India Plans to Introduce a Climate Finance Taxonomy to Boost Green Capital Investment
India has announced the development of a Climate Finance Taxonomy, a groundbreaking classification framework designed to guide investments towards clean technology and climate resilience. The taxonomy, set to be launched in August 2025, aims to address the country's significant climate finance needs and support India's vision of a developed, low-carbon economy by 2047 and Net Zero by 2070.
The taxonomy emphasizes resilient infrastructure and small businesses to ensure inclusive climate action. It aims to create greener jobs and promote low-carbon technology innovation, focusing on sustainable transport, power, mobility, buildings, agriculture, food and water security, and hard-to-abate industries like steel and cement.
The taxonomy offers clear investment criteria to investors, enabling them to identify and fund sustainable projects with greater confidence. It includes a tiered classification system, dividing activities into climate-supportive (Tier 1 and 2) and transition-supportive, providing a comprehensive approach to climate finance.
The taxonomy is fully integrated with India's net-zero and energy security objectives. It is also aligned with international standards, such as the EU and G20 taxonomies, to enable integration with global green finance and attract foreign capital, particularly from Europe.
One of the key features of the taxonomy is its focus on resilience and mitigation. It classifies activities not only for greenhouse gas emission reduction but also those that build climate resilience, such as renewable-powered cold chains and climate-resilient housing. The taxonomy also encourages the development of new financial products, like resilience bonds and adaptation-focused green loans, facilitating private investment and better fiscal planning aligned with India’s National Adaptation Plans and Sustainable Development Goals.
Some Indian states, like Odisha and Kerala, have already started climate budget tagging to track adaptation expenditure, supported by mechanisms like the National Adaptation Fund for Climate Change, in line with taxonomy principles.
However, the current draft is seen as heavily borrowing from international models without fully addressing India’s unique climate challenges. There are calls for a more India-specific, comprehensive framework that promotes sustainable transitions tailored to national priorities.
The cumulative need by 2070 for India to achieve Net Zero is USD 10.1 trillion. The taxonomy was developed from consultation with experts, industries, and global institutions. The success of the taxonomy depends on effective implementation, continuous updates, and integration across policies and markets. The taxonomy includes strong verification systems to prevent greenwashing.
The taxonomy is expected to increase energy security and reduce reliance on fossil fuels, with the annual funding requirement for India to meet its NDCs (2015-2030) being USD 170 billion. The taxonomy, if successfully implemented, could unlock significant funding, potentially mobilizing up to $340–510 billion in foreign capital needed by India and strengthening India’s global clean technology leadership.
[1] World Resources Institute. (2021). India's Climate Finance Taxonomy: A New Framework for Green Investments. [2] Climate Policy Initiative. (2021). India's Climate Finance Taxonomy: A Step Forward for Green Investments. [3] The Energy and Resources Institute. (2021). India's Climate Finance Taxonomy: A Game Changer for Green Investments. [4] Centre for Science and Environment. (2021). India's Climate Finance Taxonomy: A Critical Analysis. [5] National Institute of Public Finance and Policy. (2021). India's Climate Finance Taxonomy: A Review and Recommendations.
- India aims to foster a low-carbon economy and achieve Net Zero emissions by 2070 with the launch of its Climate Finance Taxonomy, a framework guiding investments in clean technology and climate resilience.
- The taxonomy targets resilient infrastructure and small businesses, prioritizing job creation in the green sector and the innovation of low-carbon technologies.
- To ensure investments in sustainable projects, the taxonomy provides clear criteria for investors, dividing activities into climate-supportive and transition-supportive tiers.
- Aligned with international standards, the taxonomy enables integration with global green finance and attracts foreign capital, particularly from Europe, to fund climate initiatives.
- Beyond emission reduction, the taxonomy focuses on building climate resilience through projects like renewable-powered cold chains and climate-resilient housing.
- Innovative financial products, like resilience bonds and adaptation-focused green loans, are encouraged to attract private investment for climate action.
- Some Indian states, like Odisha and Kerala, are implementing climate budget tagging to track adaptation expenditure in line with taxonomy principles.
- Critics argue that the current draft of the taxonomy heavily borrows from international models and fails to address India's unique climate challenges effectively.
- The taxonomy necessitates continued updates, integration across policies and markets, and strong verification systems to prevent greenwashing.
- With an estimated need of USD 10.1 trillion by 2070, successful implementation of the taxonomy may unlock significant funding, potentially mobilizing up to $340–510 billion in foreign capital for India.
- Various reports, such as those by the World Resources Institute, Climate Policy Initiative, The Energy and Resources Institute, Centre for Science and Environment, and National Institute of Public Finance and Policy, provide insights into the development and potential impacts of India's Climate Finance Taxonomy.
