FinMin note on climate finance to enable channeling funds to India's green ecosystem, say experts

As per NITI Aayog, the total investment required for energy transition is estimated at $250 billion per year till 2047.

The draft framework on Climate Finance Taxonomy (CFT), released by finance ministry on May 7, is being seen a "strategic enabler" for channelling capital into climate action, suited to India’s unique development trajectory, says climate finance experts. The game-changer framework acknowledges the need for "proportionality" and "sector-specific pathways", rather than a one-size-fits-all approach, they say.

The Department of Epconomic Affairs (DEA) last week released a draft framework to develop ‘India’s Climate Finance Taxonomy’--which outlines the approach, objectives, and principles that will guide the taxonomy. It also details the methodology for classifying activities, projects, and measures that contribute to India's climate commitments, while also considering goals associated with achieving ‘Viksit Bharat’ aim by 2047.  The DEA has sought comments on the framework till June 25, following which the official framework will be released.

India’s climate ambitions are reflected through the Nationally Determined Contributions (NDCs) and the announcement of net zero emissions by 2070. India requires around $2.5 trillion (at 2014-15 prices) to meet the NDC targets till 2030. As per NITI Aayog, the total investment required for energy transition is estimated at $250 billion per year till 2047.

Finance for adaptation action is, therefore, vital for addressing climate change impacts, building resilience and achieving India’s development goals, said the draft. Preliminary estimates indicated that about $206 billion (at 2014-15 prices) would be required from 2015 to 2030 to implement adaptation actions in agriculture, forestry, fisheries, infrastructure, water resources and ecosystems, it said.

Given the size of resources required for financing India’s ambitious climate action, Union Budget 2024-25 had announced that a CFT be developed for "enhancing the availability of capital for climate adaptation and mitigation".

According to the draft, the CFT aims to facilitate greater resource flow to climate-friendly technologies and activities, enabling the country to achieve the vision of being ‘net zero’ by 2070 while also ensuring long-term access to reliable and affordable energy. “The CFT will serve as a tool to identify activities consistent with a country's climate action goals and transition pathway,” the draft says.

The classification of activities contributing towards India’s climate commitments will be into two baskets - climate supportive and climate transition. Climate-supportive activities would include either of these activities: avoiding green-house-gas (GHG) emissions, reducing emission intensity, or deploying adaptation solutions that reduce the risk of adverse impacts of climate change.

To begin with, the following sectors will be considered: power, mobility, and buildings in the context of climate mitigation and adaptation co-benefits; agriculture, food and water security will be in the context of climate adaptation and resilience building; and addressing transition, in line with country circumstances, in hard-to-abate sectors. “Iron and Steel and Cement shall be considered at the outset,” the framework said.

Moreover, the proposed work will be conducted in two distinct phases. The first phase will establish the foundational framework and the approach. Following this, the second phase will involve the classification of activities, measures, and projects that are climate-supportive, along with those facilitating transition in specific sectors and industries, says the draft.

Experts take

According to experts, the taxonomy distinguishes between “climate supportive” and “transition” activities, acknowledging both the urgent need for decarbonization and the realities of hard-to-abate sectors like steel, cement, and power. "This graded, nuanced approach is critical for a country balancing rapid growth with climate ambition," said Manpreet Singh, Partner, PwC India.

By initially focusing on power, mobility, buildings, agriculture, and hard-to-abate industries, the CFT aligns with India’s economic priorities and emission profiles, and by recognizing that not all sectors can leapfrog to net zero immediately, the taxonomy provides a credible pathway for transition investments-avoiding stranded assets while incentivizing R&D and efficiency improvements, say experts.

"The real test will be in the operationalization. Financial institutions, corporates, and investors will need to align their strategies to this new framework," said Singh.

Heena Khushalani, Partner, EY India highlighted a noteworthy aspect of the taxonomy is its focus on MSMEs, and its recognition of agriculture’s critical role in both climate change mitigation and adaptation, both which make it stand out in comparison to many international taxonomies.

"While the phase one framework lays a strong foundation and this guidance will help many financial institutions in India align their net zero transition plans, the final taxonomy will help us build a strong climate finance proposition and create significant opportunities for international and domestic investors to contribute to India’s green transformation," added Khushalani.

Namrata Rana, National Head of ESG, KPMG in India stated that by recognizing both green and transition pathways, the CFT empowers sectors to innovate and decarbonize. "With the right design, it can align financial flows with national priorities, support inclusive development, and accelerate our journey toward a resilient, low-carbon economy," Rana said.

At present, India’s energy consumption per capita is about one-fifth of the developed countries and would need to appreciate significantly during the Amrit Kaal, a period of rapid economic growth. Estimates suggest that the minimum level of per capita final energy requirement for India to become a developed country with an HDI of 0.9 must be in the range of 45.7 to 75 gigajoules per year, when the total final consumption of energy per capita for FY23 was 16.7 gigajoules only, the draft says.