Green budgeting

Also called: Climate budget tagging · Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Beyond NCERT

Meaning

Green budgeting (also called climate budget tagging) means the government uses budget tools to mark, or "tag", each item of its spending and revenue and to check whether it helps or harms the environment and the climate.

It matters because a budget shows what a government really values. Green budgeting shows how much public money goes to climate goals and how much goes to activities that pollute. This lets the government, the legislature and citizens compare what the government promised on climate with what it actually spent.

A simple way to read the result (the same method used for the Gender Budget Statement share): Green budget share = (Spending tagged as green ÷ Total budget spending) × 100

Explanation

How it works

• Step 1: Tag. Officials go through each scheme and each tax or revenue item. They mark whether it has an effect on the environment or the climate.
• Step 2: Assess. Officials judge how big that effect is and whether it is good or bad.
• Step 3: Report. The tagged figures are put together in a separate statement that is published with the budget.
• Step 4: Use it. The statement helps the government:
• move money away from polluting activities
• put more money into clean ones

• track results from year to year.

• Green budgeting does not create new money. It only re-reads the existing budget with a climate lens.

What gets tagged

• The spending side. Tags usually fall into three groups:
• Green (positive): helps the climate, for example solar power, afforestation (planting new forests) or flood protection.
• Neutral: has no clear effect on the environment, for example salaries in most offices.

• Brown (negative): harms the environment, for example support for fossil fuels.

• Two kinds of climate spending:

• Mitigation: cuts greenhouse gas emissions, for example renewable energy or electric buses.

• Adaptation: helps people cope with climate damage, for example drought-proof farming or cyclone shelters.

• The revenue side. This checks how taxes and subsidies affect the environment.

• A tax on polluting fuel raises money and also discourages pollution.
• An explicit subsidy (support shown openly in the budget as a spending line) on fossil fuels makes polluting cheaper. That subsidy gets a brown tag.

A worked example (hypothetical numbers)

• The inputs. Imagine a state that spends ₹1,00,000 crore in a year. After tagging:
• ₹8,000 crore is green (solar pumps, forests, flood control)
• ₹2,000 crore is brown (support for polluting fuel)

• the rest is neutral.

• The green share. (8,000 ÷ 1,00,000) × 100 = 8%.

• The brown share. (2,000 ÷ 1,00,000) × 100 = 2%.
• How to read it. If the green share rises next year and the brown share falls, the budget is moving towards climate goals.

What makes it stronger or weaker

• Stronger:
• clear, common rules for tagging
• the tagging is checked by an outside body
• revenue is covered as well as spending

• the tags are linked to outcomes (real change, such as lower emissions), not just to money spent.

• Weaker:

• loose tagging, where too many schemes are called "green" so the numbers look better
• covering only spending and leaving out taxes
• no follow-up on results.

In India

• States led the way. Odisha and Bihar began climate or green budgets from 2020-21.
• The Union level. The Centre has used sovereign green bonds since January 2023.
• A sovereign green bond is a loan the Union government raises, where the money can only be spent on green projects.

• These bonds are a way to raise money. They are not a tagging exercise.

• Where it fits. Green budgeting is one of India's budgeting innovations, along with:

• the performance budget, recommended by the Administrative Reforms Commission (1968)
• the outcome budget, from 2005-06
• zero-based budgeting, tried from 1986-87

• gender budgeting, with the Gender Budget Statement from 2005-06.

• The gap. Green tagging is still mostly done by states. There is no Union-level green statement like the Gender Budget Statement. For comparison, the Gender Budget Statement took up 9.37% of the Union Budget in 2026-27 [2].

• Legal base. The Union Budget itself comes from Article 112 (the Annual Financial Statement). No separate law requires green budgeting. It is an administrative practice.

Don't confuse with

• Sovereign green bonds: these are a borrowing tool that raises money for green projects (India, from January 2023). Green budgeting is an assessment tool that tags and judges all revenue and spending.
• Gender budgeting: this checks how the budget affects women, using Parts A, B and C of the Gender Budget Statement. Green budgeting checks the effect on the environment and climate. Both use the same idea of re-reading the budget through one lens.
• Outcome budget: this links a ministry's money to outputs and outcomes for every goal. Green budgeting looks only at environmental effects.
• Carbon tax: this is a single tax on emissions. Green budgeting is a framework that would record such a tax as a green revenue item.

Prelims Hooks

• Definition: green budgeting, or climate budget tagging, tags and assesses the environmental and climate impact of both revenue and spending, not spending alone.
• First Indian states: Odisha and Bihar had climate or green budgets from 2020-21.
• Sovereign green bonds were issued from January 2023. The trap: they are a debt tool, not the same thing as green budgeting.
• Mitigation vs adaptation: mitigation cuts emissions (renewable energy). Adaptation reduces damage from climate change (flood defences).
• A family of reforms: green, gender, outcome, performance and zero-based budgeting all focus on "what changed", not just "how much was spent".
• The trap: fossil fuel subsidies on the revenue or subsidy side are tagged brown (negative), even though they are welfare spending.

Mains Points

• From spending to results:
• Green budgeting moves the question from "how much was spent" to "what changed for the climate".
• It sits alongside outcome budgets and gender budgets.

• But in India it is still mostly done by states (Odisha and Bihar from 2020-21), so there is no national picture.

• The welfare vs environment trade-off:

• Subsidies on fuel (LPG was 2.6% of the Union subsidy bill in 2026-27 [1]) and on fertiliser (3.2% of total central spending in 2026-27 [1]) help the poor and farmers.
• They can also carry environmental costs.

• Tagging makes this trade-off visible, so it can be fixed through targeting, DBT or a switch to cleaner options, not through sudden cuts.

• The credibility problem:

• Without common rules and outside checks, green tagging can turn into greenwashing (calling ordinary spending "green" to look good).
• A Union-level green budget statement would help. So would linking tags to outcomes and connecting them to sovereign green bond spending.
• Together these would build trust and give India a stronger case in climate finance talks.

Related concepts

• Subsidy
• Cash transfers
• Targeting errors
• JAM trinity
• Universal Basic Income
• Freebies
• Performance budget
• Outcome budget
• Zero-based budgeting
• Gender budgeting

Read more

• Spending better: subsidies, DBT and budgeting innovations