Climate Finance Gets a Boost as India Introduces New Taxonomy

In the budget presentation for 2024-25, Nirmala Sitharaman, the Union Finance Minister of India, proposed the creation of a framework for climate finance that identifies specific projects. This framework will seek to identify specific projects that go in the direction of achieving adaptation and mitigation and, hence, attract financial pools to fuel the process through which India treads towards the greening of the economy and accomplishes the task of the climate goal. Such a climate finance taxonomy could help to label a good number of these economic activities according to their sustainability degree, offer clarity on what constitutes a "green" investment, and help investors and financial institutions to understand what they might consider. Without it, a guide on how to direct the money into the right areas to assure the deployment of projects with the minimum impacts on climates would not be possible. According to a report from the Canadian government, it could be used not only for classifying financial products but also for better climate risk management, net-zero planning, and climate-related disclosure. As the temperatures and associated climate impacts continue to rise, the approach in moving towards a net-zero economy—where GHG emissions are balanced out by removals from the atmosphere—gets more and more compelling and imperative. And taxonomies can help determine whether economic activities are on alignment with scientifically based transition pathways and may do so. It could be the kind of taxonomy that would significantly drive international funding toward climate goals for India. As evidenced in the Climate Policy Initiative's 2022 report on green finance, climate objectives in India are being realized; green finance forms only about 3% of the integuments of foreign direct investment. It creates a new definition of what comprises a 'sustainable' investment, which will likely bridge this gap and mobilize money into green projects. India has a massive climate-smart chance to investment, and 2018 up to 2030 is estimated to be $3.1 trillion by IFC. The biggest part of the total investments to be placed will be largely channeled to the electric car sector at $667 billion to enable India to cross the line of having all new vehicles running on electricity by 2030. The renewable energy sector presents enormous opportunities, with an investment potential of $403.7 billion. Substantially, it could unlock such opportunities for driving investments in the green sectors by defining clearly what constitutes sustainable investments through the Climate Finance Taxonomy. India is not alone in developing a taxonomy on climate finance. Many others like South Africa, Colombia, South Korea, Thailand, Singapore, Canada, to name just a few, have either come up with their versions or are working on creating one. The European Union has also set up its taxonomy, possibly setting a principle for others to emulate. India has committed itself to a net-zero economy by 2070. Secondly, it will also reduce the emissions intensity of its GDP by 45 percent in 2030 from the 2005 levels. It has also set the target that 50% of its electricity will come from non-fossil fuel sources by the year 2030. A major step in the direction of these ambitious targets, a climate finance taxonomy, is aimed at channeling more investments to sustainable projects and enabling the country to transition to a low-carbon economy. Conclusion: A very pertinent takeaway from the case is that an exercise for a climate finance taxonomy is likely to be outlined in India's Union Budget for 2024-25. This much-needed change heralds greater sustainability in economic activities in India. The taxonomy will give clear guidelines on green investments, attract international funding, and stimulate flows of capital into climate adaptation and mitigation projects. This will be quite an instrumental enabler to support India very firmly in its transition towards a greener economy in its stride to meet its climate goals. Source: The Indian Express