Daily Times

Pakistan, like many nations, confronts a host of challenges stemming from climate change, including recurring floods, land erosion, melting glaciers, pollution, shifting weather patterns, and biodiversity loss. These environmental perils not only jeopardize the lives and livelihoods of millions but also expose the government to significant fiscal risks. Urgent action is required, and Pakistan must infuse climate considerations into its economic policies and budgetary practices. Green budgeting, a strategic approach that utilizes budgetary tools and policies to achieve climate and environmental objectives, offers a systematic means to assess the budget’s alignment with Pakistan’s climate and environmental agenda. By integrating an environmentally-conscious approach across policy domains and throughout the budget process, green budgeting can mitigate financial risks associated with climate change and environmental degradation.

With the imminent presentation of Pakistan’s federal budget for the fiscal year 2023-2024 on June 9th, 2023, the government has a timely opportunity to prioritize and embed climate change considerations within its economic agenda. This budget serves as a pivotal instrument for resource allocation, priority setting, and driving sustainable development. By embracing the principles and strategies of green budgeting, Pakistan can align its fiscal policies with climate and environmental goals, promoting resilience, sustainability, and long-term economic growth.

Pakistan’s vulnerability to climate change is undeniable. The country has already experienced an increase in the frequency and intensity of extreme weather events, resulting in substantial economic losses and disruptions. Critical sectors such as agriculture, water resources, and infrastructure are already feeling the impacts. Without proactive measures, these vulnerabilities will escalate, jeopardizing the nation’s socioeconomic progress.

Achieving a sustainable and climate-resilient future necessitates collaborative endeavours across society.

Integrating climate change considerations into economic policy and budgeting is imperative for Pakistan’s sustainable development. By addressing climate risks and incorporating adaptation and mitigation strategies, the government can ensure efficient resource allocation, mitigate fiscal shocks, and cultivate a resilient economy capable of withstanding the challenges posed by climate change. Furthermore, integrating climate considerations into budgetary planning will unlock opportunities for green investments, job creation, and the transition to a low-carbon economy. As the government prepares to present the federal budget on June 9th, 2023, it is paramount to seize this opportune moment and prioritize green budgeting. By systematically assessing and managing fiscal risks associated with climate change, Pakistan can enhance fiscal resilience, safeguard public finances, and lay the foundation for a sustainable and climate-resilient future. The integration of climate change and environmental considerations into the budgetary framework is vital to facilitate effective and transparent resource allocation towards climate action.

Here are several recommendations for Pakistan to enhance fiscal risk management in terms of climate and environmental aspects:

Firstly, recognizing the Fiscal Risks of Climate Change: Governments need to acknowledge that climate change presents diverse fiscal risks that should inform budgetary strategy. These risks include both immediate impacts such as property damage and trade disruptions due to extreme weather events, as well as long-term risks associated with policy and technological adjustments to mitigate or adapt to climate change. It is essential to understand that environmental degradation, rising sea levels, land erosion, and other consequences of climate change can undermine ecosystems vital to the economy.

Secondly, analyzing and Managing Climate Change Risks: To maintain fiscal credibility and mitigate negative contingencies, governments must analyze and manage risks related to climate change and environmental degradation. As extreme weather events become more frequent and intense, they lead to substantial economic losses shared by the public and private sectors. Governments should be prepared to redirect resources to more productive uses to ensure economic recovery and growth. Climate change-related fiscal responses often increase government deficits and debts, which must be anticipated and accounted for in budgetary planning.

Thirdly, tools for Assessing and Managing Fiscal Risks: Governments have access to various tools to assess and manage fiscal risks related to climate change. By distinguishing between sudden shocks and gradual transformations, governments can analyze the vulnerability of public and private assets to future disasters. Historical analyses of past disasters and the identification of climate change-driven risks should inform the fiscal strategy, medium-term budget frameworks, and the Public Sector Balance Sheet.

Fourthly, Macro-Fiscal Scenario Analysis and Stress Tests: Macro-fiscal scenario analysis and stress tests are valuable tools for analyzing and managing fiscal risks associated with climate change. Governments should consider plausible climate change scenarios and use them as the basis for stress test exercises. Such scenarios and tests enable better risk management by demonstrating the need for prevention and mitigation efforts, ensuring the availability of fiscal resources for rapid response, and facilitating the creation of dedicated funds and instruments. Budget documentation should include information on fiscal risks related to climate change and natural disasters.

Fifthly, enhancing Frameworks for Climate Change-Related Risks: It is crucial to bolster frameworks that address climate change-related risks comprehensively. The amplifying effects of climate change on natural disasters necessitate the development of robust frameworks for understanding, managing, and disclosing fiscal risks associated with climate change. These frameworks are instrumental in providing decision-makers with valuable insights into the fiscal risks posed by climate-related factors. Consequently, comprehensive disaster risk management frameworks should be established to effectively inform policymakers about the financial implications of climate-related risks. By implementing disaster risk financing strategies, governments can proactively limit the impact of climate-related disasters on public finances. Accurately estimating both explicit and implicit liabilities arising from natural disaster risks is essential. Employing advanced modelling and assessment tools, such as probabilistic disaster risk modelling, Monte Carlo simulation, and stochastic analysis, can enable governments to gauge the economic and fiscal repercussions of such disasters. Armed with these insights, policymakers can then develop strategies to enhance financial resilience, ensuring the ability to withstand both the immediate and long-term effects of climate-related disasters on public finances.

Sixthly, broadening Long-Term Fiscal Sustainability Analysis: Long-term fiscal sustainability analysis traditionally focused on demographic changes. However, the fiscal consequences of climate change are gaining prominence. Climate change may result in higher public expenditures for infrastructure reconstruction and disaster relief transfers. Adverse economic effects can reduce the tax base, leading to lower tax revenues. Considering climate and environmental factors in long-term fiscal sustainability analysis can identify savings from early mitigation and adaptation efforts, which may appear fiscally burdensome otherwise.

Seventh, the inclusion of Climate Change Risks in Fiscal Sustainability Analysis: Governments must incorporate climate change and environmental risks into long-term fiscal sustainability analysis using diverse methodologies. Initially, raising awareness of the issue through a qualitative assessment is essential. As progress is made, governments should expand their efforts to quantify climate change risks in selected channels that are more readily measurable. This incremental approach ensures a comprehensive grasp of the fiscal implications stemming from climate change. By gradually incorporating these risks into fiscal sustainability analysis, policymakers can effectively gauge the potential fiscal impacts and make informed decisions to safeguard long-term fiscal stability.

Finally, transparent Disclosure of Environmental and Climate Change Risks: Quantification and management of environmental and climate change-related risks should be transparently disclosed. International guidelines, such as the IMF’s Fiscal Transparency Handbook and the OECD Recommendation on Budgetary Governance, highlight the importance of quantifying and disclosing risks like natural disasters in budget documents. Currently, few countries, including Pakistan, consider climate or environmental risks in their fiscal reports, limiting transparency and hindering effective risk management.

By adopting green budgeting principles and implementing these recommendations, Pakistan can enhance its financial risk management in the face of climate change and environmental degradation. The integration of climate and environmental considerations into the budgetary process will contribute to a more sustainable and resilient economy while safeguarding public finances.

In conclusion, as Pakistan confronts the formidable challenges posed by climate change and environmental degradation, the adoption of green budgeting principles emerges as an imperative for effective financial risk management. Integrating climate considerations into economic policy and the budgetary framework becomes crucial for ensuring a sustainable and resilient future. By acknowledging the fiscal risks associated with climate change and environmental degradation, undertaking thorough risk analysis and management, and employing tools such as macro-fiscal scenario analysis and stress tests, Pakistan can bolster its fiscal resilience and safeguard public finances. Moreover, expanding long-term fiscal sustainability analysis to encompass climate and environmental factors will enable the identification of cost savings from early mitigation and adaptation efforts, paving the way for a more sustainable trajectory.

Transparency and disclosure pertaining to environmental and climate change-related risks play a vital role in fostering accountability and informing decision-making processes. Pakistan must take proactive measures to quantitatively assess and transparently disclose these risks in budgetary documents, aligning its practices with international best standards and enhancing fiscal transparency. With the imminent presentation of the federal budget on June 9th, 2023, Pakistan finds itself at an opportune juncture to prioritize green budgeting. By integrating climate change considerations into economic policies, allocating resources towards climate action, and advancing sustainable development, Pakistan can effectively mitigate fiscal risks, foster resilience, and propel long-term economic growth. Achieving a sustainable and climate-resilient future necessitates collaborative endeavours across all sectors of society. Policymakers, experts, civil society organizations, and citizens must unite to implement green budgeting strategies, advocate for sustainable practices, and hold the government accountable for its climate commitments.

By wholeheartedly embracing green budgeting principles and fortifying fiscal risk management in the face of climate change, Pakistan can forge a path toward a greener, more prosperous, and resilient future for its citizens and the planet. The time for action is now, and the federal budget signifies a momentous opportunity to prioritize climate change as an integral component of Pakistan’s economic policies.

The writer is associated with SDPI as an energy consultant. He can be reached at khalidwaleed@sdpi.org and tweets @Khalidwaleed_