A Comparison of Climate Budgets Presented by State Governments in India

Background

The enormity of the challenge posed to humanity by climate change, and the large investments required to combat it, are highlighted in multiple national and international forums. India is ranked 7th on the Global Climate Risk Index 2021.¹ Speaking at a public event in January 2024, Finance Minister Smt. Nirmala Sitharaman stated that India will need at least US$ 10 trillion to achieve its net zero targets by 2070.² A sizeable portion of this investment would be in the form of government spending. The balance must come as private investment, for which the government must act as an enabler through a combination of regulation, conducive policies, and financial support in the form of subsidies, catalytic capital and viability gap funding.

Climate budgeting is one among emerging public financial management (PFM) tools available to governments in their efforts to reorient public spending towards climate action. Climate budgeting, also called green budgeting, helps in mainstreaming climate concerns in budget preparation and execution processes, thus enabling a government to quantify and monitor the fiscal impact of its climate actions. For a detailed discussion on the concept of climate budgeting, its benefits, methodology for preparing climate budgets, and the pre-requisites, see the May 2023 article in The Chartered Accountant journal titled ‘Climate Budgeting powered by Climate Budget Tagging: An Effective PFM Tool in the Fight Against Climate Change’.³

This article is the second in a series of articles on Climate Budgeting. While the May 2023 article introduces the concept of climate budgeting and climate budget tagging, this article does a deep dive into the climate budgets presented by certain early-mover state governments in India and presents the key findings.

Climate Budgeting in India

1.1 Preparation of Climate Budgets

In India, action on climate budgeting is being seen at the state-level. Odisha and Bihar were the first Indian states to publish a climate budget for fiscal year 2020-21. While the two states have continued the trend in subsequent years also, Assam, Meghalaya and Puducherry have followed suit by presenting a climate budget along with the regular annual state budget. At the local level, although the number of cities and villages preparing local climate action plans is on the rise, climate budgeting is yet to start. Coimbatore, Panaji, and Shimla are reported to have been selected for producing climate budgets under a German-funded climate program, but the present status is not readily available.⁴

It is heartening to note that state governments have been leading the way in adopting climate budgeting. Although the Union Government has been aggressively driving the climate agenda in successive budgets, it does not present a separate climate budget as yet. In its annual budget for 2021-22, it clarified that climate action at the national level would be executed through the normal budgeting process.⁵ Nonetheless, since it has been continuously enhancing the mobilisation of resources towards climate action, climate budgeting at the national level is bound to become a reality soon.

1.2 Legal Requirements and Policy Direction

As pointed out in the May 2023 article, a prerequisite for the successful implementation of climate budgeting is the establishment of a climate budgeting mandate, preferably in the annual budget circular. From information available on the budget webpages, it is difficult to state conclusively that all the early movers have followed this practice. Assam and Puducherry climate budgets mention the issuance of the circular as a step in the climate budgeting process. Odisha’s annual budget circular for 2023-24 makes a cursory mention of the climate budget.⁶ Further, the State Action Plan for Climate Change (SAPCC) provides the general policy direction for green budgeting in the roadmap for climate change adaptation and mitigation strategies. All four states have relied on their respective SAPCCs for identifying the key priority areas, mapping of relevant departments, and for setting targets. Additional policy documents referred to in climate budgets include the National Biodiversity Strategy and Action Plan (NBSAP) in Bihar and the Disaster Risk Reduction Roadmap in Assam. While SAPCC will define the climate action priorities and the methodology for preparing climate budgets, it may be judicious to include the mandate for presenting a climate budget in the budget circular, or even better, in the governing budget law.

A Comparison of Climate Budgets

1.1 Overview

The four States and Union Territory (UT) have variously referred to climate budget as ‘green budget’, ‘climate action budget’, or simply ‘climate budget’. Though Odisha and Bihar published their first climate budgets in 2020-21, Bihar has since published more number of climate budgets. At the time of publishing this article, Bihar and Meghalaya have come out with the climate budget for fiscal year 2024-25 also. Odisha has announced preparation of a carbon budget in June 2024 which is aimed at monitoring the state’s progress in meeting emission reduction targets.⁷

Assam and Puducherry have both published their first green budgets for 2023-24. Puducherry has stated its intentions clearly that although only department-level mapping has been attempted in the first budget, future climate budgets will be more granular. Table 1 provides a quick snapshot of the climate budget documents reviewed for this article.

1.2 Sectoral Coverage

One of the first steps in the climate budgeting process is the determination of vulnerable sectors and the identification of departments that execute schemes/programs that impact the climate and the environment—positively or adversely. SAPCCs, on which climate budgets are based, are largely modelled on the National Action Plan for Climate Change. Therefore, nine sectors are covered commonly across all the climate budgets studied as indicated in Table 1. Additionally, there are sectors that have been specifically covered by certain states suited to the local context (see Table 1).

Although Assam’s SAPCC lists the strategies for Mining and Industries, the departments’ program expenditures have not been included in the climate budget due to their minor representation in the overall state budget. The same is the case with Odisha as well. On the other hand, Bihar has mapped schemes/programs to the sugar industry department specifically.

1.3 Process and Methodology

The climate budgeting process is similar across the five budgets reviewed – it starts with a capacity-building exercise with officials of stakeholder departments through orientation workshops on climate change, its relevance, green budgeting, and realigning of departmental schemes to achieve greater climate relevance. To ensure consistency, a standardised template is circulated to collect budget inputs from the departments on the schemes and programs identified as having environmental and climate change relevance. For efficient tracking, department-level and programme-level codes are developed. The schemes are then mapped to themes/domains, activities and the Sustainable Development Goals (SDG). Once the tagging of allocations and expenditures is completed by the departments, they are analysed and compiled into the green budget.

Variations in the process explained above are observed in the tagging methodology adopted by different states. While the basic principle of budget tagging is at the heart of all methodologies, they differ in terms of complexity. At one end, while Odisha has adopted a more complex tagging methodology, beginners like Meghalaya and Puducherry have followed simplistic tagging models. A summary of the methodology adopted by each state along with the key insights that can be drawn from the climate budget document are given in Table 2.

Only Bihar and Meghalaya have published the rationale for including specific departments, schemes or programs for climate budgeting. Their climate budgets explain how the activity/scheme/program of a department contributes to positive environmental impact. For instance, while it may not be immediately clear as to why the Home Department (Police) has been included, Meghalaya’s climate action budget explains that it has been considered for its role in disaster risk reduction.

Bihar’s budget simply goes by the ‘objective of the scheme’ to justify its inclusion. For example, the Pradhan Mantri Gram Sadak Yojana has been considered because road construction is to be done using green technologies.

1.4 Presentation Aspects

Arrangement of sections: The climate budget documents of all four states and Union Territory follow a similar presentation scheme. The ‘Introduction’/’Overview’ chapter covers the state profile which gives important insights into the state’s geographic, demographic and environmental vulnerabilities. Bihar’s document additionally compares the state’s performance on sustainability and climate indices with that of India. The introduction section is followed by the state’s response to climate change through sectoral interventions or key initiatives and its achievements. Then comes the main part comprising of sections on the principles, framework, process, and methodology for preparing the climate budget. This is followed by the ‘budget analysis’ or ‘findings’ section. All the documents contain annexures which provide the department-wise inputs received in the form of green budget statements.

Executive Summary: Only Odisha, Meghalaya and Puducherry contain an Executive Summary. Budget documents of Meghalaya and Puducherry carry a paragraph summarising the key findings from the climate budgeting exercise. The Executive Summary in Odisha’s climate budget merely covers the general background of the state, the policy context and the climate budgeting methodology, but does not discuss the key highlights.

Presentation of findings: In the ‘analysis’ or ‘key findings’ section of each climate budget, a budget summary is presented covering a summary analysis of increase/decrease in the proportion of green budget in the total budget of the State. This is followed by a department-wise breakdown of the budget figures. In its first green budget in 2023-24, as a part of the baseline-setting exercise, the UT of Puducherry has identified six indicators as the ‘baseline indicators’ for presenting the summary.¹⁴

Climate Budgeting in Other Countries

Several developing countries have adopted climate budgeting, with Nepal introducing it as early as 2012. In Nepal’s climate budget, climate related programs are either tagged ‘highly relevant’ or ‘relevant’ according to the technical guidelines provided in the Climate Budget Code prepared by the National Planning Commission of Nepal.¹⁵ Much like the state climate budgets in India, Nepal’s green budget also presents the sector-wise flow of money for climate expenditure and the ministry-wise appropriation of the budget for climate related expenditure. It additionally presents the percentage share of capital and recurrent budget within the total climate budget.

Bangladesh published its first climate budget six years later in 2018. It has developed a more complex methodology of computing the climate change relevance criteria. Bangladesh uses Rio Markers to define what expenditure is climate change relevant.¹⁶ Based on the priorities set out in the National Climate Change Policy, there are three options to tag the expenditures - ‘principal objective’, ‘significant objective’ and ‘not targeted to the policy objective’. After tagging, various interventions within a programme are assessed and ‘weighted’ for their climate change relevance and sensitivity. Nepal’s tagging methodology resembles the one adopted by Odisha in several aspects. Negative allocations such as investments causing additional emissions are not yet being tracked in Nepal’s climate budget although the same is tracked in Odisha’s budget.

Amongst developed nations, France has led the way in climate budgeting. Climate budgeting in France is done at the level of budgetary actions which are tagged to six environmental objectives like pollution abatement, water resources management, etc.¹⁷ To assess an action’s degree of climate relevance, a counter-factual scenario is considered. For example, a vehicle scrapping bonus is considered ‘positive’ when judged against the ‘pollution’ objective because the counter-factual scenario would be that without such a bonus, there is a greater likelihood of having more old, greater Green House Gas (GHG) producing vehicles on the road. France has adopted a 5-point rating scale and tracks expenditures with a negative impact as well by assigning them a ‘-1’ rating. The visual representation system in the climate budget presents expenditures as a grey dot for ‘neutral’ (those rated 0), green dot for ‘positive’ (those rated 1, 2 or 3) and brown dot for ‘negative’ (those rated –1).

Conclusion

The Sixth Assessment Report of the Intergovernmental Panel on Climate Change (AR6) published in March 2023 estimates that the required investment levels to meet climate goals are 3-6 times the current investment.¹⁸ The Report, however, offers a ray of hope by stating that enough global financing is available to meet the needs and talks of a need for innovative financing mechanisms to redirect capital towards climate action in developing countries. Climate Budgeting is one such mechanism.

Several Indian states have announced their intentions to publish a climate budget along with the main budget. Until now, climate budgets are being presented by state governments more as a demonstration of their intent to imbibe climate considerations into policy making and budgeting, and less as a tool to decide on budget allocations. As methodologies such as climate vulnerability/impact assessments and climate budget tagging mature, climate budget is expected to emerge as a strategic tool to inform budget allocations to sectors and schemes/programs with maximum impact on the government’s climate goals. While climate budgets must be increasingly used for better climate-informed budget decisions, their utility must not stop with that. Climate budgeting must be backed up by climate public expenditure reviews which can indicate the extent to which a government has achieved its climate policy and budget priorities, and the findings must inform the subsequent climate budget cycles.

This article indicates that there are wide variations in climate budgets of states in terms of: the sectoral coverage, tagging methodologies, presentation aspects, and analysis of findings, making a direct comparison difficult. Furthermore, the quality of source data on which climate budgeting relies also becomes crucial. It is therefore important to institutionalize climate budgeting processes through budget laws, green budgeting standards, green taxonomies, and standard operating procedures. Attempts at climate budgeting by the early mover states have generated valuable experiential learning from which cues can be drawn to develop a comprehensive climate budgeting framework for the country. Such an initiative can come from the Union Government, roping in climate change and public finance professionals for this purpose.