Climate finance in developing countries: green budget tagging and resource mobilization

ABSTRACT

Information on the benefits of green budget tagging (Green budget tagging refers to itemization and linking of every budget item with climate action, mitigation, adaptation, or both) in developing countries could help boost the uptake of this practice and in turn help these same developing countries to mobilize climate-related development finance. We apply double differences in means econometric analytical approach to evaluate the association between green budget tagging (GBT) and target outcome variables of climate-related finance and CO₂ emissions. The results show that all 32 developing countries that have undertaken green budget tagging are also associated with larger inflows of climate-related finance. Among the adopters, climate-related finance inflows have been significantly larger for countries with externally-initiated green budget tagging than for those with internally-initiated tagging. The results also show that a minimum level of climate-related finance is required to achieve CO₂ emissions reduction. However, the current mean yearly inflow of climate-related development finance falls short of the level that drives emissions reduction. These findings point to the importance of green budget tagging and to the need to upscale climate-related finance inflows to propel improvement in environmental quality. Although green budget tagging is a useful tool for mobilizing external development finance, current external finance inflows are insufficient to achieve ambitious emission reductions. Immense effort is therefore required to mobilize the adequate scale of climate-related finance from both external and other sources.

Key policy insights

• Green budget tagging can be a crucial tool for mobilizing climate-related finance and improving environmental quality in developing countries.

• To entice climate-related development finance, developing countries need to clearly define climate-related projects in their national budgets.

• Climate finance mobilization policies designed for reducing emissions are not complete unless they emphasize and promote the scale of inflows. Hence, policymakers should put greater effort into mobilizing adequate finance (from both external and domestic sources) to drive emissions reduction.

KEYWORDS:

• Budget tagging
• resource mobilization
• climate finance
• climate policy
• developing countries

Disclosure statement

No potential conflict of interest was reported by the author(s).