Union Budget 2024: What Is Climate Finance Taxonomy That Govt Wants To Develop? Explained

Climate Finance Taxonomy: FM said a road map will be made for transitioning hard-to-abate sectors, including shipping, aviation, iron and steel, and chemicals, from energy efficiency targets to emissions targets

Climate Finance Taxonomy: Finance Minister Nirmala Sitharaman during her Budget speech on Tuesday announced that the government will establish a taxonomy for climate finance to enhance the availability of funds aimed at climate adaptation and mitigation. This initiative is expected to support the country's climate commitments and facilitate a green transition, as detailed during the presentation of the Union Budget for 2024-25 in the Lok Sabha. Sitharaman mentioned that the Centre will prepare a road map for transitioning hard-to-abate sectors, including shipping, aviation, iron and steel, and chemicals, from energy efficiency targets to emissions targets. 

What is Climate Finance Taxonomy?

The development of a climate finance taxonomy is set to increase the flow of capital towards efforts aimed at adapting to climate change and reducing greenhouse gas emissions, thus supporting India's climate goals and green transition.

Understanding in details

Climate finance taxonomy involves a standardised set of regulations and guidelines designed to guide companies and investors in making impactful investments in environmental conservation and combating the climate crisis. The term 'taxonomy' originally comes from biology, where it refers to the scientific method of naming and classifying organisms.

India's Efforts Toward a Green Taxonomy

In January 2021, India established a task force on sustainable finance under the Department of Economic Affairs, Ministry of Finance, to create a framework for sustainable finance in India. This task force was tasked with establishing the pillars for a sustainable finance road map, suggesting a draft taxonomy of sustainable activities, and creating a framework for risk assessment by the financial sector.

In April 2021, the Reserve Bank of India (RBI) joined the Central Banks and Supervisors Network for Greening the Financial System (NGFS) as a member. Additionally, RBI is part of a task force on climate-related financial risks set up by the Basel Committee on Banking Supervision and the International Platform on Sustainable Finance.

The Need for a Green Taxonomy in India

According to the International Finance Corporation (IFC), India requires an estimated $10.1 trillion to achieve net-zero emissions by 2070. Given that public investments alone cannot meet this goal, standardisation in investments is crucial.

In this regard, Aarti Khosla, director at Climate Trends, says, "The Budget reflects India's commitment to sustainable development with significant allocations like Rs 1.52 lakh crore for climate-resilient agriculture and the introduction of initiatives like the PM Surya Ghar Muft Bijli Yojana for rooftop solar. The focus on critical minerals, a policy for pumped storage projects and the decision to develop a policy document on energy transition pathways is laudable too. However, what remains to be seen is how the role of nuclear power in India’s energy mix takes shape. The Budget lacks timelines for announcements on taxonomy, carbon pricing mechanisms and detailed strategies for mobilising climate finance for adaptation and mitigation efforts in vulnerable communities."

India's Climate Commitments

India has pledged to achieve a net-zero economy by 2070 and aims to reduce the emissions intensity of its GDP by 45 per cent by 2030, compared to 2005 levels. Additionally, India has committed to achieving approximately 50 per cent cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030.

Suranjali Tandon, who is an associate professor at National Institute of Public Finance and Policy, points out that investors and industry have been demanding a taxonomy and transition pathway as guidance for flow of finance and reorientation of economic activity. "The Budget announcements that clearly mention the establishment of a carbon market, taxonomy, and transition pathways mark significant progress in planning towards Net Zero in 2070," Tandon says.

According to Neshwin Rodrigues, electricity policy analyst with, Ember India, this year's Budget has a lot in store for the energy sector. "It is in line with the interim Budget, and with major investments in renewable energy will give a shot in the arm to clean energy companies. It underscores a move towards more holistic energy transition pathway, considering energy security, economic growth, employment generation, and environmental sustainability. India now needs to find ways to reduce reliance on thermal power and with battery costs expected to further fall sharply in the coming years, can plan phasing down this reliance," Rodrigues adds.

Global Efforts in Climate Finance Taxonomy

Several countries have also developed or are in the process of developing climate finance taxonomies. Among these are South Africa, Colombia, South Korea, Thailand, Singapore, Canada, and Mexico. The European Union has also established its own taxonomy.