Post: COP30, public finance, and the state

It’s the main event on this year’s climate policy agenda. World leaders (some), policymakers, experts, and advocates (well-nigh all of them) are meeting in Belém this week for COP30, the culmination of Brazil’s COP presidency. The summit itself was preceded by a long schedule of preparatory and supporting events all year. One of which, barely less exciting than the main event itself, “States of the Future 2”, was held last month in Rio de Janeiro. The Brazilian Ministry of Management and Innovation in Public Services[i] (or MGI, by its Portuguese acronym) hosted a group of experts to discuss the role of the state in a future that comes to grips with climate change.

The conference brought together an interesting mix of Brazilian officials and academics, experts from the Americas (mostly South), and a smattering of people from further afield (including yours truly). There was a lot of discussion of the changing global landscape, the threat to democratic norms and institutions (Latin America’s massive achievements in this area are easily forgotten among Europeans), as well as ways that climate action and public institutions can be made mutually reinforcing. In other words, far too much ground for me to cover, so I’ll limit myself to a few observations about climate action and public finance institutions.

States of the Future 2, part of the road to COP30

There is a lively debate going on about what climate action even means, and what it should mean. It probably won’t be settled anytime soon, if ever. But starting with the bigger picture, I don’t think the nature of economic and especially fiscal resilience is terribly different in the context of climate action. It always evolves around some narrow measures of fiscal sustainability – having deficits and debt levels under control, as well as having the fiscal capacity to mount a serious fiscal response to short-term emergencies and crises. Resilience also clearly includes growth prospects, economic diversification, and a path towards economic transformation – if only because without those things, it is hard to see how fiscal sustainability could be maintained over the long term.

There is a big difference between climate change and many other areas of public policy: it imposes an inflexible measure of impact. CO2 emissions either go down or they don’t. Global temperatures either level out at some point or they won’t. Maybe the environmental impact of a given temperature increase is going to be different from our current predictions, but how it plays out is subject to the laws of physics and not societal agreement. Yes, whether environmental impacts cause deaths and harm people is a matter of adaptation and very much subject to human agency, but we can’t negotiate with storms and droughts.

Budgeting and fiscal policy are rarely about physics and objective outcomes. At its core, budgeting evolves around distribution and the balancing of competing claims on the public purse. From highways to hospitals to child benefits, there is no objective measure of how much is “enough”. The ultimate measures of success or failure are delivered, however imperfectly, via political accountability. If a government fails in its balancing of roads versus schools, it will face electoral consequences (at least in a democracy). More of everything is usually better, but revenues are finite. If all stakeholders are reasonably happy, there is no one else to say that higher pensions are better than more schools.

In most modern societies this balanced, dare I say incremental, way of allocating resources is deeply embedded in institutions and norms. For the most part, that is a good thing – budgeteers can achieve significant reallocations over time, but dramatic shifts right here and now are rare outside of major crises. Really bad ideas thus have a hard time breaking government programs overnight, at least in a system based on democratic institutions.

In contrast, progress towards net zero doesn’t engage in negotiation. Societies can decide to do less climate action and live with the consequences of the resulting climate change. That is a political choice. Societies cannot ignore climate action and then expect temperatures not to rise. If a government wants to pursue a path towards net zero, then it needs to have more information about the effects of its spending decisions, something of a medium-term plan, and possibly more of an active role in the economy than many governments have gotten used to in the last few decades. As Murray Petrie put it recently, the capacity demands required for serious progress will be severe.

Taking care of the planet for the future of humanity, no pressure (Foto: Jonas Pereira/Agência Senado)

There is no single institutional solution for climate action, but finance ministries have an increasingly good idea of the toolkit. It is perhaps understandable that the initial tools were relatively simple and symbolic, like green budget tagging. Given the state of global PFM, some amount of box-ticking will probably persist. But the debate has long moved on. An excellent overview published by the OECD under its green budgeting collaborative offers a very nuanced perspective on the cost and benefits of different tools, as well as analytical pointers on how these tools can give a government the information it needs to manage climate action within the budget process. Similarly, the Coalition of Finance Ministers for Climate Action has published a wealth of resources to support building ministerial capabilities.

The inconvenient truth is that most high-income country finance ministries already have the institutional and organizational setup they need, whereas in most low-income countries green budgeting will not be enough. OECD countries may choose to set different priorities, but their finance ministries do plenty of complex policy work, forecasting and planning, as well as interministerial coordination already. But if, for instance, a macro-fiscal unit lacks the capability to lead on climate action, then it needs to build up its macro-fiscal policy function in general. That is the binding constraint and fixing it takes longer than adding a section to the budget circular. Meaningful climate action only underscores the need to invest in budgeting and PFM.

Against this backdrop, it is very encouraging that governments in Brazil and elsewhere are trying to think through climate action not just as matter of policy design, but from the perspective of state capability. Hopefully, they’ll get a boost from Belém this week.

[i] Sidebar for structure of government geeks: MGI is primarily the ministry for the civil service (or "función pública" elsewhere in Latin America), as well as the lead on state reform. Its setup offers an interesting counterpoint to countries that chose to establish separate ministries or bodies for state reform, as happened early this year in Germany, which easily end up more lightweight when they’re not really responsible for the thing they’re trying to reform.