2.2.2. Main entry points in greening budget support operations

➡️ Apply the environment & climate risk screening and determine the need for a Strategic Environmental Assessment

In the context of budget support, the screening:

• determines the need for dedicated studies to ensure that implementation of the supported development policy/strategy will not result in significant adverse impacts to the environment and climate (do no harm);
• can provide elements for the completion or update of the risk management framework plus (RMF+).

In all cases, it is required to:

✅ Verify that the action does not imply the support to any of the activities excluded under Art. 29 of the NDICI-Global Europe regulation (See section 1.1.4).

When launching a budget support operation, undertaking an SEA is strongly encouraged!

An SEA will help assess the first eligibility criterion for budget support from an environment and climate change perspective, namely ensuring a credible and relevant national/sector policy.

An SEA’s findings can be useful in other phases of the budget support cycle. An SEA can:

• identify environment and climate change elements to be integrated in the policy dialogue;
• suggest environment and climate related indicators to be included in the performance assessment framework;
• provide recommendations for support measures to help address e.g. shortcomings in environmental/climate change capacities and regulatory frameworks.

To learn more about why an SEA is relevant to budget support, click here. An SEA ToR template can be found in Annex 6.

✅ Determine the need for a Strategic Environmental Assessment (SEA) and justify the decision.

➡️ Analyse the budget support eligibility criteria from a green perspective

A country may be considered eligible for budget support when there is:

• a credible and relevant sector policy, which supports^[22] sustainable and inclusive growth;
• a stable macroeconomic framework or policies aiming to maintain/restore macroeconomic stability;
• a programme to improve public finance management, including domestic revenue mobilisation. To learn more about greening PFM click here;
• transparency and oversight of the budget.

Each of the criteria can be used to identify entry points for greening the budget support operation. For instance, by identifying the macro-economic risks of not addressing climate risks or environmental degradation e.g. storms, floods, droughts, water contamination, air pollution (macroeconomic framework); by greening public budgeting processes (PFM); or by supporting the reporting on the use of national environmental and climate budgets (transparency and oversight).

Use Annex 14 to identify key entry points for environmental and climate integration when assessing the budget support eligibility criteria.

➡️ Make use of budget support general conditions to formulate green performance indicators

A key lever in the promotion of policy shifts, reforms and results lies in the monitoring of performance indicators, upon which the release of variable tranches is conditioned. Performance indicators come in addition to the general conditions applying to all disbursements and mirroring the four eligibility criteria. The general conditions of budget support allow for policy dialogue on the policy as a whole, with all the related reforms and expected results. They also allow for dialogue on the country’s macroeconomic and fiscal policies as much as PFM/DRM systems and fiscal transparency (for instance, addressing harmful subsidies and fostering transparency on their impact, or promoting green budgeting or sustainable procurement). Variable tranche disbursements add an extra layer of performance incentive with a limited number of specific indicators.

If there are key environmental or climate change issues related to the policy/strategy being supported, addressing them should be considered a key aim, and thus be addressed in the overall dialogue/monitoring around budget support general conditions and reflected specifically in the performance indicators.

When selecting environmental and climate indicators in the context of budget support, consider:

• making use of an SEA to get recommendations on environmental or climate change related issues that could be integrated in the policy performance assessment framework;
• when possible, using indicators from the country’s statistical or monitoring and evaluation systems e.g. the national measuring, reporting and verification (MRV) system for climate action or the NBSAP indicators;
• using the sector performance assessment framework to identify how environmental and climate change issues and opportunities can influence the sector’s performance. Ensure they are reflected in the performance indicators;
• giving preference to indicators at induced output or outcome level e.g. volume of inputs used in agricultural production, water bodies achieving sustainable abstraction criteria, municipal waste recycling rates[^23];
• considering the current capacities to gather and report relevant environmental or climate information, at both institutional and private level e.g. the quantification of greenhouse gas emissions at sector level should be based on valid international protocols and are often more credible if public and private parties are involved.

Any other performance indicators need to be checked to ensure they will not promote undesired negative impacts on the environment or climate, or exacerbate vulnerability to climate change (e.g. indicators such as ‘tonnes of pesticides imported’ should be avoided, as they are related to the use of environmentally harmful substances or activities).

➡️ Green the policy dialogue in the context of budget support

Budget support operations involve policy dialogue to agree on the reforms or development results to which it can contribute; an assessment of the progress achieved against the general conditions and the use of performance indicators; financial transfers to the treasury account of the partner country contingent on results; and capacity development support. All of these aspects can be geared towards optimising environmental and climate change objectives and aligning to the ‘do no harm’ principle.

To ensure a whole-of-government perspective, it is essential to involve central ministries including finance and planning, which are central to PFM, as well as line ministries (e.g. ministry of environment) and other national institutions (e.g. for audit and transparency), including when the budget support is targeting the implementation of environmental and climate change strategies.

Check section 2.4 on Greening the policy dialogue for further insight.

➡️ Define complementary support measures for green objectives

Complementary support is an essential component of budget support, taking the form of studies, capacity development and short- or long-term technical assistance, feeding into policy dialogue.

To strengthen the environment and climate-related capacity of partner institutions and systems, complementary support may combine some of the following activities.

Studies

• Promote analytical and participatory approaches that aim to better integrate environmental considerations into policies, plans and programmes, such as a Strategic Environmental Assessment (SEA). Depending on the context also consider the use of tools such as climate vulnerability and risk assessment, or an economic valuation of environmental and climate integration.
• Promote the regular use of PFM diagnostic tools with their dedicated modules addressing climate/environmental aspects (for instance, public expenditure and financial accountability (PEFA Climate), methodology for assessing procurement systems (MAPS) for sustainable procurement, Climate-PIMA on public investment management). See Annex 12 for more details.
• Support institutional self-assessments, including in line ministries, to review their governance set-up and existing practices on green budgeting, and identify areas for improvement. For instance, identify the implications of integrating climate‐related measures in policies, strategies and programmes on the revenue as well as the expenditure sides of a budget. These can then be applied in a medium-term expenditure framework (MTEF), or a medium-term revenue strategy (MTRS).

Capacity development

• Address knowledge gaps and develop guidance allowing decision makers to assess benefits of environmental and climate change proposals, including when engaging with other stakeholders comprising local actors and civil society.
• Support national capacities for the identification of revenue and expenditure relevant for climate or environmental objectives in specific sectors, building on national budgetary classifications, or other applicable methodologies (notably, the EU taxonomy or regional/national taxonomies).
• Develop training and capacity-building of government officials (e.g. accountants, budget analysts and auditors) and/or budget officers and planners in procedures and techniques for preparing green budgets and subsequently monitoring and reporting on fiscal outcomes and fiscal risks.
• Consider complementary capacity development to actors able to channel finance towards a green transition, in the view of accessing additional finance, including from private sources. This could include, for instance, trainings on how to invest in green spaces and natural infrastructure, on the definition and management of green/blue bonds and carbon markets, or on how to improve financial support to policies with green objectives e.g. an inclusive and sustainable blue economy.

Technical assistance

• Deploy short or long-term technical assistance contributing the development of policy and regulation supportive of environmental and climate action.
• Provide technical assistance to PFM institutions covering the development and effective use of guidelines and templates for greening PFM systems, including taxation (e.g. reduce tax benefits with adverse environmental effects, promote tax exemptions and duty waivers that stimulate the consumption of green products and services over polluting ones), procurement (e.g. promoting greener technical specifications and award criteria) or public investment management (e.g. mainstreaming sustainability principles in investment screening, management and monitoring).
• Promote the exchange of good practices between actors in green PFM systems, external audits that address environmental and climate concerns and parliamentary oversight, also with peer/neighbour countries or through peer-to-peer partnerships with EU administrations (e.g. twinning/TAIEX).
• Considering that monitoring and evaluation in budget support can go beyond the use of performance indicators, provide support to data systems to:

1.  track or record progress in terms of environmental sustainability and climate action, including in the implementation of reforms to improve green PFM;
2.  promote good practices and innovation at sector level (e.g. limiting environmental degradation, improving natural resource management);
3.  improve information for decision-making on green investments;
4.  build evidence for future policy making.

More details on complementary support measures and tools for greening the budget support are available in Annex 14.

References

^[22] The full criteria review includes policy support to the overall objectives of poverty eradication and inequality reduction, and sustainable and inclusive growth and job creation, the consolidation of democracies and peaceful societies, and the promotion of gender equality (Budget Support Guidelines).

^[23] In the case of environmental or climate action, results may only be measurable in the medium term, sometimes after the implementation period. Also, the availability of some environmental or climate information (e.g. forest inventory, total national GHG emissions) may not be suitable to budget support timelines, which usually reviews progress on an annual basis. This calls for realism on which information should be required when formulating performance indicators.