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On Tuesday, 23 July, while presenting the Union Budget 2024, Finance Minister Nirmala Sitharaman announced that the Centre will work on developing a “taxonomy for climate finance” in the country.
She said, “This will support achievement of the country’s climate commitments and green transition.”
A taxonomy for climate finance, according to the European Union’s definition of the term, “is a classification system that defines criteria for economic activities that are aligned with a net zero trajectory by 2050 and the broader environmental goals other than climate.”
For the EU, taxonomies have helped with “direct investments to economic activities” that are most needed for a transition to clean and green energy.
However, the EU is not the only agency to have a climate finance taxonomy. Countries like South Africa, South Korea, Canada, Singapore, among others, too have taxonomies developed for climate finance.
With India taking a step towards this as well, what is in store for us? The Quint asked experts.
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‘Important Classifications’: Experts on Climate Finance Taxonomies
To put it in simpler terms, Kavin Kumar Kandasamy, CEO, ProClime, a unified service provider in the climate space, explains that a taxonomy is a set of classifications of certain verticals under key terminologies.
For instance, if we develop a taxonomy, something like ‘emissions under management’ would be standardised and mean exactly the same thing wherever you go in the country. “It enables a free flow of climate economics,” says Kandasamy.
Abinash Mohanty, Sector Head, Climate Change & Sustainability at IPE Global, and Expert Reviewer of IPCC- AR(6) agrees. For him, something like this becomes important for developing countries like India because between balancing economic and just transition, he stresses that climate imperatives often take a backseat for us.
“You need to segregate that every finance is not climate finance – because that leads to a tug of war between governments and larger agencies over who should be paying, what activities need priority, etc.”Abinash Mohanty
And Why Exactly Do We Need a Climate Taxonomy?
One might ask what we will achieve by developing a climate finance taxonomy. This, Mohanty says, is a valid question.
He explains, “Taxonomy is the operational boundary that’ll put forward clear mandates and allocations of the finances available for climate. For the collective combine to pay, we need to look at climate finance from not just a mitigation perspective, but also from the point of view of adaptation. This will foster a lot of climate innovation as well. “
But the good news is that we do not need to start from scratch. With other countries already having developed their taxonomies, we get to pick and choose what works for us.
“The European and American markets, which is primarily where the capital markets are based, have very clear common structures. It is important to look at them and see how much of the wheel does not have to be reinvented at this point. So we should look at these global markets and see which ones we’re aligned to, which ones we can work closely with from India’s Nationally Determined Contribution perspective, and biological engagement.”Kavin Kandasamy
‘A People Centric Approach to Climate Finance Taxonomy Is the Future’
Will something like developing a taxonomy for climate finance have an impact on the common person? Will it ease the repercussions of the climate crisis that we live with every day?
Kandasamy tells The Quint, “It won’t impact people unless the taxonomy brings about a climate budget that is very involved in everyday life.”
However, Mohanty has a different take on this. He stresses that what we’re living through right now is the impact of climate change – be it erratic rainfall, traffic congestion, increased energy emissions, higher power demands, costlier electricity, heatwaves.
“A climate finance taxonomy will bring in systematic changes and a pool of resources that will foster climate smart innovations that will help the common person at the end of the day. You will have technological impacts that will have a ripple down effect on your finances, hopefully bettering your situation – which will also prompt the government to subsidise innovations. If all this happens, your carbon footprint will go down as well.”Abinash Mohanty
But it’s important to remember that all this won’t just magically happen solely by developing a taxonomy. Mohanty asks, “We don’t want to just add our name to the list of countries with a taxonomy, right?”
The way ahead, Mohanty stresses, is by focussing on a people-centric taxonomy that is strictly monitored – to see how much climate action is being furthered because of the proposed taxonomy.
In Mohanty’s words, “We don’t need another fancy pillar for climate action that just exists, we need a bottom-up approach on a hypergranular level that mainstreams climate action from margins to the mainstream.”
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