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Union Finance Minister (FM) Nirmala Sitharaman presented the Union Budget for the 2024-25 session in the Lok Sabha, in New Delhi on July 23.
One of the most salient features in her budget was the ‘climate finance taxonomy’ which will help India achieve its commitments towards climate change.
Here’s a detailed picture of the subject.
What Is Climate Finance Taxonomy?
A climate finance taxonomy, in simple words, is a system that categorises those parts of the economy that can be marketed as sustainable investments; and guides investors and banks managing trillions for productive investments to mitigate climate change.
A report by Canada’s government claims “Taxonomies are frequently used to set standards for classifying climate-related financial instruments (e.g., green bonds), but, increasingly, they serve other use cases where the benchmarking feature is viewed as beneficial, including in the areas of climate risk management, net-zero transition planning, and climate disclosure.”
The transition towards a net-zero economy has become crucial given the rapid climate change the world is facing. No country is safe from its repercussions. If one country is successful in achieving it while its neighbours or other countries have not, the harmful consequences will still be faced by all.
The ongoing heatwaves, droughts, crop failures, and erratic rains are all proof of the situation getting worse with every passing day. To achieve a net-zero economy, a country must balance the amount of greenhouse gases (GHG) it produces and the amount it removes from the atmosphere.
Taxonomies play an important role in bringing about this transition. They help in analysing whether economic activities are in line with credible, scientific pathways. They also push towards the development of climate capital and decrease the risks of greenwashing, that is, a marketing strategy through which companies or other entities misguide the public into believing they are doing more to protect the environment than they are.
A climate finance taxonomy can prove to be successful in bringing more climate funds from international sources in India. As of today, our country is falling short in green finance flows. According to a report published by the Climate Policy Initiative called The Landscape of Green Finance in India 2022, only 3% of total FDI inflows to India are for green finance.
The reason why this area gets such a tiny part of the funding is because of the lack of clarity as to which activities are sustainable and which aren’t. A taxonomy will solve this problem.
Read More: This Is Why Climate Change Affects Women More Than Men
The Potential For Green Investments In India:
A report by the International Finance Corporation (IFC) says that India has a lot of potential for climate-smart investments, about $ 3.1 trillion from 2018 to 2030. An example of this is the electric vehicle (EV) sector, having a space of $667 billion for investment.
A boom in the funding of this sector will help India achieve its goal of electrifying all its new vehicles by 2030. The report said that India’s energy sector is a very strong sector for investment.
India is not the first to introduce a taxonomy. Countries such as South Africa, Colombia, South Korea, Thailand, Singapore, Canada, and Mexico already have well-developed taxonomies.
Experts also believe that this system will prove to be more than fruitful. “It is in line with the interim Budget, and with major investments in renewable energy will give a shot in the arm to clean energy companies. It underscores a move towards a more holistic energy transition pathway, considering energy security, economic growth, employment generation, and environmental sustainability.
India now needs to find ways to reduce reliance on thermal power and with battery costs expected to further fall sharply in the coming years, can plan phasing down this reliance,” said Neshwin Rodrigues, an Electricity Policy Analyst.
An associate professor at the National Institute of Public Finance and Policy, Suranjali Tandon said, “The Budget announcements that clearly mention the establishment of a carbon market, taxonomy, and transition pathways mark significant progress in planning towards Net Zero in 2070.”
Some also believe that the Budget still lacks important details on this system. Aarti Khosla, director at Climate Trends said, “The Budget lacks timelines for announcements on taxonomy, carbon pricing mechanisms and detailed strategies for mobilising climate finance for adaptation and mitigation efforts in vulnerable communities.”
The success of this policy not only depends on the way it is formulated but also on how effectively it can be implemented.
Image Credits: Google Images
Feature image designed by Saudamini Seth
Sources: The Indian Express, The Hindu, ABP Live
This post is tagged under: India, climate change, IFC, taxonomy, green finance, net zero, GHG, pollution, heatwave
Disclaimer: We do not hold any right, or copyright over any of the images used, these have been taken from Google. In case of credits or removal, the owner may kindly mail us.
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