In May this year, the Ministry of Finance released India’s draft Climate Finance Taxonomy for public consultation. As a foundational tool, the taxonomy aims to mobilise climate-aligned investments, prevent greenwashing, and clarify for investors which sectors, technologies and practices contribute to mitigation, adaptation, or transition. Importantly, the document calls itself a “living” framework, adaptable to India’s evolving priorities and international obligations. However, its success as a credible governance tool will depend on how it operationalises this principle.

The review architecture

Herein is a proposed review mechanism that is structured for the taxonomy, drawing from the recent regulatory innovations under the Paris Agreement’s Article 6.4 Mechanism. The Article 6.4 Supervisory Body has adopted a legal and editorial review system for climate market instruments. These principles offer a useful reference for India’s taxonomy to ensure investor confidence, legal clarity, and domestic-international alignment.

The review system for the climate finance taxonomy should function on two complementary levels. First, there must be a periodic review mechanism that allows for timely course correction.

These reviews should be annual and triggered by implementation gaps, evolving international obligations, stakeholder feedback, or policy changes. To be effective, they must follow a structured and predictable process, with fixed timelines, clear documentation protocols, and mandatory public consultation.

Alongside this, a recurring review should be institutionalised every five years. This deeper, more comprehensive, process would reassess the taxonomy in light of emerging trends in carbon markets, shifts in global climate finance definitions, and lessons learned from sectoral transitions. A five-year cycle corresponds with India’s updated Nationally Determined Contributions timeline and the global stocktake process under the United Nations Framework Convention on Climate Change. Together, these two levels of review would ensure that the taxonomy remains both responsive in the short term and resilient in the long term.

The substantive aspect of the review

Two key aspects must form the basis of any meaningful review: legal coherence and substantive content clarity. The legal assessment should examine the taxonomy’s alignment with India’s laws: Energy Conservation Act, SEBI norms, Carbon Credit Trading Scheme, and international obligations. The review should ensure enforceability, remove redundancies, clarify overlaps and harmonise terms. In addition, the review must identify interdependencies between climate finance mandates and other economic or fiscal measures such as green bonds, blended finance schemes, or environmental risk disclosures, so that revisional inconsistencies are avoided.

The substantive editorial review must ensure that the taxonomy remains readable, coherent and technically precise. Definitions must reflect evolving market standards and be usable by both experts and non-experts.

Where quantitative thresholds exist, for instance, greenhouse gas emissions reduction targets or energy efficiency benchmarks, these must be updated with empirical data and stakeholder input.

These reviews should ensure the taxonomy remains accessible for micro, small and medium enterprises, the informal sector, and vulnerable communities, crucial for net-zero goals, but which face barriers. It should provide simplified entry points, staggered compliance timelines, and proportionate expectations, especially in agriculture and small manufacturing.

Institutionalising accountability

To support such a review structure, the Ministry of Finance should establish a standing unit within the Department of Economic Affairs or an expert committee composed of stakeholders from financial regulators, climate science institutions, legal experts and civil society. Public dashboards can be developed to receive inputs, document implementation experiences and publish review reports. These measures will ensure the taxonomy evolves predictably and transparently

Annual review summaries and five-year revision proposals must be made available to the public, ideally in a consolidated format, to improve investor confidence and ease of access. This will also enable better coordination with parallel instruments such as India’s carbon market mechanisms, disclosure obligations and green bond frameworks.

The taxonomy’s rollout coincides with critical developments in India’s climate finance ecosystem. The Carbon Credit Trading Scheme is expected to be fully operationalised, green bonds are entering mainstream portfolios, including on the stock market, and the pressure to align public investment flows with long-term climate goals is rising. A weak or opaque taxonomy will undercut these efforts. A ‘living document’ is only as effective as the process that keeps it alive through active review, transparent revision, and structured engagement. It is hoped that such consideration will form a part of the final climate taxonomy framework.

Shashank Pandey is a lawyer and a former Research Fellow at the Vidhi Centre for Legal Policy

Published – August 20, 2025 12:08 am IST

Carbon offsets have become big business as more companies make promises to protect the climate but can’t meet the goals on their own.

When a company buys carbon offsets, it pays a project elsewhere to reduce greenhouse gas emissions on its behalf – by planting trees, for example, or generating renewable energy. The idea is that reducing greenhouse gas emissions anywhere pays off for the global climate.

But not all offsets have the same value. There is growing skepticism about many of the offsets sold on voluntary carbon markets. In contrast to compliance markets, where companies buy and sell a limited number of allowances that are issued by regulators, these voluntary carbon markets have few rules that can be enforced consistently. Investigations have found that many voluntary offset projects, forest management projects in particular, have done little to benefit the climate despite their claims.

I specialize in sustainable finance and corporate governance. My colleagues and I recently conducted the first systematic, evidence-based look at the global landscape of voluntary carbon offsets used by hundreds of large, publicly listed firms around the world.

The results raise questions about how some companies use these offsets and cast doubt on how effective voluntary carbon markets – at least in their current state – are in assisting a global transition to net-zero-emissions.

Which companies use low-quality offsets might surprise you

Our analysis shows that the global carbon-offset market has grown to comprise a rich variety of offset projects. Some generate renewable energy, contribute to energy-efficient housing and appliances, or capture and store carbon. Others preserve forests and grassland. The majority are based in Asia, Africa and the Americas, but they exist in other regions too.

Companies use these projects to boost their environmental claims in order to help attract investors, customers and support from various groups. That practice has skyrocketed, from virtually nothing in 2005 to roughly 30 million metric tons of carbon offset per year in 2022. Investment banking firm Morgan Stanley in 2023 forecast that the voluntary offset market would grow to about US$100 billion by 2030 and to around $250 billion by 2050.

For our analysis, we examined 866 publicly traded companies that used offsets between 2005 and 2021.

We found that large firms with a high percentage of big institutional investors and commitments to reach net-zero emissions are particularly active in voluntary carbon markets.

Our results also reveal a peculiar pattern: Industries with relatively low emissions, such as services and financial industries, are much more intensive in their use of offsets. Some used offsets for almost all of the emissions cuts they claimed.

In contrast, high-emissions industries, such as oil and gas, utilities or transportation, used negligible amounts of offsets compared to their heavy carbon footprints.

These facts cast a cloud of doubt on how effective voluntary carbon markets could really be at cutting global greenhouse gas emissions. They also raise questions about companies’ motives for using offsets.

Why companies rely on offsets: 2 explanations

One explanation for these patterns is that offsetting is a means to “outsource” efforts to transition away from greenhouse gas emissions. Companies with smaller carbon footprints find it cheaper to buy offsets than to make expensive investments in reducing their own emissions.

At the same time, we found that emissions-heavy companies were more likely to reduce their own emissions in-house, because offsetting massive amounts of emissions every year for an indefinite future would be more costly.

A more pernicious explanation for the growth in voluntary offsets is that offsets enable “greenwashing.” In this view, companies use offsets to cheaply refurbish their image to naive stakeholders who are not well informed about the quality of offsets. Agencies rate offset projects on how likely they are to meet their climate claims, among other indicators of the trustworthiness of offsets. Our reviews of pricing data and ratings found that projects rated as low quality have substantially lower prices.

We found that relatively few of the 1,413 offset projects used by companies in our sample had been verified as high quality by an external carbon rating agency. Most offset credits used by companies were strikingly cheap. More than 70% of retired offsets were priced below $4 per ton.

These explanations are not mutually exclusive. We found that low-emissions companies could easily alter their peer rankings for ESG performance – how well they do on environmental, social and governance issues – by offsetting a small quantity of emissions.

Fixing the voluntary market for the future

Our findings have important implications as policymakers and regulators debate rules for the voluntary carbon markets.

The data suggests that voluntary carbon markets are currently flooded with cheap, low-quality offsets, likely due to a lack of integrity guidelines and regulations for voluntary carbon markets to ensure the transparency and authenticity of offset projects. This lack of guidelines may also encourage the use of low-quality offsets.

Ever since Article 6 of the Paris climate agreement created principles for carbon markets and ways countries could cooperate to reach climate targets, agreeing on how to implement those principles has been a challenge. For the principles to be successful, negotiators must agree on project eligibility and information disclosure standards, among other issues.

In April 2024, SBTi, the world’s leading science-based arbiter of corporate climate targets, added urgency to that process when it announced that it would allow companies to meet their carbon goals with carbon offsets to cover emissions in their supply chains.

The following month, the U.S. Treasury, Energy and Agriculture departments jointly released a policy statement laying out their own template for rules to govern voluntary carbon markets. “Voluntary carbon markets can help unlock the power of private markets to reduce emissions, but that can only happen if we address significant existing challenges,” U.S. Treasury Secretary Janet Yellen said at the time.

Article 6 and standards for carbon offsets are on the agenda for the 2024 United Nations climate conference, COP29, Nov. 11-22 in Baku, Azerbaijan.

With many segments of voluntary carbon markets faltering, the COP29 summit may be a make-or-break moment for voluntary carbon offsets to become a viable contributor to decarbonization going forward.

This article is republished from The Conversation under a Creative Commons license. Read the original article here.