II - The role of the CFP in monitoring the impact of climate change

The Portuguese Public Finance Council (CFP) is very attentive and committed to this matter, taking the lead over other institutions in our country. Thus, it has already tried, in some recent documents (starting with the "Report on Risks and Sustainability" published in 2021^[1]), to identify/analyze some of these aspects:

• macroeconomic risks and impacts of climate change^[2];

• Economic impacts and impacts on public finances of the measures adopted or to be adopted in the scope of the so-called mitigation and adaptation policies, the former aiming at immediately containing the emission of greenhouse gases and the latter aiming at reconverting economies to decarbonised economies; 

• Identification of the current 'state of the art' of microeconomic policies with such mitigation purposes, in Portugal as in Europe and other parts of the world, in particular the advances that have been verified around carbon pricing, not only  for the purposes of emissions trading, but also for purposes of taxation. This issue has recently gained increased importance in the EU with the proposal to create  a Carbon Border Adjustment Mechanism (CBAM), to  be applied to products imported from third countries considered carbon-intensive (this same CBAM will be the basis of a new European own resource);

• Last but not least, the issue, which has definitely entered the agenda, of the so-called 'green budgeting', also strongly driven here by the EU and the proposals already put forward by it within the framework of the so-called 'Green Deal'. CFP has been directly involved in various initiatives involving the exchange of views and the sharing of best practices, within the framework of both the European Commission, the European Network of Independent Fiscal Institutions, and other organisations active in this area (such as the OECD). ^[3] The involvement of the academy in the discussion of this topic has also been promoted. ^[4] In the texts already published with the CFP’s seal, there is information on the models of green budgeting considering the advances made by other countries in this matter (e.g.  France and Italy) and also the signaling of the steps already taken in our country and what still remains to be done. ^[5] They also include proposals for the implementation of green budgeting in Portugal, such as:

1. Tagging of budget lines, expenditure lines, but also revenue lines, according to their favourable, unfavourable or environmentally neutral impact, accompanied by an environmental cost-benefit analysis of the budgetary policy measures to be implemented;

2. Assessment of the environmental performance of the SB from the point of view of the environmental policy objectives contained therein;

3. Regular review of fiscal expenditure and subsidies according to their impact on the environment;

4. Exercise to review general government expenditure from a green perspective;

5. Quantification of the greenhouse gases associated with the SB as a whole and with each of the policy measures to be adopted;

6. Inclusion of environmental considerations in long-term fiscal sustainability analyses;

7. Use of a shadow price for greenhouse gas emissions in the decision-making and evaluation processes of investment projects;

8. Adoption of a green balance sheet, which contains the assets and liabilities related to the country's natural resources.

In short, the response to the challenges of climate change is urgent and difficult. Policies and public finances should be looked at from an environmental perspective that allows each measure to be filtered in the light of its impact on the emission of carbon and other greenhouse gases. In this new approach, environmental and financial sustainability should be mutually reinforcing. To this end, we will have to adopt technically correct and perhaps politically courageous decisions now. Despite some important steps already taken towards the decarbonization of our economy (e.g. adoption of new energy sources), there is still a long way to go.

Date of last update: 29/05/2023