Integrating climate change into public finance

Pakistan’s climate vulnerability doesn’t figure much in popular discourse. But its linkages with the broader economy require a proactive focus from the public and private sectors. Asad Abbas Maken, who is a Regional Public Finance Expert (Consultant) for UNDP Pakistan, spoke last week at a UNESCAP-SDPI moot on public financing for climate-resilient development. Later, BR Research sat down with Mr. Maken to discuss integration of climate change into public finance. A former civil servant and taxman, he has previously consulted for organisations including the World Bank, Asian Development Bank, USAID and DFID. Selected excerpts from our sit-down are produced below:

BR Research: In many countries, public sector is leading the way on climate change. You have been associated with a joint project between the federal government and UNDP Pakistan to strengthen the governance of climate finance. Can you tell us about that exercise?

 Asad Maken: Climate change is a serious issue for Pakistan, especially in terms of adaptation because it ranks among the top ten vulnerable countries. Despite this fact, climate-relevant expenditures had never before been distinguished as such in the budget. So government could not answer these questions or account for its spending.

The Climate Public Expenditure and Institutional Review (CPEIR) have rectified this situation. It does that by assessing how much government spending has been on climate change and whether or not that spending is aligned to real priorities. One part looks at the numbers, and the other on institutional issues behind those questions.

The CPEIR was led by the federal ministries of finance and climate change, with technical support provided by UNDP and a team of national experts. We did the exercise in two phases. In 2015, we looked at data from FY10 to FY13 for federal government as well as Khyber Pakhtunkhwa and three federal regions provided by the government’s controller general of accounts. A more extensive follow-up exercise involved all provinces, and was recently finalized. This was a first step in a larger process the project supports to strengthen integrated governance of climate finance. The benefit of the exercise is that at the national level one can now see climate-relevant spending over time and in a more comprehensive way.

BRR: So what does the review tell us about Pakistan’s spending on climate change?

 AM: It tells us that Pakistan’s spending has been fairly robust and consistent. We haven’t dealt so far with the effectiveness of the spending. But the level seems fine. The 2015 report showed that 5.8 percent to 7.25 percent of total federal expenditures related to climate change. The results from the 2017 exercise, which looked at spending from FY11 to FY15, are more or less the same.

BRR: How does Pakistan compare with the region in terms of climate spending?

AM: With about 7 percent spending, Pakistan is well-placed among regional countries. A CPEIR has been done in about 25 countries. And the share of climate spending as a function of total government spending ranges between 1 percent and 11 percent. However, I must caution that no specific figure can be a benchmark, because spending requirements vary according to specific country needs; moreover, different countries have applied the CPEIR methodology in various ways limiting cross-country comparability.

BRR: Climate change affects a lot of things. One could expand its scope to pretty much everything under the sun. How, then, did the review classify ‘climate-relevant’ expenditures?

AM: Climate change is cross-sectoral in nature. You cannot just look at one sector. Many of the things the government has been spending on relate to climate. Farmers understand climate change better than anyone else, but they cannot quite articulate it in traditional jargon. To answer your question, the study looked at the internationally-accepted definition of climate change, then classified activities into mitigation, adaptation and supporting activities, and then looked at how that spending took place across the sectors.

Once projects were classified as first being climate-relevant, they were then further scored into marginal, low, medium and high relevance. We applied weighted average to the expenditures to account for different degrees of climate-relevant spending and then arrived at total spending. For instance, preparing a school as a shelter contingency in the event of a disaster would have a marginal relevance to climate change. But if you are installing solar panels or developing drought-resistant seeds, they will come into high-relevance climate expenditures.

BRR: Can you tell us about the breakup between adaptation and mitigation? And how does that compare to the need?

 AM: Climate mitigation expenses dominate federal spending. One reason why is because the federal government has been making big investments in energy generation, particularly hydropower, for quite some time now. At provincial level, climate adaptation spending is higher, largely as provinces spend heavily on agriculture and irrigation development activities.

This spending spread reflects on functional assignment between federal and provincial governments. One could argue that Pakistan’s investment should ideally be less in mitigation activities because we don’t contribute much too global carbon emissions. But then, we have to at least maintain the emissions at those levels, so mitigation-related investments make sense. However, there is no hard and fast rule that you have to have a certain breakup between mitigation and adaptation activities. It depends on local needs.

BRR: What, then, is the climate spending requirement? Is there a reliable proxy to determine climate spending?

 AM: You cannot define individual requirements based on a universal proxy. A country may be really exposed to climate change but if it is already well-equipped to deal with the hazards, it won’t need a lot of spending. Compared to that, a country with medium or low climate-change exposure but having poor readiness and risk management would need to invest more in comparison.

It is important to assess the economic impact of country-specific climate impacts and vulnerabilities and financial gaps. This is where the climate change financing framework (CCFF) led by the ministries of climate change and finance and supported by the UNDP comes in. This document is in the works and its recommendations shared with the government.

BRR: How would that climate change financing framework look like?

 AM: The framework has two parts. The first half talks about systems. Climate change has to be integrated into governance and public financial management systems and CCFF provides a menu of reforms for this. The framework gives recommendations on such integration. Since CPEIR is time-consuming and expensive, a system of coding and tracking will help in providing periodic and transparent information on CC; this will enable tracking of climate spending for further analysis by planners. With real-time information, subsequent decisions can be made more effectively. Then you can do an ongoing analysis of all that qualitative and quantitative information during monitoring and evaluation.

It is critical to integrate climate change into planning and budgeting processes. From the planning stage, impact of spending on climate has to be assessed. This is the PC-1 stage for government projects. During budgeting, climate change angle must also be addressed. Once the integration is complete, the system would start responding itself to spending gaps based on information available on actual spending.

The other half of the CCFF is the gap assessment for different sectors, identifying the sources of financing. Pakistan is fortunate and amongst the very few countries that have a strong policy and institutional base for climate change. Pakistan has a climate change policy (2012), which recommends certain actions in sectors. The next step is alignment. This part of the CCFF is yet to be worked on. Enactment of the recent Climate Change Act will further facilitate implementation of CCFF.

BRR: What are the next steps in implementing this framework?

 AM: Recommendations have been formulated in consultation with the government for the financing framework and pending final approval. Coding and tracking process has already been started by the Controller General of Accounts. Tracking climate change expenditures will be an ongoing exercise.

BRR: How much help can an exercise like CPEIR provide Pakistan to secure external climate financing?

 AM: There are multiple factors involved in accessing external financing, but Pakistan’s position is strong. First, Pakistan is a good candidate based on its vulnerability. The CPEIR helps Pakistan show credibly that it is making an investment into climate change, but still faces a spending gap. Once relevant systems are in place, it will provide huge comfort level to the donors. If the systems are climate change responsive, and have accurate information on CC expenditures, it will lend credibility and reflect transparency as to the nature and efficiency of expenditures.

BRR: Generally, what are your thoughts on creating an attitudinal shift in the public sector as vis-à-vis climate change? 

 AM: Governance of climate finance is about more than just public financial management reforms. Stakeholders must be sensitized so that everyone knows how and why climate change affects society collectively and what government can and is doing about it. More informed debate from the parliament floor as well as on the media and private sector business forums can educate both the public and the pivotal decision-makers who take policy and investment decisions.