What is in India’s new climate finance taxonomy — and why does it matter for climate action?

What is in India’s new climate finance taxonomy — and why does it matter for climate action?

The Union Ministry of Finance’s Department of Economic Affairs released the draft Framework for India’s Climate Finance Taxonomy last week, fulfilling Finance Minister Nirmala Sitharaman’s Union Budget 2024 announcement.

A climate finance taxonomy is designed to help policymakers and investors identify and streamline projects and sectors that need funding or resources and align with the country’s broader climate goals. For developing countries, defining what counts as climate-consistent, or truly ‘green’, is a crucial step forward for climate finance and action.

What’s in the framework?

Intended to be a “living document”, the taxonomy will be periodically reviewed to evolve alongside India’s climate finance needs. It is set to cover technologies, measures, projects and activities aligned with the country’s climate goals.

The taxonomy outlines key climate action areas: Mitigation, adaptation and the transition of hard-to-abate sectors. It further specifies the sectors and industries under each pillar, including power, mobility, buildings, agriculture, food and water security and hard-to-abate sectors, with an initial focus on cement, iron and steel.

Aligned with Association of Southeast Asian Nations or ASEAN taxonomies, the framework adopts a two-pronged approach: Qualitative and quantitative. The qualitative component sets out the objectives and principles for determining whether an activity is ‘climate relevant’. The quantitative aspect translates these principles into measurable ‘performance thresholds’, such as targeted reductions in greenhouse gas (GHG) emissions or improvements in emissions intensity.

These thresholds and sustainability metrics aim to establish clear, measurable targets, ensuring greater transparency and accountability going forward.
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How activities are classified

Activities and projects will be categorised into two main ‘baskets’ — climate supportive and transition supportive. Climate supportive activities are further divided into two tiers.

Tier 1 includes measures that result in absolute emission avoidance or reduce emission intensity (beyond a specified threshold, yet to be specified), while also contributing to climate adaptation or resilience.

Tier 2 comprises measures that lower emission intensity with defined pathways for further improvement; those that improve energy efficiency or reduce emissions in sectors where absolute emission avoidance is currently unviable; and those that support adaptation or enhance resilience but may involve some emissions due to technological or other limitations, such as restricted access to viable alternatives.

The qualifying criteria for transition supportive activities include measures, projects or activities that enhance energy efficiency and/or reduce emission intensity in sectors where absolute emission avoidance is currently unviable. The document goes on to highlight that “as long as the transition [activity] is in line with the stated policy of the government, it will be considered to meet the objectives of this framework.”

Notably, there are several overlaps in the current language of the qualifying criteria for different activities. For example, there are similarities between the criteria for ‘Tier 2 climate supportive’ activities and those for ‘transition supportive’ ones. One can assume this will be clarified in subsequent iterations and with the introduction of the respective quantitative metrics for each category.

The current version of the document outlines the rationale and approach of the taxonomy. Sector-specific annexures with further details are expected in due course. The draft is open for public consultation until June 25, 2025.
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Why green taxonomies matter

Climate finance is a key enabler of climate action. With the intensifying impacts of climate change, developing countries urgently need financial support to achieve their climate goals.

The independent research group Climate Policy Initiative (CPI) estimated that on average, overall annual climate finance flows need to increase five-fold compared to current levels to keep 1.5 degrees Celsius within reach. This would mean mobilising $7.5 trillion annually between now and 2030, according to their analysis. CPI further estimates that India alone will need around $2.5 trillion by 2030 to meet its Nationally Determined Contributions (NDC).

The United Nations similarly projects that at least $5 trillion in cumulative financing will be required by 2030 to support developing countries in achieving their NDCs. Since these countries cannot bear this burden alone, tools such as green taxonomies can play a role in directing finance where it is most needed. By offering investors and domestic stakeholders clearer guidance and information, green taxonomies’ potential to mobilise more climate finance, or supplement countries’ efforts towards ‘greener economies’ is likely to improve, according to experts.

Encouragingly, the Indian framework explicitly states that one of its core objectives is to prevent greenwashing — a persistent concern in global climate finance.

The use of green taxonomies is gaining global traction. Countries such as China, the European Union, Colombia, Indonesia, South Korea and Pakistan have developed their own versions in recent years. However, there remains a stark divide in adoption: A World Bank report found that 47 sustainable finance taxonomies have been released around the world as of April 2024, but while three-fourths of advanced economies are covered by some form of a finance taxonomy, only a little over 10 per cent of emerging markets and developing economies are party to this trend.

Broader implications for global climate finance discourse

Against the backdrop of the raging debates last year around the UN-driven New Collective Quantified Goal (NCQG) on climate finance — and the long-standing gaps in actual finance delivered — countries from the Global North have often urged emerging economies to improve domestic “enabling environments” to attract climate finance. While the politics of such recommendations are contentious, a climate finance taxonomy could be considered a step in that direction.

At the 29th Conference of Parties (COP29) to the United Nations Framework Convention on Climate Change, developed countries committed to providing a meagre $300 billion in climate finance to developing countries, with an ‘aspirational’ target of $1.3 trillion to be mobilised with support from ‘various actors’.

As developed and developing countries alike scramble to make sense of the ‘Baku to Belem Roadmap’ — the guidance document from Brazil’s COP30 Presidency outlining how this $1.3 trillion goal will be met — India’s release of its climate finance taxonomy sends a strong signal. It shows a willingness to do the domestic work necessary to attract more finance.

At this stage, overall the document lays out a clear set of objectives and the rationale behind the qualitative markers that will shape the taxonomy moving forward. It offers a strong starting point and will likely evolve with more clarity and nuance in future iterations. In particular, more focus on how the taxonomy will be operationalized, governed and scrutinised would strengthen its credibility and effectiveness.

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