Proposed Structure for India's Climate Finance Classification

What constitutes a climate taxonomy?

A climate taxonomy is a system for classifying economic activities that help in climate mitigation, adaptation, or transition. It assists:

Investors evaluate the environmental credentials of projects.

Governments direct subsidies and incentives;

Regulators oversee adherence and mitigate greenwashing.

Structure of India’s Climate Finance Classification

Goals: India's classification system aims to enhance tools such as green bonds, the Carbon Credit Trading Scheme, and SEBI’s ESG regulations, forming an integrated climate finance framework. Its objective is to:

• establish climate-related actions within various sectors;
• steer public and private funding towards low-carbon and climate-resilient progress;
• avoid greenwashing by setting explicit eligibility standards;
• assist India’s Nationally Determined Contributions (NDCs) in accordance with the Paris Agreement.

Sectoral Scope: Every sector contains particular standards for activities related to mitigation, adaptation, and transition.

Energy: Sustainable sources, grid enhancement, power storage;

Mobility: Electric cars, mass transit, energy efficiency;

Structures: Eco-friendly building, energy-saving renovations

Agriculture & Water Security: Climate-resilient farming, irrigation effectiveness, water preservation;

Challenging-to-Decarbonize Industries: Low-emission technologies in cement, steel, chemicals

Classification Method (Three Types)

Mitigation: Initiatives that lessen or prevent greenhouse gas emissions;

Adaptation: Efforts that strengthen the ability to withstand climate effects;

Transition: Initiatives that allow industries with high emissions to move towards sustainability;

Absence of Indigenous Context: India’s draft primarily mimics global frameworks such as the EU taxonomy, overlooking India’s specific climate challenges and developmental needs.

It does not capture local realities like the impact of informal sectors, cultural customs, and variations in emissions and climate vulnerabilities across regions.

Improper Sectoral Emphasis: High-emission industries such as energy production, transport, chemicals, cement, and real estate are insufficiently represented.

Simultaneously, sectors with low emissions like agriculture, food, and water security are included without proper justification, leading to worries about misallocated climate funding.

Lack of Defined Metrics and Standards: The taxonomy does not have a scientific, data-supported justification for choosing sectors and establishing limits for emissions reduction.

Expressions such as ‘environmentally-friendly technologies’ and ‘community engagement’ lack clarity and definition, hindering transparency and responsibility.

Ineffective Governance Framework: A clear institutional system for implementation, evaluation, or enforcement is lacking — particularly concerning due to India’s federal system.

The framework does not indicate how state governments, local entities, or civil society will participate in decision-making.

Overlooking Equity and Justice: Marginalized populations — including small-scale farmers, economically disadvantaged families, and indigenous populations — are not given precedence in the distribution of climate finance.

The proposal neglects social protections such as labor rights, human rights, and fair access to financial resources.

Excessive Focus on High-Tech Solutions: The taxonomy favors sophisticated technologies and neglects affordable, local, and community-driven climate solutions.

This may leave out MSMEs and informal sectors that do not have access to funding and technical knowledge.

Lack of Timeline Coordination with India’s NDCs: The draft does not provide sector-specific timelines or transition pathways, even though it mentions India’s Net Zero goal for 2070 and NDC objectives.

It does not distinguish responsibilities among states or sectors according to their emissions contributions.

Suggestions for Enhancement

Legal Compatibility: The classification must align with national laws such as the Energy Conservation Act and SEBI regulations.

Refocusing the taxonomy on high-emission industries is another suggestion.

• establishing quantifiable, scientifically grounded metrics;
• putting in place a strong governance and review system;
• combining indigenous knowledge, social protections, and equity;
• establishing phased compliance routes for vulnerable groups and MSMEs;