CLIMATE FINANCE TAXONOMY

TAG: GS 3: ECONOMY

THE CONTEXT: Presenting the Union Budget for 2024-25 recently, Finance Minister announced that the government would develop a ‘climate finance taxonomy’ to enhance the availability of capital for climate adaptation and mitigation.

EXPLANATION:

• This will help India achieve its climate commitments and green transition.

What is a climate finance taxonomy?

• A climate finance taxonomy is a system that classifies which parts of the economy may be marketed as sustainable investments.
• It helps guide investors and banks in directing trillions toward impactful investments to tackle climate change.
• Taxonomies are frequently used to set standards for classifying climate-related financial instruments. E.g., green bonds.
• 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,” according to a report by the government of Canada.

Why is a taxonomy significant?

• With global temperatures soaring, and the adverse effects of climate change exacerbating, countries need to transition to a net-zero economy.
• The balance between the amount of greenhouse gas (GHG) that is produced, and the amount that is removed from the atmosphere is needed.
• Taxonomies can play a pivotal role in doing this as they can help ascertain if economic activities are aligned with credible, science-based transition pathways.
• It also gives impetus to deployment of climate capital, and reduce the risks of greenwashing.
• For India, a taxonomy could bring in more climate funds from international sources.
• Currently, green finance flows in India are falling far short of the country’s current needs — they only account for around 3% of total FDI inflows to India, according to the Landscape of Green Finance in India 2022 report, published by Climate Policy Initiative.
• One reason for abysmally low green finance flows has been a lack of clarity in what constitutes sustainable activity. A taxonomy would change that.

What is the potential for green investments in India?

• India has a climate-smart investment potential of $ 3.1 trillion from 2018 to 2030, according to a report by the International Finance Corporation (IFC).
• The largest space for investment is in the electric-vehicle segment, at $ 667 billion as India aims to electrify all of its new vehicles by 2030.
• India’s renewable energy sector also continues to be a good investment avenue at $ 403.7 billion, the report added.

Do other countries have taxonomies?

• Many countries have either started to work on their taxonomy or finalised one.
• South Africa, Colombia, South Korea, Thailand, Singapore, Canada, and Mexico are some of the countries which have developed taxonomies.
• The European Union has done this as well.

What are India’s climate commitments?

• India aims to achieve net-zero economy by 2070.
• It has also pledged to reduce the emissions intensity of its GDP by 45% by 2030, from the 2005 level.
• India has committed to achieve about 50% cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030 as well.

SOURCE: https://indianexpress.com/article/explained/everyday-explainers/climate-finance-taxonomy-9470655/