The interest in greening public financial management (PFM) is gradually increasing and has been recently strengthened by a strong international move towards green recovery. Several EU Member States have committed to develop green budgeting practices.

European Union has set itself the objective of achieving zero net emissions by 2050, and it launched in December 2019 the European Green Deal as the roadmap to achieve carbon neutrality. This strategic package of policy measures has also provided the basis for the post covid-19 EU Recovery Plan. This led to strict conditions on the use of expenditure from the recovery and resilience facility (RRF), namely that 37% of EU RRF funding should be dedicated to climate projects, and that 100% of expenditure should respect the “do no significant harm” criteria.

Greening national budgets is key for climate action and the green transition. Budgets are one of the main expressions of how a government intends to implement its political ambition. The 2019 European Green Deal Communication highlights that “a greater use of green budgeting tools will help to redirect public investment, consumption and taxation to green priorities and away from harmful subsidies”.

Green budgeting is a priority-based budgeting approach that focuses on integrating environmental and climate objectives in the budget cycle. It is a useful decision-making tool for both better understanding expenditures, tax expenditures and revenues’ impact on climate change and environmental protection and informing citizens over budget allocation to this regard.

At the subnational level, regional authorities are directly confronted with climate change, biodiversity loss and increasing air, water and soil pollution issues in their respective perimeters. With increasingly stressed budgets and gradually rising energy and fuel prices, it is a major challenge for cities and regions to finance and implement measures and projects for mitigation and adaption to climate change. At the subnational level in the European Union (EU), the European Committee of the Regions adopted in its Commission for the Environment, Climate Change and Energy an opinion on “the implementation of green budgets at local and regional levels” (2022/C 375/07) in September 2022. The opinion calls for exempting green investments from the regional public deficit calculation and from the debt limit "golden rules".

Regional and local governments have jurisdictions and competences over crucial ecological-related policy areas such as housing development, land-use planning, transportation, wastewater treatment, and waste management. Therefore, subnational governments have a strong ability to mitigate and adapt to the negative impacts of climate-change through their local regulations and policies. This includes environmental protection policies, and more generally, mainstreaming environmental and climate considerations throughout the entire subnational policy framework and policy decision-making processes.

Subnational governments play a key role through their budget, whose share represents, on average, 37% of all public spending, 55% of all public investment and 32% of all tax revenue in the OECD in 2022. Subnational governments have therefore strong means that they can leverage to achieve carbon neutrality and climate resilience. Budget allocations made by subnational governments have an environmental and climate impact, be it positive, neutral, or negative.