The story so far: The 2024 Union Budget, presented by Finance Minister Nirmala Sitharaman on Tuesday, includes developing a taxonomy for climate finance to enhance the availability of capital for climate adaptation and mitigation.

“This will support achievement of the country’s climate commitments and green transition,” Ms. Sitharaman said in her speech.

What is taxonomy for climate finance?

Climate finance taxonomy refers to a set of standardised regulations and guidelines to inform companies and investors on making impactful investments towards environmental conservation and combating the climate crisis.

The term taxonomy originally comes from the field of biology. It is the scientific method of naming and classifying organisms, including plants, animals, and microorganisms.

According to the International Finance Corporation (IFC), a member of the World Bank Group, “diverse interpretations fragment markets and confuse investors. What seems ‘green’ in one country may appear ‘brown’ elsewhere, stalling environmental progress,”

Taxonomies for sustainable climate financing, in general, include a detailed list of economic sectors and activities and corresponding criteria that determine if it aligns with larger climate goals.

“There are two dimensions to a taxonomy: the system itself in all its complexity, and the final product (boiled down to its pragmatic essentials) as it will be used by financial market participants and other users. Users of taxonomies and definitions are not necessarily interested in understanding why a given metric or threshold must be used for an activity. Rather, they will use the taxonomies and definitions as a final product and screen activities to determine eligibility under the taxonomy,” according to the Organisation for Economic Cooperation and Development (OECD).

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Climate finance taxonomies are known as ‘green’ taxonomies.

Why is climate finance taxonomy important?

Climate financing forms a core area of combating the climate crisis. According to the U.N. Framework Convention on Climate Change’s (UNFCCC’s) first ‘Needs Determination Report’, financing of around $5.8-5.9 trillion is required to implement developing countries’ climate action plans by 2030, and this does not fully include adaptation costs.

Climate finance taxonomies can facilitate financing for investors, credit institutions etc. based on how climate-aligned an entity or an activity is. It can therefore direct financial resources towards projects that support climate change mitigation and adaptation.

Green taxonomies help investors compare investment opportunities and measure their environmental impact.  A localised climate finance taxonomy can also help align a country’s climate goals with the Paris Agreement and other international climate commitments while accounting for regional factors that influence localised transition pathways.

For example, different regions will have to adopt different pathways to reach the goal of limiting global warming to under 1.5 degrees C, as required under the Paris Agreement. A one-size-fits-all approach won’t work here, and where localised taxonomies on climate finance can help. Science-based targets at the regional level can help define metrics, based on which experts can develop standards and investors can determine their financial commitments, all without compromising on global climate goals.

Climate finance taxonomies can also help prevent greenwashing by companies by setting common standards based on scientific assessments.

“The development of a taxonomy for climate finance is crucial for establishing clear standards. It ensures that investments are transparently and efficiently directed towards genuine green projects, driving innovation and supporting India’s ambitious climate goals,” Harjeet Singh, Global Engagement Director for the Fossil Fuel Non-Proliferation Treaty Initiative, told The Hindu.

Many countries like China, Malaysia, and Sri Lanka have already issued green taxonomies to facilitate climate-sensitive investments.

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What has India done to set up 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, establish the pillars for a sustainable finance roadmap, suggest draft taxonomy of sustainable activities, and create a framework of risk assessment by the financial sector.

In April that year, the Reserve Bank of India (RBI) joined the Central Banks and Supervisors Network for Greening the Financial System (NGFS) as a member. RBI is also a member 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.

Why does India need a green taxonomy?

According to the IFC, India needs an estimated $10.1 trillion to achieve net-zero by 2070. Public investments alone can’t match this goal, which calls for standardisation in investments.

“A green taxonomy framework could significantly help India attract both domestic and international investments, aligning these funds with its national and global commitments to a green transition and enhanced climate resilience,” Mr. Singh said.

“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,” Suranjali Tandon, an associate professor at the National Institute of Public Finance and Policy, said.

Prime Minister Narendra Modi speaks on the Union Budget in New Delhi on July 23, 2024.
| Photo Credit: ANI

Prime Minister Narendra Modi praised the Union Budget presented by Finance Minister Nirmala Sitharaman on July 23 as one that will empower all sections of society.

“This is a budget that will take the country’s villages, poor and farmers on the path of prosperity. In the last 10 years, 25 crore people have come out of poverty. This budget is a budget for the continuation of the empowerment of the newly emerged, neo middle class,” he said.

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Highlighting the announcements regarding tax, he said a “decision had been taken” on the reduction and simplification of tax and rules on tax deduction at source (TDS).

MSME sector

He dwelt at length on the provisions made for micro, small and medium enterprises (MSME) sector, stating that these would provide a new path of progress for small traders and MSMEs. “A new scheme to increase ease of credit has been announced in the budget. Announcements have been made to take the export and manufacturing ecosystem to every district in this budget. This budget will bring new opportunities for start-ups and the space economy,” he said.

“The MSME sector of the country is connected to the middle class. This sector provides maximum employment to the poor. This budget will give a new scale to education and skills,” he added.

Employment boost

A major part of the budget was on providing incentives for youth employment. “In this budget, the government has announced ‘employment-linked incentive’ schemes. This will help generate many employment opportunities. Under this scheme, the government will give the first salary to those who are newly entering the workforce. Youth from villages will be able to work in the country’s top companies under the apprenticeship programme,” he said. He said the development plans of 12 new industrial nodes, new satellite towns and transit plans for 14 big cities would enable the development of new economic hubs in the country and create numerous jobs.

Touching upon the schemes for poverty alleviation and empowerment of the poor, he highlighted the measures to build three crore houses for the poor and the ‘Janjatiya Unnat Gram Abhiyan’, which will link five crore tribal families to basic facilities with a saturation approach.

The budget brings numerous opportunities for India’s start-ups and innovation ecosystem, Mr. Modi said, referring to the ₹1,000-crore corpus fund to vitalise the space economy and the decision to abolish the angel tax. “Record high capex will become a driving force of the economy,” he added.