In the Union Budget 2024-25, it was announced that the government would develop a ‘Climate Finance Taxonomy’ to boost capital availability for climate adaptation and mitigation, aiding India’s green transition and climate commitments.
Climate Finance Taxonomy/ Green taxonomies
- About: A climate finance taxonomy is a system that classifies which parts of the economy may be marketed as sustainable investments.
- It refers to a set of standardised regulations and guidelines to inform companies and investors on making impactful investments towards environmental conservation and combating the climate crisis.
- This initiative of Climate Finance Taxonomy will support achievement of the country’s climate commitments and green transition.
- Derived from: The term ‘taxonomy‘ originally comes from the field of biology.
- It is the scientific method of naming and classifying organisms, including plants, animals, and microorganisms.
- Countries that have established Taxonomies: Countries that have developed taxonomies to facilitate climate-sensitive investments include South Africa, Colombia, South Korea, Thailand, Singapore, Canada, Mexico, and the European Union. Additionally, China, Malaysia, and Sri Lanka have also issued green taxonomies for this purpose.
- Impact of adopting green taxonomies on India:
- Attract International Climate Funds: A taxonomy could help increase foreign climate investments, addressing the current shortfall in green finance.
- Currently, green finance flows in India only account for around 3% of total FDI inflows to India, according to the Landscape of Green Finance in India 2022 report, published by Climate Policy Initiative.
- Clarify Sustainable Activities: Provide clear definitions and criteria, overcoming the existing ambiguity in what constitutes sustainable activity.
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Role of Taxonomies in Climate Finance
- Standards for Financial Instruments: Establish criteria for classifying climate-related investments such as green bonds.
- Climate Risk Management: Aid in assessing and managing risks associated with climate change.
- Net-Zero Transition Planning: Support planning and implementation strategies for achieving net-zero emissions.
- Climate Disclosure: Facilitate transparent reporting and disclosure of climate-related financial information.
- Alignment with Science-Based Pathways: Ensure that economic activities meet credible, science-based transition pathways.
- Boost Deployment of Climate Capital: Encourage investment in climate-related projects and initiatives.
- Reduce Greenwashing Risks: Minimise the chances of misleading claims about environmental benefits.
Potential for Green Investments in India
- Total Climate-Smart Investment Potential: India has a climate-smart investment potential of $ 3.1 trillion from 2018 to 2030, according to a report by the International Finance Corporation (IFC).
- Electric Vehicle Sector: The largest space for investment is in the electric-vehicle segment, at $ 667 billion as India aims to electrify all of its new vehicles by 2030.
- Renewable Energy Sector: Significant investment avenue, with potential valued at $403.7 billion.
India’s Climate Commitments
- Net Zero Economy: India aims to achieve a net-zero economy by 2070.
- According to the IFC, India needs an estimated $10.1 trillion to achieve net-zero by 2070. Public investments alone can’t match this goal, which calls for standardisation in investments.
- Reduce Emissions Intensity: It has also pledged to reduce the emissions intensity of its GDP by 45% by 2030, from the 2005 level.
- India has committed to achieve about 50% cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030 as well.
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Measures Taken by India to Set Up a Green Taxonomy
- Task Force on Sustainable Finance: It was established in January 2021 under the Department of Economic Affairs, Ministry of Finance.
- Its objectives include creating a framework for sustainable finance, establishing pillars for a sustainable finance roadmap, drafting a taxonomy of sustainable activities, and developing a risk assessment framework for the financial sector.
- Reserve Bank of India (RBI) Initiatives:
- RBI Joined the Central Banks and Supervisors Network for Greening the Financial System (NGFS) as a member.
- RBI Participates in the Basel Committee on Banking Supervision’s task force on climate-related financial risks.
- It also engages with the International Platform on Sustainable Finance.
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Conclusion
While the budget announcement on the green taxonomy is a step forward, it lacks specific timelines for implementation and details on carbon pricing mechanisms.
July 24, 2024
