Disaggregation of environmental expenditure by type of activity 3.Distribution of environmental expenditures in relation to env’tl priorities 4.Efficiency and effectiveness of environmental expenditures 5.Government capacity for budget execution 6.Fiscal decentralisation 7.Sustainability of the environmental budget 8.Ratios: current/capital expenditures & salary/non-salary expenditures 9.Links between funding sources and environmental expenditures, and potential for increasing revenues 10.Institutional capacity for environmental planning and management 18 A way of systematically assessing the equity, efficiency and effectiveness of public environmental spending. (Markandya et al, 2006) Source: Markandya et al (2006)

19. PEER example: Rwanda 2009 PEER: Identified low degree of environmental expenditures Recommended MINECOFIN increase resource allocation to ENR sector 2013 Public Expenditure Review for Environment and Climate Change 2008-2012 Since 2004 expenditure on environment and cc increased from 0.4% to 2.5% MINECOFIN reintroduced annex on environment and cc in National Budget Call Circular

20. Climate Public Expenditure and Institutional Review (CPEIR) UNDP tool currently piloted in Asia- Pacific countries Review: -how national climate change policy aims were reflected in public expenditures -how institutions might be adjusted to ensure that financing a response to climate change is delivered in a coherent way across government 20

21. Entry points for mainstreaming climate-related aspects in a PER AspectIssues to consider Budget planning process Role of climate-related considerations in allocation decisions Expenditure trends and categories Actual spending on vs. allocations to: * adaptation- and mitigation-friendly measures * development programmes with a focus on climate risk management, climate-resilient / low-emission development Availability of recurrent funding vs. capital investment for climate risk monitoring and management Budget financingLevel of and trends in allocations to climate-relevant sectors and agencies Origin of such allocations (internal vs. external funding) Possibility of increasing resources for climate-resilient development 21 Sources: UNDP-UNEP (2011), World Bank (n.d.) GN4

22. Complementing with awareness raising tools Findings of public expenditure reviews (PERs, PEERs, CPEIRs) can be complemented with ‘awareness raising’ tools to inform budgeting, e.g. -Economic analyses -Communication and advocacy strategy and work plan 22

23. Beyond-GDP and environmental accounting Indicators available e.g. Adjusted Net Savings, Sustainable Development Indicators, Green Growth Indicators, Human Development Index Source: http://ec.europa.eu/environment/beyond_ gdp/indicators_en.html

24. System of Integrated Environmental and Economic Accounting (SEEA) SEEA Central Framework - international standard by UNSC (2012) Records: Flows of raw materials from the environment to the economy Exchanges of these materials within the economy Returns of wastes and pollutants to the environment WAVES (Wealth Accounting and the Valuation of Ecosystem Services) WB-facilitated global partnership to mainstream natural capital accounting into national accounting system and development planning

25. Turning words into action  Mainstreaming environment and climate change in the budgetary process  Using Public Expenditure Reviews (PER), Public Environmental Expenditure Reviews (PEER) and Climate Public Expenditure and Institutional Reviews (CPEIR) 25 What can be done and what are the institutional and capacity needs in your organisation?

26. External resources for environment and climate change financing External resources for environment and climate change financing Main sources: www.climatefundsupdate.org, UNDP-UNEP (2011)www.climatefundsupdate.org 26

27. Main sources of external financing for climate change (1) 27 Source of fundingActivities supported Development cooperation programmes Adaptation and mitigation with a focus on dvpt Least Developed Countries FundPreparation and implementation of NAPAs) Special Climate Change FundAdaptation (priority objective), technology transfers, mitigation in high-potential sectors GEF Trust Fund’s climate change focal area Mitigation projects, adaptation demonstration projects and ‘enabling activities’ Adaptation FundProjects and programmes that reduce the vulnerability of communities and sectors to CC Green Climate Fund (operations not yet started) Channel for future multilateral funding for adaptation and mitigation Clean Technology FundDemonstration, deployment and transfer of low-emission technologies Strategic Climate Fund (SCF) - Pilot Program for Climate Resilience Climate risk and resilience mainstreaming in development planning

28. Main sources of external financing for climate change (2) 28 Source of fundingActivities supported SCF- Forest Investment ProgramREDD- related activities, sustainable forest management SCF - Program for Scaling Up Renewable Energy in Low-Income Countries Deployment of renewable energy sources Fast Start Finance (finished 2012) Adaptation and mitigation measures in developing countries REDD+ (various streams of funding incl. UN-REDD, which promotes the mainstreaming of REDD strategies in national development) Preparation, pilot implementation and deployment of national strategies for reducing emissions from deforestation/forest degradation Prototype Carbon FundPioneering approaches to mitigation that contribute to sustainable development BioCarbon FundCarbon sequestration projects in forests and agro-ecosystems

29. Main sources of external financing for climate change (3) 29 Source of fundingActivities supported Forest Carbon Partnership FacilityPreparation of national REDD strategies, pilot financial transfers based on verified emission reductions from REDD Carbon Partnership FacilityLong-term, post-2012 mitigation projects Global Energy Efficiency and Renewable Energy Fund Energy efficiency and renewable energy projects Global Climate Change AllianceMainstreaming of CC in poverty reduction and national development strategies Adaptation, DRR, participation in REDD/CDM MDG Achievement Fund, ‘environment and climate change’ thematic area Mainstreaming of environmental issues in national and sub-national policies, planning and investment frameworks Clean Development MechanismMitigation projects in developing countries Voluntary carbon marketsMitigation projects

30. Market mechanisms for mitigation Market mechanisms for mitigation under the Kyoto Protocol: Clean Development Mechanism (CDM) Joint Implementation (JI) Negligible participation of ACP region in the CDM Future of mechanisms in post-Kyoto times? Likely continuity of CDM New Market Mechanisms (NMM) Framework for Various Approaches (FVA) Potential integration of NAMAs and REDD+ 30

31. Opportunities: CDM PoA Bundling together small-scale carbon offset projects under a single CDM programme Example: Improved Cook Stoves for East Africa (ICSEA) Uganda, Kenya, Burundi, Rwanda Reduces 40,000 tCO 2 per year Mitigation, health and gender equality benefits Technology-neutral Fair trade approach 31

32. Voluntary carbon market Prices currently higher in the voluntary than in the mandatory market Different certification options, e.g. 32

33. Transactions in the voluntary market 33 Source: Forest Trends (2013)

34. Sources of external financing for environment (1) 34 Source of fundingActivities supported ACP-EU Water FacilitySupply of water and basic sanitation EU blending mechanisms: EU-Africa Infrastructure Trust Fund (ITF); Neighbourhood Investment Facility (NIF); Latin America Investment Facility (LAIF); Investment Facility for Central Asia (IFCA); Asia Investment Facility (AIF), Investment Facility for Caribbean; Investment Facility for Pacific Environmental infrastructure, e.g. water and sanitation, renewable energy, sustainable transport Global Environment Facility (GEF)Biodiversity, climate change, international waters, land degradation, the ozone layer, POPs Multilateral Fund for the Implementation of the Montreal Protocol (MLF) Activities under the Montreal Protocol on ozone-depleting substances, including industrial conversion, technical assistance, training and capacity building

35. Sources of external financing for environment (2) 35 Source of fundingActivities supported Nagoya Protocol Implementation FundActivities under the Nagoya Protocol on Access to Genetic Resources and the Fair and Equitable Sharing of Benefits Arising from their Utilization (to the CBD) Nordic Environmental Development Fund (NMF) Cleaner production investments, energy-efficiency, environmental investments on farms Other environmental trust funds

36. Sources of information on climate- related finance www.climatefundsupdate.org www.carbonfinance.org 36

37. 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 37

38. Budget support and mainstreaming opportunities General eligibility conditions: 38 Existence of a well-articulated national or sectoral policy/strategy to which the budget transfer will contribute Reasonably stable macroeconomic framework Reliable or improving public financial management Transparency and oversight of budget 1 1 2 2 3 3 4 4 Environmentally sustainable and climate-resilient Potential use of SEA PER, PEER, CPEIR

39. Budget support and mainstreaming opportunities Inclusion of key environmental and/or climate change indicators for disbursement of: fixed tranche (paid in full as long as eligibility conditions are maintained) variable tranche (paid in full or in part based on actual performance against an agreed set of criteria and targets) criteria/targets in principle taken from the PAF associated with the supported policy or strategy provides a results-oriented performance incentive 39

40. Performance assessment indicators on climate change in Bhutan Under GCCA a Renewable Natural Resources – Climate Change Adaptation Action Plan mainstreamed into 11 th 5-year Plan (2013-2018) Activities include budgeting exercise for cc adaptation actions Conditions for release of variable tranche include on ‘climate change adaptation readiness’ of RNR sector’s monitoring and evaluation system and improvement of RNR statistical systems to allow for reliable collection of climate-related data

41. National climate and environment funds Several countries have established a ‘national climate fund’ and/or an environment trust fund’ to: -channel and manage external funding related to CC and environment -leverage existing funds and initiatives (incl. those financed with national resources) -Support mainstreaming 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 and environmental challenges 41

42. Turning words into action  Promote mainstreaming through national budgetary processes  Using (EC) budget support to leverage for mainstreaming 42 What can be done and what are the institutional and capacity needs in your country/sector of responsibility?

43. Recap – Key messages Environment- and climate-related policies and measures can impact the national budget in multiple ways There are entry points for mainstreaming environment and climate change at practically all stages of the budgetary process – including at the stage of ex post evaluation (PERs, PEERs and CPEIR) It is recommended to set up systems to keep track of environment- and climate change-related expenditures Multiple sources of funding exist to support environment and climate change – focus on eligibility and objectives Where conditions are met, budget support is a suitable modality for supporting CC mainstreaming efforts 43

44. Key references Petkova N. (2009) Integrating Public Environmental Expenditure within Multi-year Budgetary Frameworks. OECD Environment Working Papers no. 7. OECD Publishing, Paris Carbon Finance website of the World Bank: www.carbonfinance.org www.carbonfinance.org Climate Funds Update: http://www.climatefundsupdate.org/http://www.climatefundsupdate.org/ Markandya, A; Hamilton, K and Sanchez-Triana, E (2006) Getting the Most for the Money – How Public Environmental Expenditure Reviews Can Help. World Bank Environment Strategy Notes No. 16, September 2006. Climate Public Expenditure and Institutional Review: http://www.aideffectiveness.org/CPEIR http://www.aideffectiveness.org/CPEIR 44

45. References Carbon Finance website of the World Bank: www.carbonfinance.orgwww.carbonfinance.org Climate Funds Update: http://www.climatefundsupdate.org/http://www.climatefundsupdate.org/ Forest Trends (2013) Maneuvering the Mosaic, State of the Voluntary Carbon Markets 2013. Ecosystem Marketplace & Bloomberg New Energy Finance: Washington and New York. 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 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.pdfhttp://www.oecd.org/dataoecd/56/18/48785310.pdf 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 http://www.unpei.org/knowledge-resources/publications.html 45

46. References Norrington-Davies, G and Thornton, N (2011) Climate change financing and aid effectiveness, Kenya case study. OECD, ADB. Swanson, A and Lundethors, L (2003) Public Environmental Expenditure Reviews (PEERS), Experience and Emerging Practice. World Bank Environment Strategy Papers No. 7. World Bank (n.d.) Mainstreaming Adaptation to Climate Change in Agriculture and Natural Resources Management Projects. World Bank, Washington, DC. Guidance Note #4 – Developing Readiness for Institutional Capacity Development and an Enabling Policy Framework. [Online] Available from: http://climatechange.worldbank.org/climatechange/content/mainstream ing-adaptation-climate-change-agriculture-and-natural-resources- management-project http://climatechange.worldbank.org/climatechange/content/mainstream ing-adaptation-climate-change-agriculture-and-natural-resources- management-project 46