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1 Summary of the workshop Climate Public Expenditure and Institutional Reviews: (CPEIR) Workshop on Past Experience and the Way Forward 10 th -12 th September 2012, Bangkok 0

2 Climate Public Expenditure and Institutional Reviews (CPEIRs): Past Experience and the Way Forward 10 th -12 th September 2012, Bangkok Summary of workshop Over 22 countries from Asia Pacific, Africa, Latin America and Europe represented by Ministries of Finance, Ministries of Planning and Ministries of Environment met to discuss Climate Public Expenditure and Institutional Reviews (CPEIRs) together with multilaterals and bilateral agencies including the EU, Germany (GIZ), Korea, Sweden (SIDA), OECD, UK (DFID), USAID, the UN (UNCDF, UNDP and UNEP) and the World Bank. UNDP has so far supported CPEIRs in Bangladesh, Cambodia, Nepal, Samoa, Thailand and World Bank has supported them in Morocco and Philippines - many other countries are now interested. Context Climate change is a development issue and development is managed by Ministries of Finance and Planning so they need to play a leading role which CPEIRs can facilitate. Dynamics of UNFCCC are such that climate finance is earmarked challenge is how to ensure it is transferred and spent in most effective ways - applying the lessons from development effectiveness. This require climate change and public finance policy specialists to be brought together and Finance, Planning and Environment ministries speaking the same language CPEIRs are a demand driven tool arising from the global south, relevant for the global debate Learning from national experiences The rationale for doing a CPEIR Provides analytical support to inform government decision-making and support climate change strategy development Enhances understanding of what the public finance impacts of climate change are Raises awareness on climate change issues amongst public finance managers Enables better integration of climate issues in routine development plans and budgets Potential exists to enable and outline reforms that strengthen accountability, transparency, good governance and environmental sustainability It has the potential to be used as a tool to help mobilize resources and budget support Reviews the role played by communities, civil society, private sector and international support in responding to climate change and in complementing domestic finance Climate change has specific challenges (uncertainty, extended timeframe,, wide scope (public sector infrastructure, tax issues etc.) that more general Public expenditure reviews might not address Approach taken to CPEIRs Cross government steering group led by Finance and Planning Ministries with technical input from Ministry of Environment, e.g. Thailand s Working Committee on Climate Fiscal Framework Builds and expands on Public Expenditure Review modality Review of policies and institutions Reviews whole budget (including sub-national level) to assess activities relevant for climate change Challenges in undertaking CPEIRs All countries faced challenges in definition and identification of expenditures Data collection challenges, particularly with external financing, public enterprises, local governments Inclusion of climate change aspects in budget performance indicators is not yet systematised difficult to assess quality of climate expenditures and align expenditures with policy goals 1

3 Opportunities in undertaking CPEIRs Increases the visibility of climate change as a development issue across government Helps countries move towards greater policy and institutional coordination Ensures greater coherence between international and domestic climate finance flows Allows adjustments to be made to national budgets to promote longer term development outcomes. Emerging lessons and common themes A number of findings and recommendation arose from national presentations of CPEIR experiences to date. It was recognized that this is an ongoing learning process and further work will be required to answer all these questions, but the workshop provided a stock-take of some initial lessons. Introduction to the Sourcebook A tool for public finance professionals to conduct PERs on climate change. Responds to many of the questions and themes emerging from initial CPEIRs. CPEIRs to date have potentially been too narrowly focused on expenditure. Sourcebook looks at full toolkit of policies: information, regulation, taxation and expenditure as well as harmful expenditures. Sourcebook draws from CPEIRs undertaken and existing knowledge from other fields that can be applied and begins to provide direction for some of the emerging themes/questions outlined below. How can climate change be integrated within the budget process? National budget is key mechanism for translating government strategy and policies into action, hence the importance of CPEIRs, given their budgetary focus. CPEIR can review tools/entry points for integrating climate change with the budget system: (e.g. sector strategies, tagging, budget call circular, screening guidelines) A number of countries are considering the introduction of Tagging mechanisms or functional markers to track expenditures relevant to climate change (Nepal has already done so). Not just on-budget direct expenditures to consider, off-budget also has implications for climate change (including state owned enterprises, public private partnerships, tax expenditures etc.) Need to review expenditures that have harmful consequences on climate change outcomes (eg fossil fuel and other subsidies and tax incentives, infrastructure spending, utility pricing policies) Use of country systems has multiple elements (planning, budgeting, accounting, auditing etc.) and donors should engage with them wherever possible. This may require a more phased approach as well as better understanding of the rationale of these systems. Tensions between ring-fencing funds in National Climate Funds and an integrated response to climate change and budgetary processes There is clear appetite for further exploring funding mechanisms that can (i) be set up quickly but (ii) also better use country systems (eg virtual climate funds, topping up sector budget support, multi-sector budget support (including example from Viet Nam) and use of financial institutions The experience of Virtual Poverty Funds introduced in a number of countries following HIPC debt relief was discussed as a possible model that could be applied in this domain. With this approach, the budget classification systems can used to tag and track specific climate expenditures without setting up separate institutional arrangements. Such funds are more easily created where countries have a program budget classification, but they may also be developed along administrative lines How can linkages be made between public expenditures and climate change given definitional challenges? Numerous, complex, technical challenges in defining expenditures have emerged when undertaking CPEIRs (embedded expenditures, Co-benefits, Splitting out climate change, defining additionality) 2

4 A key strength of CPEIRs has been the nationally led process for defining expenditure. While there is scope for improvements to methodology, this process has been important as it (i) brings institutions together, (ii) raises awareness of linkages between expenditures, climate change policies and the actual climate change impacts, (iii) responds to national differences in budget systems and policy priorities Issue of international classification and standardisation also raised on the donor side, OECD s work on Rio markers and World Bank s on climate change co-benefits to track international financial flows. While certain donors support a pragmatic international standard to track international finance, there is a lack of consensus as to how it might be done How can institutional ownership on national climate change responses be broadened? Recognition that analysis of technical reforms aimed at linking climate change with development planning, budgeting, M&E processes is necessary, but not sufficient. Consideration also needs to be given to how incentive structures might: (i) Enable reform through political ownership (e.g. CPEIRs could incorporate a stronger institutional analysis / political economy approach; Support for committees / champions with communications) (ii) Leverage additional resources (financial and human) to deliver reform in key priority sectors (e.g. Develop financing strategies: focus on leveraging domestic, public and private, resources) (iii) Align climate to existing agenda (e.g. build on growth/poverty agenda, e.g. Green Growth strategies) Moving forward, need to monitor more closely institutional reform as part of CPEIR follow-up. How can fiscal policy influence impacts on climate change? The focus of CPEIRs to date has been relatively narrow looking primarily at budgeted expenditures. CPEIRs would benefit from considering broader relationship of fiscal policy (including tax policy, price incentives etc.) and climate change. Policy begins from premise of determining role of public sector in climate change agenda: to (i) rectify market failures and (ii) to provide public goods (i.e. infrastructures, R&D, new technologies) On mitigation, recommended focus is on use of price based instruments to change incentives for private actions (i.e. emissions trading schemes, carbon taxes, removal of fossil fuel subsidies, subsidies for energy efficient equipment) Considerations for design of fiscal instruments o Which is most cost effective? (i.e. Carbon tax vs. cap and trade) o Distributional impacts on households, industries, regions o Interaction with other policies and instruments (Taxes, Subsidies, Tax expenditures etc.) o Political economy of fiscal measures How can climate change concerns be addressed at the local level? Local government is important in this agenda because: o Implementation will be at local level o Can capitalize on local knowledge and indigenous know-how o Changing climate will create new challenges and opportunities that may vary by region Existing flows of climate finance are largely channelled in three ways, sector allocations, discretionary block grants to district administrations (small), off budget projects and programmes (donor/ngo) More needs to be done on awareness raising the local public, elected officials and also technicians Local response to climate change needs to be rooted in national realities of decentralization processes (e.g. statutory division of tasks, relative roles of centre/sectors/local etc.) Weak revenue raising capacity suggests case for redirecting existing expenditure to be more climate-relevant, as well as seeking to mobilize more dedicated climate-change related funds 3

5 How do you embed climate change concerns in sector priorities/plans/budgets? CPEIRs may need to analyse where core sector objectives are aligned with mitigation and adaptation outcomes and where there are conflicts Need to better understand costs and benefits within sectors of factoring climate change concerns into core sector plans (e.g. how much does it cost to build climate resilient infrastructure? When should it be built? How could the incremental cost be financed? ). Work is underway under numerous initiatives looking at the economics of climate change in this regard (UNDP-ADAPT Asia, Pacific Island Secretariat, DFID), supporting economic appraisal tools for investments (e.g.: cost effective mitigation-ghg abatement cost curve, no regret adaptation measures) and vulnerability assessments These complementary studies can help to inform decision making reallocations/need for resource mobilisation/regulation within sectors Indonesia CPEIR is interesting case study of tailoring CPEIR to evaluate linkages of expenditure and specific policy goals (ie reduction of GHG emissions in forestry and energy sector). Development of results based frameworks for M&E are needed, but for adaptation they would need to be sector specific. How to incentivize private sector to leverage their finance and expertise for climate change response? Viet Nam s Green Growth Strategy example of engaging private sector Further work required to understand barriers to investment Need to develop a range of policy instruments to overcome barriers (e.g. Awareness building, seed capital, regulatory reform, smart use of fiscal instruments such as guarantees, subsidies, tax incentives, Public Private Partnerships) How to make planning and budgeting decisions given uncertainty of climate change? Long-term effects and costs of climate change are uncertain the potential damage function. Considerable uncertainty and regional variation, so cannot use probabilities, indeed it may be optimal to wait and see (e.g. In Samoa, should we build new road to airport now or rehabilitate existing road and potentially build a new one later?). o Clear economic case for using real options approaches within a cost-benefit framework to consider flexible financing options under conditions of uncertainty, But short-term, 12- month, budgeting cycles of national and donors governments: use it, or lose it, Not just climate-related costs to consider but understand how green growth/climate change adaptation triggers changes in the overall economic structure e.g. transformation to a low emission economy, including development of renewable energy sector, in Poland may lead to job losses in energy intensive, traditional industries. Some emerging responses that can be learnt from o o Philippines and Viet Nam planning cycle for short-term, medium term and long term Financing vehicles (insurance, catastrophe bonds) How do you integrate disaster risks in fiscal risk assessment and management? A Disaster Risk Management Framework has been developed by World Bank A number of tools available for helping to quantify the complex dynamics of disaster given probability of disaster. Consensus around need to invest more in ex ante risk reduction compared to ex post response Recommended to combine of ex-ante (e.g. catastrophe bonds) and ex post financing instruments to cope with climate disaster risk and reduce contingent liability Matching the funding needs over time: time line for mobilizing resources in case of emergency 4

6 Way Forward Key messages from development partners A growing consensus of the importance of addressing governance issues on climate change finance and climate relevant public expenditure Existing body of work on development effectiveness (e.g. use of country systems, coordination, review of financing modalities) that can be drawn from, but also the limitations of aid effectiveness literature for climate finance need to be taken into account and analysed (e.g. role of private finance) Although CPEIR methodology is a quickly evolving agenda, there is a need to keep approaches simple and to be explicit on differences in the approaches taken Importance of national ownership of the agenda - CPEIRs and complementary support should be responsive to country needs (e.g. CPEIR approach is being tailored to capacity of small island states.) A number of development partners are looking at readiness and institutional reforms required to access increased potential flows of climate finance Donors looking at CPEIRs for different ends: o To be used as a tool to identify specific capacity gaps, o To build case for budget support Aspiration to see climate change embedded in routine public expenditure reviews in relevant sectors (e.g. agriculture, water etc.) and being used to inform donor operations and financing arrangements Widespread support for supporting the build-up of Monitoring Reporting and Verification (MRV) capabilities and integration into country s accountability institutions (e.g. Supreme Audit Institution) Given National Climate Funds are already a reality, donors and government can encourage that they are mainstreamed as much as possible with country systems At a local government level there is growing interest in establishing incremental costs of delivery of public services in response to climate change Further work needed to bring Civil Society and private sector on board with these processes A number of areas for Development Partners to collaborate were identified: o Common research agenda political economy analysis, vulnerability analysis, economics of climate change o Common and coordinated approach to capacity development, Sourcebook, CPEIR methodological note, supporting economic appraisal etc. o Learning from development effectiveness agenda on suite of instruments to support partner countries o Community of Practice as a platform for exchange International climate finance is needed to cover incremental costs of mitigation and adaptation to climate change. In LIDCs and LCDs additional climate finance from international funds is needed. Supporting the readiness of institutions though capacity building and technical assistance can ensure increased access, and more efficient spending of such funds Key national priorities for further support Support in sharing methodological tools to assist decisions making (i.e. cost of adaptation/inaction, employment, sectoral vulnerability assessments etc.) Support for effective information campaigns and engagement of other key actors for climate change action: Academia, Civil society organisations and private sector Request global guidance on indicators for measuring impacts of climate change Technical and financial support for conducting CPEIRs and utilising forthcoming Sourcebook Capacity development development finance strategy related to policy, development and refinement of budget codes, monitoring progress, mobilization of resources, support for development of MRV systems etc. South-south exchange and knowledge sharing 5

7 Annex: List of countries and organisations represented 1. Government officials representing environment, climate, finance and planning from: Bangladesh Cambodia Fiji India Indonesia Lao PDR Nepal Philippines Samoa Thailand Timor Leste Vietnam El Salvador Honduras Ghana Morocco Tanzania Uganda Poland 2. Representatives from development partners, CSO and international / regional organisations from: European Commission German Development Cooperation Korea KEXIM OECD Development Assistance Committee Overseas Development Institute Pacific Island Forum Secretariat Better Aid/IBON international Secretariat of Pacific Regional Environment Programme Swedish International Development Cooperation Agency UNCDF UNDP UNEP United Kingdom Department of International Development United States Agency for International Development World Bank 6

8 For more information: Climate Finance Cross-Practice Team UNDP Asia-Pacific Regional Centre 3 rd Floor UN Service Building Rajdamnern Nok Avenue, Bangkok Thailand Tel: Fax: tom.beloe@undp.org 7

NATIONAL CLIMATE FINANCE INSTITUTIONS. Their challenges and how the Fit for the Funds Programme can respond to them

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