Ministry of Finance unveils “Climate Taxonomy” document to help clean energy investment

A View shows signs of the COP29 UN Conference on Climate Change and on October 31, 2024 in the cityscape background of Baku, Azerbaijan. Image source: Reuters

To make direct investments in clean energy projects and infrastructure to better adapt to climate change weather threats, the Ministry of Finance has made a public draft document, “The Framework of India’s Climate Finance Taxonomy”.

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The report said the climate finance taxonomy is “a tool for determining activities consistent with India’s climate action goals and transition pathways”. The purpose of the taxonomy is to encourage investment in climate-friendly technologies and activities, thereby enabling India to net zero by 2070, but also to encourage long-term access to reliable and affordable energy. The taxonomy should also prevent “green washes” and be consistent with the development goals of “Vixit Bharat”.

The draft bill was announced by Nirmala Sitharaman in a budget speech in February this year.

“The climate finance taxonomy is a system of which parts may be sold as sustainable investments. It helps guide investors and banks to guide trillions of dollars towards impactful investments to address climate change,” Rajasree Ray, an environmental advisor, said in a January seminar.

Demand in developing countries

Defining such a taxonomy will also help resolve controversial issues in international climate negotiations (such as meetings of parties). Developing countries demand billions of dollars from developed countries in the form of subsidized technology transfers and grants to fund renewable energy development and strengthen defense against climate change. Developed countries often view commercial investment in renewable energy projects as part of “climate finance.” At the last climate conference in Baku, Azerbaijan, developed countries only had US$300 billion per year by 2035, or “new collective quantitative targets”, which was actually required at that time of $1.35 trillion, and most of the differences were due to the lack of consensus on “the definition of climate financing.”

The climate classification document aims to categorize a range of activities and sectors as “climate support” or “climate transition.” The former includes activities to reduce greenhouse gas emissions, emission intensity reduction (emissions per unit of GDP), adaptation solutions to reduce the risks of adverse effects of climate change and the research and development required to achieve these goals. Climate support activities will include those in sectors that improve emission intensity reduction, in which absolute emissions pose challenges in available technologies – which could mean in the so-called “hard to mitigate” the fields of iron, steel and cement.

The main sectors to be covered will include electricity, buildings, liquidity, agriculture, food, and water security. Current estimates suggest that the country needs to significantly expand its investment to increase installed capacity from 470.4 GW (as of February 2025) to 777.14 GW. Given the scale, strategic investment is required in advanced super critical (AUSC) thermal power plants, which can reduce emissions through higher efficiency, increasing plant efficiency to 46%, exceeding subcritical (~38%) and supercritical (about 41-42%) technologies.

According to the initial adaptation communications submitted by the country to the United Nations in December 2023, the cumulative expenditure required for adaptation is estimated to be Rs 56.68 trillion (approximately US$648.5 billion) until 2030, with a price of 2023-24. This is the funding required to implement investments required for agriculture, forestry, fisheries, infrastructure, water resources and ecosystems.