Recovery funds for climate action – does the funding actually help achieve climate objectives?

Governments around the world have spent huge sums on economic recovery following the pandemic. Many stimulus packages also aim to support climate action. But how can we make sure that the climate really benefits? Climate finance tracking methods provide one way of assessing and monitoring the allocation and impacts of funding. They can also support decision-making and improve the effectiveness of climate policy. A report commissioned by the National Audit Office of Finland contains recommendations for developing the tracking methods.

Major spending on recovery in the aftermath of the coronavirus pandemic coincides with growing concerns over future global threats, including the climate crisis. Many stimulus packages are thus geared to supporting the transition towards a carbon-neutral economic system. For example, the European Union has decided that at least 37% of the Next Generation EU recovery instrument amounting to EUR 750 billion should be used to support climate actions.

To what extent does recovery funding actually support climate action: are funds allocated in line with the climate objectives and are the actions effective? To support this examination, the National Audit Office commissioned a report from the Institute of European Environmental Policy (IEEP), which is an independent sustainability think tank. The report analyses climate tracking approaches and key methodological questions based on nine case studies. The case studies focus on Canada, France, Ireland, the European Union, Norway, Nepal, Chile, Mexico and the World Bank.

Harmful funding should also be identified to gain an overview of climate finance

The objectives of climate finance tracking methods vary from meeting quantitative climate finance commitments to mainstreaming climate policy by making it relevant to different sectors. Depending on its level of ambition, the tracking method may also seek to evaluate the effectiveness of finance.

The impacts of climate finance should be clearly demonstrable. Identifying funding that has a negative impact on climate objectives would also be essential. Only this way can we gain an overall understanding of the budget’s climate impacts.

Essential aspects of climate finance tracking methods include the extent to which indirect impacts are accounted for, and whether taxation is also included, rather than funding only. Additionally, the report’s authors argue that we should consider the level of government at which the funding is monitored and the budget cycle stage at which the tracking takes place: are we talking about ex ante tracking based on budget plans or ex post monitoring on the basis of actual funding, or both? IEEP also finds it important that funding for climate change mitigation and adaptation are kept separate. The report additionally reflects on whether funding in support of a just transition, including the retraining of the workforce, should be factored in. As the transition may target both mitigation and adaptation, avoiding double-counting should be ensured.

As tracking climate finance becomes more common, the uniformity and comparability of different systems – for example between EU Member States – will be important. Different approaches taken in the public and the private sector also pose their own challenges, including in situations where public sector investment acts as a catalyst for private investments. For example, the EU taxonomy for sustainable economic activity regulates private investors and contains the principle of doing no harm, according to which climate actions should not hamper the achievement of other environmental objectives.

Report supports cooperation between European audit institutions

This newly published report supports the work of not only the National Audit Office of Finland but also other European audit institutions. It is part of a European cooperation project focusing on long-term risks and climate finance. The National Audit Office serves as the vice chair of this project. The report helps auditors and researchers both in Finland and across Europe to verify how climate finance is realised and to better assess its effectiveness, while also providing decision-makers and the wider public with important information on appropriate use of budget funding.

To download this report published in English, go to the link below.