Climate Finance Taxonomy

The Department of Economic Affairs (DEA), Ministry of Finance, has officially released the draft framework, marking a critical step in building a structured and credible climate finance system in the country.

What is the Climate Finance Taxonomy?

• A climate finance taxonomy is a classification system that defines what counts as a “green” or “climate-aligned”
• It helps governments, investors, and businesses identify and prioritize financial flows toward activities that support climate change mitigation (reducing emissions) and adaptation (adjusting to climate impacts).
• India’s taxonomy is being developed in line with the Union Budget 2024-25 announcement and is guided by India’s national climate goals, such as:

• Objectives: The taxonomy aims to:
  • Facilitate finance for mitigation (reducing emissions),
  • Support adaptation (resilience to climate impacts),
  • Enable transition of hard-to-abate sectors (like steel, cement),
  • Prevent greenwashing (false green claims),
  • Align with India's development and energy security goals.
• Principles Guiding the Taxonomy: It is based on eight key principles, such as:
  • Alignment with India’s climate goals and development priorities
  • “Do No Significant Harm” to other environmental/social objectives
  • Support for transition pathways (especially in complex or carbon-intensive sectors)
  • Indigenous technologies and domestic innovation
  • Proportional support for MSMEs
  • Flexibility and interoperability with international frameworks
  • Emphasis on science-based and measurable outcomes

Why is India developing its own Taxonomy?

While several global taxonomies exist (e.g., EU Taxonomy), India needs a customized framework for several reasons:

• Context-Specific Needs: India is a developing country with pressing developmental priorities like energy access, job creation, and industrial growth.
• India’s climate finance gap is massive: Over USD 2.5 trillion needed by 2030 (only for NDC targets). Green finance currently makes up just 3% of total FDI (Climate Policy Initiative, 2022). IFC estimates USD 3.1 trillion climate-smart investment potential in India by 2030, led by:
  • Electric vehicles: USD 667 billion,
  • Renewables: USD 403.7 billion,
  • Green buildings, water management, and climate-resilient agriculture.
• Just Transition: The taxonomy must balance climate ambition with equity and affordability.
• Attracting Finance: A clear taxonomy builds investor confidence and encourages both domestic and international green finance flows.
• Avoiding Greenwashing: It ensures that only genuinely climate-supportive activities get labelled as “green,” avoiding misleading claims.

Global Alignment

• Many countries have either started to work on their taxonomy or finalised one. South Africa, Colombia, South Korea, Thailand, Singapore, Canada, and Mexico are some of the countries which have developed taxonomies. The European Union has done this as well.
• India’s taxonomy is informed by international practices (like the EU, China, South Africa, and ASEAN taxonomies), but it is adapted to Indian needs.
• It acknowledges that developing countries need transition periods, and hence includes “transition” and “enabling” categories not emphasized in all global taxonomies.