Finance Minister Nirmala Sitharaman has announced that the government would develop a ‘climate finance taxonomy’, in the “Next Generation Reforms” section of the Union Budget 2024-2025. “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 finance minister said in her speech.
What is the importance of the climate finance taxonomy?
With global temperatures rising, and increase in the adverse effects of climate change, there is a need for the countries to transition to a net-zero economy at the earliest. Taxonomies can play a significant role in doing this as they can help ascertain if economic activities are aligned with credible, science-based transition pathways. They can promote deployment of climate capital, and reduce the risks of greenwashing.
In India, a taxonomy could aid in bringing more climate funds from various international sources. Currently, green finance flows in India are falling far short of the country’s current needs. In fact, they 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.
One of the major reasons for low green finance flows has been a lack of clarity in what constitutes sustainable activity. A taxonomy would change that.
India is not the first country to make a move to create climate finance taxonomy. Many countries have either started to work on their taxonomy or have already finalised one. South Africa, Colombia, South Korea, Thailand, Singapore, Canada, and Mexico are some of the countries which have developed taxonomies, along with the European Union.
India aims to achieve net-zero economy by 2070. 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. The climate finance taxonomy will help in streamlining the efforts to achieve these targets at a rapid pace.
