Context and role of Ministries of Finance 

Financing the transition works through existing budget processes 

The budget is the central instrument available to a Ministry of Finance (MoF) for allocating public resources, shaping incentives, and supporting private finance mobilization in line with the transition. Development strategies, Nationally Determined Contributions (NDCs), and adaptation plans remain unfunded commitments unless their priorities are reflected in the budget. Yet most expenditure is already committed to debt service, the wage bill, and statutory transfers. The practical task is therefore to use a limited discretionary margin and, over time, redirect the existing stock of spending rather than assume that new resources are available. 

MoFs have taken on major new claims before, from pensions to universal health coverage and mass schooling, and have built systems to appraise, finance, and sustain them (Schuknecht and Tanzi, 1995). Financing the transition draws on the same processes, though its front-loaded capital costs and long, uncertain payback periods are more similar to infrastructure investment. Much of the required spending remains ordinary investment that an MoF would assess on its economic merits irrespective of whether it carries a climate label. However, where investments also delivers demonstrable climate benefits, they may support access to concessional finance and help establish additionality for financing partners. 

The budget cycle provides the organizing frame

MoFs plan, allocate, execute, and account for public money through the budget cycle. It runs from macro–fiscal forecasting and fiscal strategy through budget preparation and approval to execution, accounting, reporting, and audit (Allen et al., 2015). Public financial management (PFM) comprises the institutions, rules, and systems through which governments manage public resources. Green PFM integrates climate and environmental considerations into these existing arrangements rather than creating parallel systems (IMF, 2021).

Each phase of the budget cycle offers a different entry point

This Action Area focuses on budget formulation and considers what each of the following the entry points in the PFM cycle require in administrative cost, capacity, and political economy (see Figure 1): 

1. In the strategic and macro–fiscal phase, climate, nature-related, and disaster risks may enter forecasts, debt sustainability analysis, and the fiscal strategy that sets the resource envelope. 

2. During preparation, the circular, expenditure ceilings, and challenge function determine what is funded. 

3. At approval, published classification results can inform legislative deliberation. 

4. For execution and procurement, the question is whether spending produces the intended outputs. 

5. Accounting, reporting, and audit show where resources went and allow findings to inform future circulars.. 

Figure 1. The public financial management cycle and where climate action enters

Source: Adapted from Appendix 2, Key entry points for mainstreaming climate action in budget formulation prepared by Peter Murphy, (Expert Advisory Group) and IMF (2021). 
Note: Timings are indicative. 

Budget formulation has the greatest influence over allocations

Budget formulation is the main point at which an MoF can influence allocations to support growth, competitiveness, and resilience as the economy decarbonizes (Petrie, 2021). The aim is to finance the transition while protecting the public balance sheet against climate and disaster shocks. However, in most countries existing budget allocations fall short of the operating and capital expenditure required, including the funds needed to implement the climate and development strategies covered in Function 1. 

Public sources provided US$796bn of climate finance in 2024, about 40% of the US$2.008tn total, while the average annual requirement to 2030 is estimated at US$7.8tn (Climate Policy Initiative, 2026). For developing countries other than China, the Independent High-Level Expert Group on Climate Finance puts the requirement at US$2.3–2.5tn a year by 2030 (Bhattacharya et al., 2024).  

The budget can also support finance beyond its own resources. A credible fiscal framework, a pipeline of appraised projects, and clear signals through tagging, standards, guarantees, and blended finance facilities can help attract concessional and private capital rather than substitute for it (see Function 3, Driving innovations in financing models, including blended finance; and Part A, Why Ministries of Finance matter for climate action and economic transformation). 

Using the budget to support the transition starts before allocation  

Recording the climate relevance of allocations already decided is necessary but not sufficient; it reports where the money went rather than deciding where it should go. The main decisions come earlier, when the MoF and relevant line ministries determine what will be funded, including through program-based budgeting in countries that use it. The MoF can specify what a submission needs to assist line ministries and streamline the approval process. Climate proposals can then be assessed against the same considerations as other major spending proposals, including effects on growth, public finances and stability, and value for money.   

Conventional appraisal may understate the returns to adaptation where it does not adequately capture avoided losses and wider economic, social, and environmental benefits (Brandon et al., 2025). The same applies to ecosystem assets such as watersheds, wetlands, and forests that regulate water, reduce flood risks, and protect soils. Their contribution as natural infrastructure can be reflected in appraisal and in the performance indicators used to assess subsequent spending (see Function 2, Greening public investment management). 

The budget also has a role in managing physical and transition risks 

General fiscal buffers remain important because governments need to respond to many types of shock, not only climate-related ones. Physical climate risk is difficult to reduce to a single estimate because hazards evolve; tail risks can be large; and substantial exposures may sit in the losses and guarantees of state-owned power and water utilities. Fiscal risk statements can present ranges and identify contingent liabilities. Governments may also provide for these risks through reserves and, where available on appropriate terms, risk-transfer instruments. As disasters become more frequent, contingency provision may need to become a more regular part of budget practice (see Function 3, Providing disaster risk finance and insurance for all). 

Established public investment management systems can mainstream climate considerations into the PFM cycle 

Public investment management (PIM) is the appraisal and selection of major investment projects (see Function 2, Greening public investment management). Initial disaster-risk screening at the pre-appraisal stage may be feasible even where capacity is constrained. Appraisal tests the policy fit and value for money of major projects, and an MoF can adapt it so that material climate, nature-related, and disaster risks form part of that assessment. 

Figure 1 sets out possible entry points for integrating climate action across a typical PFM process. They cover: 

• Macrofiscal strategy and medium-term frameworks through budget circulars. 

• Spending reviews. 

• Climate budget tagging (CBT), a code, marker, or flag applied to budget lines, programs, or projects to identify their relevance to climate mitigation or adaptation; and tracking, the broader system that uses tagged data to monitor and report public climate finance. 

• Hearings. 

Entry points also extend to ex-post audit and parliamentary oversight, which normally sit outside the MoF. The timings and document names are illustrative, and no MoF is expected to follow every step. 

The strategic planning and fiscal framework phase is the earliest point at which medium-term choices can be shaped 

A medium-term fiscal framework (MTFF) is the top-down macrofiscal forecast that MoFs use to set aggregate revenue, spending, and deficit ceilings over the medium term; a medium-term expenditure framework (MTEF) is the allocation of those ceilings across sectors and programs over three to five years (Curristine et al., 2024).  

Where medium-term frameworks are in place, the MoF and line ministries can translate priorities for national development plans, long-term strategies, NDCs, and NAPs) into funded programs rather than unfunded commitments. Climate shocks may affect growth, inflation, revenue, and spending needs, while transition policies may alter the tax base. If these effects are material but excluded from the fiscal strategy, projections of debt and available fiscal space may be incomplete (see Box F2c.2). The objective is to support an early agreement across government on spending priorities and the corresponding implications for revenue, debt, and allocations. This is typically done through the MTEF. 

Clear MoF guidance during annual budget preparation can reduce the risk of late-stage climate-related allocations  

This guidance can encourage line ministries to show how proposed spending supports national strategic objectives, consistent with frameworks such as the United Kingdom Treasury Green Book. Depending on the national system, this may include:  

• Assessing the economic, social, environmental, and distributional effects of new climate policies. 

• Comparing options and setting out fiscal implications. 

• Identifying implementation barriers. 

• Explaining proposed shifts in sector allocations within available fiscal space. 

The challenge function turns strategy into scrutiny. An MoF can define the climate-related criteria that line-ministry submissions need to address before negotiations begin. The process can then test whether submissions reflect agreed priorities, respect ceilings, compare alternatives, demonstrate value for money, and use classifications and cost estimates that can be audited. 

Detailed review may also consider the effectiveness and efficiency of proposed measures and establish performance indicators through output-based frameworks. While AI-assisted screening can help assess large numbers of proposals, it does not replace expert review (OECD, 2025). 

Execution, reporting and audit determine whether budgeted allocations are delivered 

Cash rationing, mid-year reallocations, and slow procurement can disproportionately affect programs with long lead times or unfamiliar technical specifications, as is often the case for climate investment. The same instruments used to protect other priority spending may also be relevant, including commitment controls, treasury release rules, and limits on virement. Procurement determines whether resilience and other performance requirements identified during appraisal are reflected in what is built, through contract design, technical standards, and framework agreements (see Function 2, Greening public procurement). Full execution does not by itself demonstrate effectiveness, which also requires performance monitoring. 

CBT is widely used for monitoring or transparency purposes, but its effectiveness remains debated 

Box F2c.2 reviews what CBT has delivered, where it falls short, and the alternatives and complementary measures that can inform allocation decisions. 

Box F2c.2. CBT: Benefits, design, and coverage 

CBT can improve transparency, communication, and accountability, but does not by itself demonstrate better allocation. Tagging assigns climate relevance to budget lines, programs or projects, sometimes using weights to estimate climate expenditure. France’s Green Budget classifies spending annually, while Rwanda’s tagging feeds an annual Climate Budget Statement to Parliament (MINECOFIN, 2023). However, a marker records expenditure rather than outcomes; MoFs cannot use it alone to assess value for money or reallocate resources from underperforming programs (Long, Velandia, and King, 2026). Its usefulness depends on the decisions it informs and the administrative burden it creates (World Bank, 2021c; OECD, 2024). 

Classification requirements belong in the budget circular to inform preparation rather than only reporting afterwards. Clear guidance on adaptation spending, resilience criteria, and the timing of disaster risk reduction investment requests can support prioritization. Some climate information can be extracted from existing classifications to provide a starting point. Coverage can begin with capital expenditure before expanding to recurrent spending on energy, transport, information and communications technology, and routine procurement. Publication also matters: few countries present climate impacts alongside the executive budget proposal, limiting the information available for legislative scrutiny (IBP, 2023). Published tagging results and plain-language climate budgets for citizens can support transparency and public engagement. 

Many systems draw on the OECD-DAC Rio markers. This donor scoring convention flags an activity’s environmental or climate objective as Principal, Significant, or Not Targeted. A Principal objective is fundamental to the activity’s design or motivation—it would not have been funded or designed that way without it. A Significant objective is explicitly stated but secondary to the activity’s main purpose. Some also apply a negative tag to spending that works against climate objectives. 

Weights translate tags into reported climate expenditure, commonly counting 100% of principal-objective spending and 40–50% of significant-objective spending. The 40% convention is a reporting practice rather than a formal OECD-DAC rule (Calleja, 2021). Clear criteria, documentation, and quality assurance are therefore important. 

Adaptation requires explicit criteria and separate tracking. Irrigation, coastal protection, and urban heat programs may serve adaptation without appearing as such in standard categories. Analysis of donor projects tagged as adaptation-relevant found that more than 70% were either not clearly related to adaptation or too poorly documented to judge (Weikmans et al., 2017, in World Bank, 2021c).  Linking budget classifications to National Adaptation Plan (NAP) priorities can help governments identify and track spending against adaptation objectives (UNDP, 2025).  Dedicated adaptation financing arrangements can complement tagging by connecting funding decisions to defined priorities. 

Gender and nature objectives can be incorporated as systems develop. Joint gender and climate classification can reveal distributional gaps, support just-transition planning, and help meet the requirements of climate funds. Where gender-responsive budgeting already operates, existing systems can support dual tagging provided clear guidance and sex-disaggregated data are available (CABRI, 2022; ICLEI Africa, 2024). A related example is a gender-responsive water management project in Zambia’s drought-prone districts, combining dam rehabilitation with greater participation by women in water governance (NDC Partnership, 2025) ). Integrated gender and climate evidence can also support project design and access to climate finance. 

Dedicated biodiversity and nature tagging remains rare, and most frameworks miss secondary environmental effects (OECD, 2024). France’s approach covers six environmental axes and identifies spending unfavorable to nature. Explicit links to national biodiversity strategies and a do-no-significant-harm test can strengthen the evidence underlying nature classifications (World Bank, 2021c; IMF, 2025a). 

The success of tagging depends on underlying PFM systems, institutional arrangements, and available capacity. Clear responsibilities, coordination with line ministries, and quality assurance help make classification consistent and connect it to budget decisions. Program-based structures give tags meaningful objectives to attach to, while performance indicators help track results. Where budgets mainly record inputs, tagging provides less information about what spending achieves. MoFs can begin with a simple methodology and expand coverage as capacity develops. AI-assisted classification may reduce workload where systems and criteria are established, as Brazil’s National Treasury experience illustrates, but still requires expert review (OECD, 2025). Where delivery rests with subnational governments, consistent guidance, shared reporting tools, and transfer criteria aligned with NDC and NAP priorities can help connect national objectives to local spending. Linking tags to outputs and outcomes, as with Indonesia’s Low Carbon Development Planning and Monitoring Application (Aplikasi Perencanaan dan Pemantauan Pembangunan Rendah Karbon Indonesia, or AKSARA), can strengthen monitoring and inform future allocations. 

Tagging can be complemented by tools that assess spending choices more directly. The Sustainable Budgeting Approach compares budget measures across economic, social, and environmental impacts to inform decisions during formulation (O’Callaghan et al., 2023). Spending reviews assess existing expenditure and identify opportunities to redirect resources toward agreed priorities. Extending climate classification to tax expenditures, such as reliefs and exemptions, can also make a less visible form of government support easier to assess. Together, these approaches can connect information on climate relevance with decisions about what to fund, retain, or change. 

Source: Authors’ compilation, based on contributions from UNDP, CABRI, Murray Petrie and Andy King.

The budget cycle also extends to state-owned enterprises and subnational governments 

Subnational governments account for an average of 60% of climate-significant public expenditure across evaluated OECD and European Union countries, delivering transport, water, waste services, and front-line adaptation (OECD, 2023). Yet many countries have not engaged them systematically on climate spending, and central and subnational systems often use separate planning and reporting arrangements (see Box F2c.5 and World Bank, 2021b). Flexible climate-linked conditional grants are one option. The UNCDF Local Climate Adaptive Living facility in Uganda and Kenya’s Financing Locally Led Climate Action program channel performance-based climate finance to local governments through national systems (UNCDF, 2023; World Bank, 2021a). 

Box F2c.3. Green budgeting: From city experience to national practice  

While CBT is a valuable first step to revealing where money flows, green budgeting (also known as climate budgeting) goes further by linking climate targets to specific measures, funding, and responsibilities within the annual budget process. C40 Cities supports the development and application of this approach, and while it has primarily been tested at the city level the core framework is transferable to national government contexts. Oslo, New York City, and Mumbai—cities with very different governance structures, fiscal scales, and levels of development—have each built credible climate budgeting systems by adapting the framework to their own starting conditions (C40 Cities, 2025).      
Oslo pioneered city climate budgeting in 2016 in response to a challenge of accountability. The city had ambitious emissions targets but no mechanism to ensure the annual financial budget delivered them. It now includes a dedicated climate budget chapter within the financial budget, with each measure assigned a cost, a quantified emissions reduction, and a named accountable agency. The model has spread to around 200 Norwegian municipalities, demonstrating that the approach scales across different governance capacities and fiscal contexts (WRI, 2024). 
New York City screened its roughly US$98bn capital plan against net zero, flood, and heat criteria using finance-owned methods. This resulted in a more robust basis for fiscal decision-making, while accelerating over US$1bn in investment and producing the city’s first long-run emissions forecasts (NYC OMB, 2024; NYC OMB 2025). 
Mumbai began with an ex-post assessment showing that about one third of its capital budget was already climate-aligned but poorly targeted; it then built a prospective climate budget into its circular (BMC, 2024; C40 Cities, 2025). For resource-constrained settings, Mumbai shows that reviewing existing spending shifts the focus from incurring added costs to improving targeting.  
Source: C40 (Astrid Haas, Andrea Fernández, and Luis Saenz).

State-owned enterprises are often responsible for transition-critical utilities and infrastructure 

The transition and the public balance sheet depend on power, water, and transport infrastructure (see Function 3, Greening sovereign wealth funds and state-owned enterprises). Where these assets rely on transfers or guarantees, or where their liabilities can migrate to the state balance sheet, visibility within the fiscal framework supports the management of contingent liabilities and climate risks (see Function 2, Managing the fiscal risks of cascading contingent liabilities). Enterprises operatingon a fully commercial basis may instead be overseen primarily through the state ownership framework rather than the budget process. 

Audit and legislative scrutiny close the cycle by assessing whether the budget was executed as approved 

Supreme audit institutions have begun to examine climate-related spending and the quality of tagging, while legislatures increasingly ask what tagged expenditure achieved as well as how much was spent. The first climate disclosure standard for the public sector, the Sustainability Reporting Standard 1, was issued in January 2026 and applies to reporting periods beginning in 2028, with early adoption permitted (IPSASB, 2026). The fiduciary and reporting standards used to assess direct access to international climate funds mean that a PFM system able to demonstrate them may also support access to finance (see Function 3, Getting climate finance “ready” and leveraging MDB and DFI capital). 

Audited reporting may further support green bond issuance, donor co-financing, and public confidence in spending, the benefits of which arise over several decades. Early experience is collected in UNDP’s good practice guide for climate change audits (UNDP, 2026). The administrative cost of emerging standards is not yet established, and MoFs will need to weigh that cost against the expected benefits. 

Within an MoF, these functions fall across a defined set of units, although final responsibility varies by jurisdiction. Figure 2 maps each entry point to the unit or division that typically manages it. 

Figure 2. Where the budget entry points sit within an MoF 

Source: Prepared by the authors, drawing on Allen et al. (2015).