ANNEX 12. ENTRY POINTS FOR GREENING PFM SYSTEMS

How to support authorities in greening a PFM system?

Economic governance measures, in particular PFM, are critical to accelerate the green transition.  A structured approach to environmentally sustainable, climate resilient, low carbon and resource efficient development (encouraging low carbon paths, avoiding carbon lock-in of infrastructure investments) can be encouraged at both central levels of government, notably ministries of finance and economic planning through enhanced PFM systems, and line ministries. EU support to partner authorities could contribute to:

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• Determining finance options, potentially implying a mix of budgetary resources including fiscal tools and the phasing out of harmful subsidies, stemming from dialogue between ministries of finance and line ministries. These can be accompanied by risk-sharing instruments and private and public insurance tailored to the local risks.
• Strengthening of internal controls and external audit, building the capacity of partner authorities, legislature and civil society organisations to analyse climate and environmental issues (including in the relevant reports) and to assess to what extent they are being integrated in the different stages of the budget cycle.
• Improving oversight, information and analysis of public climate and environmental action. This can be done through environmental expenditure reviews and technical, non-partisan organisations that act as “honest brokers” to national or territorial stakeholders facing issues in ensuring a just transition. Available information and analysis can help institutions in strengthening governmental commitments, addressing political economy issues, and increasing credibility of green public action.
• Extending a green PFM approach to subnational governments, and in line with the promotion of a green and circular economy, to State Owned Enterprises.
• Encouraging explicit high-level support from government (e.g. Minister of Finance, Prime Minister, President).

Are climate and environmental risks adequately identified, measured and considered for planning?

Environmental and climate risks are among the main risks to the global and local economy. While the identification of risks can be done through risks and vulnerability assessments, at territorial or sector level, there may be no systemic instruments in place for quantitative estimates. It remains crucial to have forms of assessments on potential impacts and to include an environmental and climate change related risk dimension into the fiscal risk management. The assessment can be guided by:

• The extent to which national budgets can be impacted by climate and environmentally related stresses and shocks (e.g. droughts, floods, hurricanes, soil degradation, affected ecosystem services including food provisioning and water provision, biodiversity loss…). It is important to assess the impacts of climate change and environmental degradation on macro-economic stability, tax revenues, the disruption of economic activities and public services, the generation of additional spending (e.g. reconstruction after climate-related disasters, climate proofing, rehabilitation or reconstruction, new investments to compensate the reduction in agricultural production, de-polluting operations, rise in healthcare costs, …).
• The estimated cost of action and of inaction. Climate vulnerable countries need to invest now to reduce future damage and economic disruption from disasters, decrease their disaster recovery spending, and provide a quicker return to normal economic activity (i.e., investing in resilience). Costing may imply using risk information on specific events (e.g. storms, floods, wind, heat waves…), and calculate the resources needed for risk mitigation, preparedness and potential response.
• The definition of development paths for climate and environmental action. The level of uncertainty over climate future has decreased over the years, with an improved understanding of impacts on natural systems and human economic activities. This allows public actors to define a vision for climate and environmental action in the medium term. Tools such as stress-tests (see below) help local authorities engage in participatory processes with their communities and decide on future climate and environmental investments.

To which extent can improved revenue and expenditure management provide fiscal space for climate and environmental priorities?

The fiscal framework can act as a supporting instrument for climate action and improved natural resources management as drivers of social and economic opportunities. Essential steps include:

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