The government aims to unlock a floodgate of private capital by creating a standardized framework for identifying climate-aligned projects. The taxonomy will be able to achieve this by developing a set of standardized regulations to inform investing actors of the activities or businesses working towards combating climate change.
Achieving India’s net-zero target by 2070 requires investment far in excess of the domestic and international funding available. India has primarily relied on domestic resources, as mobilizing global capital for emerging economies has been a challenge, due to perceived risks, lengthy project timelines and high capital costs. The Economic Survey notes that India faces a “wall” of capital rather than a “flood.”
Despite being historically low-emitters compared to developed nations, developing countries are expected to play a delicate balancing act in juggling their economic growth prospects with reduced emissions. A report by the International Finance Corporation estimates that India would require clean-energy investments ranging from $253 billion to $263 billion during 2026-30.
Significant gaps persist, as the current investment available is only around $44 billion per year. The report further estimates that India has a $3.1 trillion climate-smart investment potential between 2018 and 2030. Also, India’s renewable energy market offers an attractive investment opportunity.
Thanks to a government push, India has met parts of its Nationally Determined Contributions (NDC) target for 2030 much ahead of time by reducing the emission intensity of its GDP by 33% and achieving 40% of installed electric capacity through non-fossil sources.
Yet, sustained financing from the private and public sectors is a must to ensure that the country stays on track to achieve its long-term climate goals.
The plan to develop and standardize the climate finance market was visible in the establishment of a task force under the ministry of finance in January 2021.
It was tasked to create a sustainable finance roadmap, a draft taxonomy of sustainable activities, and a risk assessment framework. The Reserve Bank of India in a discussion paper also addressed India’s climate finance needs of more than $17 trillion to achieve net zero.
India can adopt ‘best practices’ from frameworks across the world while incorporating local capabilities and resources. As of December 2022, there were more than 29 taxonomies at different stages of development, most notably in the EU, UK, China, Singapore and across Asean.
The EU’s taxonomy follows the guiding principle of ‘do no harm’ while covering six broad goals: Climate change mitigation, adaptation, sustainable use and protection of marine sources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.
In the developing world, Asean has an efficient system, incorporating the interests of 10 diverse countries into a single framework. Its tiered system allows nations to adopt a level that suits their capabilities. Similar to a traffic-signal system, the Asean framework’s levels of green, amber and red are based on their impact on the environment.
Diversity in the economic composition of countries and their geographical contexts brings with it the challenge of a uniform taxonomical structure. What some countries define as a ‘green’ activity may not be so for others.
For instance, the Malaysian taxonomy endorses palm-oil plantations, but that conflicts with the EU’s view of this activity causing biodiversity loss. Hence, greater cooperation is needed for countries to ensure inter-operability between different taxonomies.
Creating a successful climate finance taxonomy for India would require a multifaceted approach that features strong political leadership, clear objectives, expert involvement, effective governance and robust stakeholder engagement. The active participation of the government and private sector is essential.
A dedicated governance structure, perhaps through a monitoring committee with representatives from key institutions, would be crucial. Clearly defined climate and environmental objectives would ensure such a taxonomy’s relevance.
Leveraging expertise from international and local experts is also vital; their combined knowledge would enhance its quality and adaptability to local contexts. Engaging a wide range of stakeholders, meanwhile, will foster ownership.
India stands at a crossroads, where economic growth and environmental sustainability must co-exist. A well-crafted climate finance taxonomy can guide it to a greener future. By aligning financial flows with climate goals, India could mitigate climate risks even as it unlocks new economic opportunities.
It is imperative that the government, private sector and civil society collaborate to create a robust framework that can serve as a global benchmark.
With the right policies and investments, India can provide a framework for developing economies to balance development goals with climate-conscious policies.
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