I - Climate transition, public policy and green budgeting: What is done and what remains to be done

The fight against climate change will entail profound changes in the definition and implementation of public policies, entailing costs (both mitigation and adaptation) for which our country is probably not yet aware. This fight is transversal, affecting the performance of the  various sectors of the economy and the way they interact with each other.

In the case of public policies (PP)  and the measures through which they are implemented (and which, it should be noted, are policies and measures that always involve the other private and social sectors, not only the State), all of them must pass through the filter of decarbonization, in order to determine whether they are favorable, unfavorable or neutral in the light of this objective. But this is not enough: it is not enough to identify a policy measure that is unfavourable from an environmental point of view, if nothing is done to reverse this situation. Progress must also  be made towards adaptation or reconversion, which means that public policies must be designed in the light of a  'green' perspective, and the State must bind itself, as happens in several areas of private sector activity, to criteria or metrics 'Environmental, Social and Governance – ESG' (save the necessary adaptations).  In fact, the State must lead by example, it must be a catalyst for the climate transition, encouraging and dragging the other sectors into this common goal.

Therefore, all the budgetary programmes that implement these PPs (I reinforce here the 'all'), being public expenditure programmes, must incorporate sustainability objectives, even if they are not directly inserted in environmental policies. For some years now, significant steps have been taken, for example in terms of public procurement and public contracting, seeking to incorporate environmental criteria into procurement and award decisions (even by European legislation imposition). More broadly, any policy decision, in particular one involving public investment, should include not only the carbon emissions cost (associated negative externalities calculation), but also include greener alternative options in that investment, with a cost-benefit analysis that reflect precisely the environmental dimension. In particular, an intertemporal or intergenerational cost-benefit analysis  is needed, which makes it possible to counteract the higher present costs of carrying out 'green' public investment (e.g. the use of  cement with lower carbon incorporation or other decarbonisation technologies), the   future savings verification, not only in environmental terms,  but also for public finances (first of all, preventing the cost of climate catastrophes and which could be enormous).

In the strict budgetary plan, the country is still taking the first steps in the so-called 'green budgeting', not being possible to identify,  for now, what will be the model to follow and considering the most advanced experiences of some European Union (EU) countries – the case of France and Italy. First of all, it is a matter of tagging budget expenditure items, but also revenues, according to their favourable, unfavourable or neutral impact in environmental terms. In Portugal, in the 2023 State Budget (SB), a first embryo of the 'green budget'  was launched, but still with a  very incomplete character, which only covered 'green' initiatives by nature, since they were inserted in the environmental policy tout court. In other words,  the environmental impact of all public expenditure has not yet  been taken care of, nor has revenue been included. One aspect to be avoided is precisely this bias in the identification of policy measures and programmes, selecting only initiatives in the area of environmental policy, which already have this environmental concern in themselves, and forgetting or ignoring the rest of the budgetary programmes, since these may even cancel out the favourable effects in terms of decarbonisation targeted by that same environmental policy. On the other hand, the green budget must also be true and transparent: the State must account for the advances, but also for the setbacks (and justify why). For example, the measures, adopted last year and repeated this year, to suspend the carbon tax and reduce the Petroleum Products Tax, although justified as a way of mitigating the effects of energy inflation, have certainly meant a setback in the policy to combat climate change.

On the other hand, in the design of budget programmes (to be included in the OE), it is not enough to contain quantified information on their environmental costs; it is also necessary, as mentioned earlier, that they be designed in a proactive logic of promoting the reduction of these same environmental costs. The basic budgetary aggregates – public revenue and expenditure (including fiscal  expenditure)  – must  still regularly pass through this environmental sieve or filter, and in particular the public expenditure review exercise (which is designed to achieve budgetary savings) must also be done in an environmental logic, if only with a view to obtaining future savings.  

An interesting aspect, but one that has not yet received enough attention in our country, is that which relates to the financing of the State through the issuance of 'green bonds'.  This new government bond has already been issued by some European countries (e.g. Sweden, France, Italy and Spain), but also by the Commission itself to finance the 'Recovery and Resilience Programme' adopted in the wake of the pandemic. These are new sovereign bonds, marked from the outset by liquidity and security, and which can mean a change in the functioning of the debt market (now  guiding the 'appetite' of investors for 'green' objectives), also changing the risk profiles and financing conditions of the debtor countries in question.

Finally, also in terms of budget implementation, environmental performance should be assessed and the budget implementation reporting instruments should contain information on progress or setbacks in this area. There are those who argue that, just like companies, which are today increasingly obliged or conditioned to draw up sustainability reports to be added to conventional financial statements, the State should also evolve in this direction when presenting its accounts, that is, present its own 'Global Sustainability Report'. In this same framework, one can evolve towards the adoption of a 'green balance sheet' that also records the assets and liabilities related to our environment (or the country's natural resources).

The implementation of green budgeting among us, throughout the entire budget cycle, will be favoured by the adoption of true performance budget programmes, provided for in the Budgetary Framework Law (which is not yet done), and should, in turn, imply the conclusion of the process of adopting accrual accounting that allows the construction of a State balance sheet and where the aforementioned 'green balance sheet' can even be grafted, with a view to the subsequent monitoring of environmental risks and risks to public finances.

Date of last update: 26/05/2023