India’s Climate Finance Taxonomy: Better Late Than Never?

Despite the country’s climate ambitions, it lacked a national policy framework to guide money earmarked for climate action to efforts that are truly sustainable. Until now. 

The Department of Economic Affairs on Wednesday released a draft framework for a national climate finance taxonomy intended to channel capital to activities that advance climate change mitigation and adaptation. 

Objectives + Principles + Approach = Guide

With clear objectives, defined principles and a tiered approach, the draft framework attempts to create a comprehensive guide for investments.  

The objective is three-fold. First, to encourage greater resource flow to climate-friendly endeavours that push the country to be Net Zero by 2070, but also ensure long-term access to reliable and affordable energy. 

Secondly, to prevent “greenwashing”, where investments are misleading and not actually eco-friendly, and thirdly, to be consistent with the goal of Viksit Bharat by 2047, thereby not compromising on development of the nation. 

The framework helps distinguish between mitigation efforts, adaptation efforts, and support to transition hard-to-abate sectors (where transition is challenging due to the nature of their processes or technologies) like steel. 

Built on eight principles that outline how to identify and classify activities, projects, and technologies, it was developed after consultations on the concept note and a review of existing taxonomies. 

Sliced and diced, the taxonomy will classify activities/projects into two buckets, either climate supportive or transition supportive.

The coverage of sectors is currently focused on and limited to power, mobility, buildings, agriculture, food and water security. But, it points to an iterative development of the taxonomy in addition to the proposal for sector-specific annexures and activity-level clarity, which will be critical for implementation across industries. 

Among the highlights are provisions to address climate risks and ensure resilient investments, direct investment towards clean-energy projects and building of infrastructure that is better adapted to weather threats from climate change. This includes MSMEs (Micro, Small and Medium Enterprises), along with a recognition of their unique financing needs and their significant contribution to India’s energy use. 

A Hybrid Model

A climate finance taxonomy has two sides: Qualitative and quantitative. The qualitative side outlines the principles and defines the objectives to identify the projects that contribute to climate action. This includes the country’s own climate goals, as well as its international commitments. In India’s case, this would be our Nationally Determined Contributions (NDCs) and the Sustainable Development Goals (SDGs).

The quantitative side sets measurable targets, such as specific reductions in greenhouse gas emissions or improvements in environmental performance. This allows accountability and transparency.

By combining these two aspects, the draft aims to create a flexible framework. It uses the qualitative principles to guide the overall direction, while the quantitative metrics offer concrete goals that can adapt to India’s diverse industries and changing regulations. 

In its own words, the draft framework was developed as a hybrid model that “combines qualitative principles with quantitative metrics”. 

This enables the taxonomy to be inclusive, addresses India's diverse industrial structure and allows it to respond to the dynamic nature of targets, regulations, and policies, all the while “promoting a science-based trajectory for climate transition”.

The move has been welcomed by investors, environmentalists, and other stakeholders. A way to direct money where the mouth is. But this isn’t the first time they have rejoiced and then been ghosted. 

Hiccups To A National Climate Taxonomy

The gap that existed between climate finance goals and actual investment standards was not for a lack of intent. It has been a while since the need for a common language for climate finance was recognised. 

The development of a national climate taxonomy was announced by Finance Minister Nirmala Sitharaman in the Union Budget of 2024-25. But it was delayed for 6 months, and then for 6 months again. 

In February, after the latest budget didn’t mention the taxonomy, The Secretariat analysed how the absence of a clear direction for investing funds could soon jeopardise India's green commitments. 

Now, the draft has finally been released. 

What Next?

It is estimated that India needs about US$2.5 trillion (at 2014-15 prices) to meet the NDC targets till 2030. It’s a large ask, but the release of the draft taxonomy is encouraging. It is expected to give climate finance investors more confidence.

The Carbon Markets Association of India (CMAI) that works to accelerate the Net Zero transition of India, is an active industry voice and stakeholder. It has urged other stakeholders to review and respond to the draft notification. 

“We will be submitting a consolidated response on behalf of all stakeholders to the Ministry of Finance, amplifying the industry’s insights and priorities in shaping this national framework,” the association announced. 

The policy framework is meant to be a living document, an iterative guide to shape the way a greener future is funded. This sets the stage, but the real test will lie in implementation and uptake. Public consultation is open till June 25. Mark the date and file your inputs, if any, before that.