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• Apply Green DRM. Domestic revenue mobilisation is part of a social contract that underpins social cohesion and contributes to shaping good governance. Applying a polluter-payer principle shall generate revenues, while primarily supporting environmental protection including pollution abatement. Domestic revenues also help finance set priorities such as new adaptation investments. Green taxes can be justified through:
  • Environmental protection itself, leading to a healthier environment and reducing the local impact of climate and environmental issues.
  • Ensuring that all costs are taken into account in the composition of goods and services prices (such as environmental degradation including water, air or soil pollution).
  • Steering the behaviour to green choices e.g. the promotion of energy savings and an incentive for companies to innovate in sustainability.
  • Discouraging environmentally damaging practices e.g. unreasonable use of certain pesticides, plastics, drinkable water.
  • The generation of revenue for governments, allowing other taxes to be lowered or climate and environmental projects to be carried out.
• Estimate and keep track of climate change and environmental efforts in the budget. The definition of climate/environment-relevant expenditure and its coverage, as well as the estimation of related spending are important prerequisites for budget allocation decisions. A systemic identification and monitoring of budgets allocated to climate and environmental action facilitate a systematic move towards national and international environmental and climate change related long-term objectives, contribute to raising awareness, improve transparency and accountability (through reporting), and may help in preparing more climate and environment responsive budgets in the future (e.g. CPEIR, tagging). In addition, practices like budget tagging can help to bring in additional private finance, for instance, through green bond financing schemes.
• In expenditure management, it is crucial to identify budget elements that negatively impact the environment or that contribute to climate change. The elimination of harmful/perverse subsidies (e.g. to fossil fuels) are typically included in environmental fiscal reform measures to create new financial resources.

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(1)  See IMF on Climate-Sensitive Management of Public Finances – “Green PFM”.

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(2)  Budget tagging is a process that allows identifying, measuring, and monitoring specific expenditure that are related to a certain objective or policy. Climate budget tagging, for instance, has been in place in many countries inside and outside of the EU. It can be done throughout budget preparation and implementation. The quality of tagging depends on the quality of the classification system, the clarity of the budgetary and activity definitions (i.e., defining which activities can be eligible for tagging), the level of understanding of agents in charge of the classification. More importantly, the usefulness of tagging heavily lies on its capacity to influence decision making, shall it be on acting upon expenditure slippages if they occur, or on influencing future budgets and ensuring they improve their capacity to consider climate and environmental issues.

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