Draft Framework of India’s Climate Finance Taxonomy

Syllabus: GS2/Government Policy & Intervention; GS3/Environment

Context

• The Ministry of Finance released the Draft Framework of India’s Climate Finance Taxonomy which is aimed to create a unified classification system for climate-aligned investments, ensuring transparency, credibility, and alignment with national and global climate goals.

What Is a Climate Taxonomy?

• A climate taxonomy is a classification system that identifies which economic activities contribute to climate mitigation, adaptation, or transition. It helps:
  • Investors assess green credentials of projects;
  • Governments channel subsidies and incentives;
  • Regulators monitor compliance and prevent greenwashing;

Framework of India’s Climate Finance Taxonomy

• Objectives: India’s taxonomy is designed to complement instruments like green bonds, the Carbon Credit Trading Scheme, and SEBI’s ESG norms, creating a unified climate finance ecosystem. It aims to:
  • define climate-aligned activities across sectors;
  • guide public and private investments toward low-carbon and climate-resilient development;
  • prevent greenwashing by establishing clear eligibility criteria;
  • support India’s Nationally Determined Contributions (NDCs) under the Paris Agreement.
• Sectoral Coverage: Each sector includes specific criteria for mitigation, adaptation, and transition activities.
  • Power: Renewable energy, grid modernization, energy storage;
  • Mobility: Electric vehicles, public transport, fuel efficiency;
  • Buildings: Green construction, energy-efficient retrofits
  • Agriculture & Water Security: Climate-smart agriculture, irrigation efficiency, water conservation;
  • Hard-to-Abate Sectors: Low-carbon technologies in steel, cement, chemicals

Classification Approach (Three Categories)

• Mitigation: Projects that reduce or avoid greenhouse gas emissions;
• Adaptation: Initiatives that enhance resilience to climate impacts;
• Transition: Measures that enable high-emission sectors to shift toward sustainability;

Key Concerns in India’s Climate Finance Taxonomy Framework

• Lack of Indigenous Context: India’s draft borrows mostly from international models like the EU taxonomy, hindering India’s unique climatic vulnerabilities and development priorities.
  • It fails to reflect local realities such as the role of informal sectors, traditional practices, and regional disparities in emissions and climate risks.
• Misplaced Sectoral Focus: High-emission sectors like energy generation, transportation, chemicals, cement, and real estate are underrepresented.
  • Meanwhile, low-emission sectors such as agriculture, food, and water security are included without clear justification, raising concerns about misdirected climate finance.
• Absence of Clear Metrics and Criteria: The taxonomy lacks scientific, data-backed rationale for selecting sectors and defining thresholds for emissions reduction.
  • Terms like ‘climate-friendly technologies’ and ‘public consultation’ are vague and undefined, limiting transparency and accountability.
• Weak Governance Architecture: There is no defined institutional mechanism for implementation, review, or enforcement — especially problematic given India’s federal structure.
  • The framework does not specify how state governments, local bodies, or civil society will be involved in decision-making.
• Ignoring Equity and Justice: Vulnerable communities — such as small farmers, low-income households, and indigenous groups — are not prioritized in climate finance allocation.
  • The draft overlooks social safeguards like labor rights, human rights, and equitable access to finance.
• Overemphasis on High-Tech Solutions: The taxonomy promotes advanced technologies while sidelining low-cost, indigenous, and community-based climate solutions.
  • This risks excluding MSMEs and informal sectors that lack access to capital and technical expertise.
• No Timeline Alignment with India’s NDCs: The draft fails to establish sector-specific timelines or transition pathways, despite referencing India’s Net Zero by 2070 and NDC targets.
  • It does not differentiate responsibilities across states or sectors based on their emissions contributions.

Recommendations for Improvement

• Legal Alignment: The taxonomy needs to harmonize with domestic laws like the
• j, and international frameworks such as the Paris Agreement (Article 6.4).
• Content Clarity: Definitions should be technically precise and accessible to MSMEs, informal sectors, and non-experts.
  • Quantitative thresholds (e.g., GHG reduction targets) need to be updated with empirical data.
• Other recommendations include:
  • Re-centering the taxonomy on high-emission sectors;
  • Defining measurable, science-based metrics;
  • Establishing a robust governance and review mechanism;
  • Integrating equity, social safeguards, and indigenous knowledge;
  • Creating staggered compliance pathways for MSMEs and vulnerable groups;

Source: TH