Understanding the Concept and Importance of Green Budgeting

As the climate crisis deepens, governments across the world are rethinking how they spend public money. A traditional budget measures rupees in and rupees out, but it rarely asks a crucial question: what happens to the air, water, forests, and future generations after that money is spent? Green budgeting is the answer to this blind spot. It is a reform in fiscal policymaking that puts environmental consequences at the centre of every spending and tax decision, transforming the Union Budget from a purely economic document into a climate-aware roadmap.

What is green budgeting? 🔗

Green budgeting is the practice of using the tools of fiscal policy to achieve environmental and climate goals. Instead of treating the environment as a side issue handled only by the Ministry of Environment, it mainstreams ecological thinking across every ministry, scheme, and subsidy. The OECD describes green budgeting as using budgetary policymaking tools to understand the environmental impact of spending choices and to ensure public budgets are aligned with climate and environmental objectives.

In simpler terms, it asks three questions of every rupee the government spends or collects: Does this help the planet? Does it harm the planet? Or is it neutral? Once these answers are tracked systematically, policymakers gain a clearer picture of whether the nation’s fiscal direction matches its climate promises.

The core idea 🔗

Traditional budgets focus on inputs (allocations) and outputs (spending). Green budgeting adds a third lens – environmental impact. It aligns public finance with commitments such as the Paris Agreement, the United Nations Sustainable Development Goals, and the Kunming-Montreal Global Biodiversity Framework. According to analysis by IEEFA, green budgeting shifts fiscal focus from short-term economic outcomes to long-term environmental resilience and sustainable development.

How green budgeting works 🔗

Green budgeting is not a single action but a set of tools applied across the entire budget cycle – planning, formulation, approval, execution, and oversight. Each tool serves a different purpose.

Green budget tagging 🔗

This is usually the starting point. Every scheme or expenditure line is labelled according to whether it supports environmental goals (green), harms them (brown), or is neutral. Tagging gives a quick snapshot of how much of the total budget is pulling in a sustainable direction. It is simple to implement but, as noted by ICAEW experts, defining what counts as “green” can be challenging and may risk obscuring real outcomes if done narrowly.

Environmental impact assessments 🔗

Before a policy is approved, its potential environmental externalities are studied. For example, if the government proposes a new highway, an impact assessment would weigh the emissions from increased traffic against the economic benefits.

Carbon and climate assessments of budget measures 🔗

These go a step further than tagging by quantifying the carbon emissions linked to specific expenditures. Such assessments help connect spending directly to measurable climate outcomes.

Environmental fiscal reform 🔗

This involves restructuring taxes and subsidies so that polluting activities face higher costs while clean activities receive incentives. Classic examples include carbon taxes, removal of fossil fuel subsidies, and tax breaks for renewable energy.

Green budget statements 🔗

These are dedicated reports published alongside the main budget, showing citizens and legislators how the budget contributes to environmental goals. They act as accountability documents and anchor transparency.

Why green budgeting matters 🔗

The importance of green budgeting becomes obvious when we consider the scale of the climate challenge. India alone will need enormous investment to meet its net-zero and adaptation goals. According to an estimate cited in IndiaSpend’s analysis of climate financing, the country will require approximately Rs 85.6 lakh crore in cumulative expenditure by 2030 for climate adaptation alone. Public finances must work harder and smarter to meet this scale.

Driving climate action through public money 🔗

Government expenditure is the single largest lever available to steer an economy. When public funds are deliberately channelled into renewable energy, sustainable transport, afforestation, and clean industrial processes, the pace of decarbonisation accelerates sharply. Green budgeting ensures this channelling happens in a planned, measurable way rather than being scattered across ministries.

Efficient allocation of scarce resources 🔗

Fiscal space is always limited. Every rupee spent on an environmentally harmful subsidy is a rupee not spent on schools, hospitals, or clean technology. Green budgeting highlights these trade-offs and pushes governments to redirect funds from environmentally damaging uses towards productive green investments. Indonesia, for instance, cut fossil fuel subsidies by around ten billion dollars and redirected the savings towards renewable energy deployment.

Policy coherence across ministries 🔗

Environmental regulation has traditionally been confined to environment ministries whose budgetary weight is small. Green budgeting breaks this silo by mainstreaming climate objectives into the finance ministry itself, which controls the purse. As the Green Budgeting Portal by TERI points out, such mainstreaming shapes the attitudes and commitments of officials across departments, turning sustainability into everyone’s job.

Meeting international commitments 🔗

Countries have signed on to ambitious pledges under the Paris Agreement, the SDGs, and various biodiversity frameworks. Green budgeting provides the transparent reporting that allows progress to be tracked and credibility to be maintained. Without such a mechanism, climate promises risk becoming rhetoric without follow-through.

Signalling effect on markets and citizens 🔗

When the government demonstrably favours green sectors, it sends a strong market signal. Private investors, industries, and even households recalibrate their own decisions. A bigger allocation for mass transport over toll roads, for example, nudges citizens to favour public transport and encourages manufacturers to invest in electric mobility.

Green budgeting in the Indian context 🔗

Though India does not yet have a formal green budgeting framework at the central level, recent Union Budgets have steadily introduced green elements. The 2023-24 Union Budget explicitly positioned “green growth” as one of its seven priorities, and successive budgets have built on this foundation.

Key green initiatives in recent budgets 🔗

Recent budgets have featured several major green measures. Sovereign green bonds have been issued to finance public sector projects that reduce the carbon intensity of the economy. The Centre on Global Energy Policy at Columbia University notes that budgetary allocation towards renewable electricity rose by nearly fifty percent in a single year, supporting a rapid ramp-up of solar and hydrogen capacity. Other measures include viability gap funding for wind energy, coal gasification pilot projects, mandatory blending of compressed biogas in CNG, and support for the electric vehicle ecosystem through manufacturing incentives and charging infrastructure.

State-level green budgeting 🔗

Indian states have begun experimenting with their own green budget statements. As highlighted by the Centre for Budget and Governance Accountability, states like Bihar and Odisha have demonstrated the positive impact of such initiatives, supporting calls for a national-level climate-responsive budgeting framework with active government involvement at all levels.

The road ahead for India 🔗

Experts suggest several next steps for deepening green budgeting in India. A comprehensive green taxonomy is needed to define what qualifies as a green expenditure. Net-zero planning should be formally aligned with medium-term fiscal goals. Subnational governments need capacity support to adopt systematic green budgeting practices, since many climate-sensitive sectors such as agriculture, water, and urban infrastructure are in the state list.

Global momentum behind green budgeting 🔗

Green budgeting has moved from a niche idea to a mainstream reform. The OECD’s 2024 report on green budgeting found that two-thirds of surveyed countries – 24 out of 36 – had implemented green budgeting measures by 2022, up from just 14 countries in 2020. France, Italy, Ireland, and Austria have been early leaders, with Austria evaluating all its expenditure programmes on a green-to-brown spectrum.

The OECD Paris Collaborative on Green Budgeting, launched in 2017, has become the main international forum for exchanging practices. The European Union has also developed a Green Budgeting Reference Framework to guide member states in designing national systems.

Challenges in implementing green budgeting 🔗

Despite its promise, green budgeting faces real hurdles. The first is methodological – deciding what counts as green, brown, or neutral is not straightforward. A metro rail project, for example, reduces emissions in operation but may have a significant carbon footprint during construction.

The second challenge is institutional capacity. Green budgeting demands specialised skills in environmental economics, data analysis, and carbon accounting. Finance ministries in developing countries often lack these capabilities and must build them from scratch. The third challenge is political. Cutting fossil fuel subsidies or raising environmental taxes can be politically costly even when economically justified. Without strong public awareness and political will, green budgeting risks being cosmetic.

Finally, there is the risk of greenwashing – labelling expenditures as green when they have only marginal environmental benefits. This undermines credibility and defeats the purpose of the entire exercise.

The promise for sustainable development 🔗

Despite these challenges, green budgeting holds transformative potential. By embedding environmental considerations into every fiscal decision, it closes the gap between what governments promise on climate and what they actually fund. It makes sustainability accountable, measurable, and actionable. For a country like India, which faces both a huge development agenda and extreme climate vulnerability, green budgeting offers a practical path to reconcile growth with ecological limits. It can help direct scarce public money to where it delivers the greatest social, economic, and environmental return simultaneously.

What do you think? If every rupee of the Union Budget were tagged as green, brown, or neutral tomorrow, which sectors do you think would show the starkest mismatch with our climate promises? And how can ordinary citizens hold their governments accountable for truly green budgeting rather than merely green labelling?

References

1. https://www.oecd.org/en/topics/green-budgeting.html
2. https://ieefa.org/resources/what-green-budgeting
3. https://www.icaew.com/insights/viewpoints-on-the-news/2025/apr-2025/green-budgeting-driving-sustainable-growth-through-smart-planning
4. https://www.indiaspend.com/budget/how-india-budgets-for-changing-climate-940335
5. https://blogs.worldbank.org/en/governance/embracing-green-budgeting–a-game-changer-in-fiscal-policy
6. https://greenbudgeting.teriin.org/about-green-budgeting.php
7. https://www.energypolicy.columbia.edu/unpacking-indias-green-growth-budget/
8. https://www.cbgaindia.org/blog/exploring-opportunities-offered-by-green-budgeting-statement/
9. https://www.oecd.org/en/publications/green-budgeting-in-oecd-countries-2024_9aea61f0-en.html
10. https://economy-finance.ec.europa.eu/system/files/2023-05/European%20Union%20Green%20Budgeting%20Reference%20Framework.pdf