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The Centre will create a taxonomy for climate finance to encourage investments in climate action, Finance Minister Nirmala Sitharaman announced in the “Next Generation Reforms” section of the Union Budget 2024-2025 on July 23, 2024.
“We will develop a taxonomy for climate finance to enhance the availability of capital for climate adaptation and mitigation. This will support the achievement of the country’s climate commitments and green transition,” the minister said in her speech.
The taxonomy helps classify economic activities aligned with climate commitments along with broader environmental goals other than climate.
According to the United Nations Environment Programme, taxonomies provide clear definitions based on science, help avoid greenwashing and help identify eligible assets, activities or projects that are low-carbon, compatible with low-carbon economic development or environmentally sustainable.
Experts have largely hailed this move. “The development of a climate finance taxonomy is a proactive step as well, to direct more green finance towards our economy,” Avantika Goswami, programme manager for climate change at Delhi-based think tank Centre for Science and Environment (CSE), said. The 2015 Paris Agreement seeks to keep global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5°C.
Anjal Prakash, associate professor (research) and research director at the Bharti Institute of Public Policy at the Indian School of Business, said developing a taxonomy for climate finance to help improve the funds for adapting to climate change and also reducing greenhouse gas emissions was a good step. “This will support in achieving the country’s climate commitments and also achieve the changes needed on ground,” he added.
Sehr Raheja, programme officer at CSE, explained that the purpose of green taxonomies or climate taxonomies is to prevent greenwashing and accelerate the flow of finance to mitigation or adaptation activities that need it.
“The Indian finance regulator and the Reserve Bank of India have long been in the process of developing a green taxonomy; moving this process forward would be a welcome move,” she added.
The concept of taxonomy is not new. The European Union’s taxonomy seeks to increase transparency in the market and to direct investments to economic activities most needed for the transition, in line with the European Green Deal, which is a collection of policy initiatives that aim to steer the bloc on a path to green transition and climate neutrality by 2050.
The EU taxonomy has created four overarching conditions that need to be met by economic activity to qualify as “environmentally sustainable”.
In July 2023, the United Nations Environment Programme released a report, Common Framework Of Sustainable Finance Taxonomies for Latin America and the Caribbean, to provide guidelines for these states to develop sustainable finance taxonomies.
“India’s climate finance taxonomy could prove helpful and would be a move towards the ‘Paris alignment’ of finance in line with the goals of the Paris Agreement. Whether the tagging of activities improves finance for climate or brings in risks of greenwashing remains to be seen after it is released,” Sehr noted.
But not much is known about this announcement, for now. “The budget lacks timelines for announcements on taxonomy, carbon pricing mechanisms and detailed strategies for mobilising climate finance for adaptation and mitigation efforts in vulnerable communities,” Aarti Khosla, director, research-based consulting Climate Trends, said in a statement.
