Best Practice Report



Direct use of public budget

Traditionally, promotional policies for green growth have been funded directly by the public budget. The public budget used to finance green growth projects can come from a number of sources and the main sources are listed in Table 1 with the advantages and disadvantages (pros and cons) associated with each.

Once the funds are raised or allocated to green activities, a range of options exists for governments as to how they are used. They may be used to support sector agency programs (which may include financial instruments) or to support government-wide programs managed by cross-cutting ministries, or to be allocated to support sub-national governments such as municipalities for green capital investment.

General budget allocation for green activities can be found in Korea. Korea’s Low Carbon, Green Growth strategy includes a ’2 percent rule’ in which government spends approximately 2% of GDP on the implementation of green growth strategies (Min, 2013).

An example where a government has earmarked fuel taxes for green activities is Costa Rica where 60% of the total Payment for Ecosystem Services (PES) budget has come from fuel taxes. Costa Rica has contributed more than USD 170 million of the national budget to PES since its launch in 1993. Apart from fuel tax revenues, a range of public and private sources including the water companies and the tourist sector contribute to the PES fund (FONAFIFO, 2013). This program has been adjusted over the course of its long history to improve its performance. Its continued reliance on public funding highlights the difficulty in designing the exit of public funding from programs and the need to assess the impact of government interventions over the long term.

In the United States, ‘public benefit charges’ in the form of small fees (typically in the range of 0.001 – 0.01 cents/kWh) are levied on the electricity rates paid by customers. These are collected by energy providers and can either be used directly to fund activities related to obligations such as research, or to develop clean energy funds which provide grants, loans, subsidies, equity funds, loan guarantees, credit guarantees, and supplier credits (Heffner and Ryan, 2010). The use depends on the legislation in force.

In Vietnam, funds from international development partners are aggregated with national public funds for implementing projects on climate change and the National Green Growth Strategy. The funds are distributed within the national budget with the goal of mainstreaming climate policy priorities into its socio-economic development plans. This has presented an opportunity for the Vietnamese government to complement international funds with its own public funds to support implementation (Le, 2013).

The Climate Public Expenditure and Institutional Reviews (CPEIRs) are an example of a review methodology used by ministries of finance to address climate change in budgets and expenditures (Aid Effectiveness, 2014). Several countries are undertaking CPEIRs including in Africa (Ethiopia, Tanzania and Uganda, and in Asia Pacific (Bangladesh, Cambodia, Indonesia, Nepal, Philippines, Samoa, Thailand and Vietnam). For some of these countries, this has resulted in the ongoing tracking of expenditure for green and climate-related initiatives through the budget as in the case of Indonesia and Nepal.

Early experiences from these examples underscore that, even in some low income countries, the majority of public finance for climate change is raised domestically, but that these expenditures are often not well coordinated and managed. Globally, Climate Policy Initiative (CPI) estimates that 51% of climate finance is invested in developing countries and that the majority of this is raised domestically (Buchner et al., 2013).

In most of the case studies, the public funds allocated to green growth are small relative to the total national budget, but appear to have played a role in leveraging finance for green activities. Regardless of scale, the duration and nature of support is critical for ensuring that desired impacts are sustainable and do not create unintended consequences such as market distortions (Polycarp et al., 2013). Generally governments need to consider strategies for exit from the outset and for reducing the use of public incentives in a way that maintains investor confidence within the sector whilst ensuring competitiveness of green markets.