Best Practice Report


Mobilizing investment / Effective use of public budget and frameworks

4. Effective use of public budget and frameworks

Public finance for green growth can be allocated directly from public budgets or through the establishment of national or sectoral fund structures or through financial intermediaries, including national development and commercial banks. This section describes in two parts the different approaches to sourcing and investing public funds in green growth:

•  The direct use of public budgets to finance green growth (4.1)
•  The use of dedicated funds and other public intermediaries to finance green growth (4.2).

Criteria suggested by Hilke and Ryan (2012) can be used in comparing different funding streams and selecting appropriate sources to finance energy efficiency policy for green growth. These include the level of stability and sustainability of funding, the administrative simplicity, the least cost of finance, and the ability to leverage private funds.

The case studies differ in their context and methods of funding; nonetheless several insights can be gleaned from the experiences with different kinds of public funds used in promoting green growth.

  • Governments can choose from different public finance sources and management options to fund green growth priorities, including direct budget allocation, and/or a range of intermediaries such as dedicated funds, including government loan funds, public banks, and green bonds. These funding types differ in terms of their stability, sustainability, administrative simplicity, and ability to leverage private funds.
  • Governments can also consider a range of revenue sources (budgets, taxes, user charges, international development assistance, etc.) to support green growth. Many countries have developed strategies for combining different revenue sources and public funding mechanisms and for achieving integration with current budget and planning processes (e.g. Climate Public Expenditure Investment Reviews (CPIERs) and other similar approaches).
  • Market distortion needs to be avoided in using public finance for green growth projects and programs. This can be achieved by planning the leverage and eventual takeover of private capital in the green financial market and an exit strategy for public finance.
  • Direct budget allocation can provide flexibility to governments to fund priority green projects and programs and facilitate mainstreaming of green growth with current development programs.
  • The use of public dedicated funds enables governments to combine and leverage public and private finance (including support from financial institutions) and utilizes delivery channels that directly reach market actors. Such financing intermediaries may be more sustainable, if additional private finance is raised over time and direct budget allocation is phased out or reduced.
  • Administrative simplicity and education of investors are important to encourage high update of public finance for green projects. For example, green bonds benefits from using a well-known and proven mechanisms, but effort may be required to help investors understand the definition of green projects.
Table 1:
Main source of public budget to finance green growth