What is Climate Finance Taxonomy? Here's What FM Sitharaman Said About It

The government would be developing a “climate finance taxonomy” in order to increase the availability of capital for the purpose of climate adaptation and mitigation. This was revealed on Tuesday (July 23) by Finance Minister of India, Nirmala Sitharaman, while she presented the Union Budget for 2024-25. The move will aid the country in hitting its climate commitments. It will also help the country move in the direction of green transition.

What is Climate Finance Taxonomy- Understanding the concept

The climate finance taxonomy is a framework that categorizes the varying sectors of the economy in order to determine which sectors can be promoted as sustainable investments.

Climate Finance Taxonomy proves to be beneficial in guiding banks and investors as to where they should be investing to deal with climate change.

A report by the government of Canada says that Taxonomies are usually used to set standards that classify financial instruments related to climate. However, in recent times, taxonomies have also proven to be beneficial in the realms of climate risk management climate disclosure, and net-zero transition planning.

The importance of taxonomy

The global temperatures are increasing with time. Climate change is increasingly having adverse impacts on the planet. In a situation like this, the need of the hour for the countries is to transit towards a net-zero economy, referred to as the stable balance between the amount of greenhouse gas produced in the atmosphere and the amount of the gas removed from the atmosphere.

Here, taxonomies need to enter the scene, as they play a crucial role in achieving this goal. How? Well, they guide the economies as to which economic activities are in line with science-based and reliable methods. Taxonomies can also shed light on ways to reduce the risks of greenwashing.

In the case of India, taxonomy could help welcome more climate funds from international sources. At present, green house flows in the country are far less than the current needs of the country. The green finance flows in the country only account for over 3 percent of the total FDI inflows to the country. This has been suggested by the Landscape of Green Finance in India 2022 report.

Green Investments in India

The country holds a potential of $3.1 trillion in climate investment from the year 2018 to 2030. This has been suggested by the International Finance Corporation (IFC) report. The electric vehicle segment holds the largest space for investment, at $667 billion. India is hoping to electrify all of the new vehicles by the year 2030. The renewable energy sector of India also stands as a sound investment avenue at $403.7 billion.

India aims to hit net-zero economy by the year 2070. The country has also resolved to decrease the emissions intensity of the GDP by about 45 percent by the year 2030. Also, the country has resolved to hit over 50 percent cumulative electric power installed capacity with the help of non-fossil fuel-based energy resources by the year 2030.