Why the draft framework of India’s climate finance taxonomy needs a complete overhaul

The draft Framework of India’s Climate Finance Taxonomy, most likely built as part of a global trend, lacks in-born conviction and commitment. It is further stymied by a lack of a comprehensive response from the Government of India on how the country would transform itself in the face of climate-related disasters, visible and invisible.

In a positive sense, this draft, limited as it is, probably qualifies to be the first policy response, with some analysis and a defined path forward.

To begin with, the objective of this draft can be to facilitate greater resource flow to existing and new climate-friendly technologies and activities, enabling achievement of the country’s vision to be Net Zero by 2070, while also ensuring long-term access to reliable and affordable energy. India already has climate-friendly technologies and activities. These activities need resources too.

The authors of the draft try to tell us repeatedly that the document is in alignment with international experience and taxonomies, indicating a borrowed approach, than something which is born based on the conditions and circumstances in India.

Rightly, it mentions prominently the historic responsibility of developed countries and the per capita emissions, even while absolving India of its responsibility in contributions. And, it leaves it at that.

In fact, the thread of argument should have been extended to assess the differential responsibilities and contributions to emissions within India’s states, sectors and communities. Climate finance has to go to areas and sectors that are contributing high emissions, within India’s per capita GHG emissions that stood at around 2.9 tCO2e in 2023.

This draft brings out the dimension of timelines in achieving Net Zero, lamenting that developing countries have defined Net Zero targets with longer timelines, upto 2050. It alludes to the point that India is facing increasing pressure to adopt similar trajectories over a much shorter timeframe. Thus, it plays out the motivation for the development of this draft.

It is not being developed because India feels the inherent need to transition, but due to pressure from developed countries. Basically, transition trajectories are being conjured up because of top down pressure. Yet, this draft continues the same pathway of transition on Indian agriculture and MSME sectors without disaggregating the contributions.

In a kind of sum-up, this draft says, “A steep transition pathway relies on access to finance, advanced technologies and critical mineral resources, all of which pose significant challenges related to access and availability of such resources at a reasonable cost”.

Context: Draft inconsistent with India's reality

After recognising these challenges, one would expect this draft to include an argument for longer timelines, prioritising sectors and insulating communities, whose contribution is minimal if not nil, from the pain of transition. However, the draft falls far short of the requirements that it recognises. In fact, altogether it fails to establish timelines or align timelines as per India’s NDCs.

Identification of sectors to be focused upon in this draft framework appears to be based on the trend rather than hard data and information. No criteria have been enunciated to select sectors, which require focus and thrust in the framework.

Inclusion of agriculture, food and water security in India’s climate finance taxonomy remains unjustified and unsubstantiated. Unlike other countries, including EU taxonomy, India should not include agriculture, food and water security in its climate finance taxonomy framework. The taxonomy should include high-emitting sectors such as energy generation, transportation, manufacturing (chemical, plastics, pharma, cement), construction and real estate. The purpose of climate finance taxonomy should be to facilitate financial flows to sectors that need to transition away from high emissions.

This framework should have included cross-sectoral measures in its principles. It did not, even though in the progress report on NDC implementation it mentioned cross-sectoral measures as the top-most initiative.

In the progress report, it is claimed that ‘influencing consumer and producer behaviour’ had impacted emissions growth; not mentioning positively or negatively. Assuming that this impact on emissions growth was negative, singularly this should have been adopted as one of the principles that drive this climate finance taxonomy framework.

The draft explains that the central theme of the taxonomy is promoting measures that adapt and build resilience to climate change, but mention only agriculture. Why only in agriculture? Indian agriculture’s contribution to emissions is minimal, as the document admits elsewhere.

It is known that agriculture is at the receiving end of climate change, impacted by extreme weather-related events. Thus, the change and the transition measures have to be located in sectors that cause climate change. Without addressing the root cause of climate change, which does not lie in agriculture, food and water security, focusing on agriculture becomes a ‘forever transition’ measure as the contribution to emissions volume by other sectors continues unabated and unchecked.

Further, the draft recommends modernisation, greater private sector participation, development of post-harvest facilities, precision irrigation, climate resilience and climate resilient crop varieties, among others, as the adaptation measures.

Funnily, the document mentions ambition to build climate resilience in agriculture, through climate resilience. Interestingly, it does not apply the eight principles enunciated in the same document to come up with these adaptation measures. To cite a few instances, it does not mention the need for usage of native varieties (support indigenous technologies), local agro-climatic conditions (focus on pathways and trajectories in country context), risk to local livelihood security and food security from modernisation and support transitional activities such as safety nets.

Agriculture in India has inherent resilience capacity in the form of native varieties, indigenous knowledge and skills and changing consumer behaviour demanding natural farming products. The Government of India has to address policies that hinder the transition of Indian agriculture towards a pathway that builds resilience to climate change, not based on advanced technologies, but on indigenous, native, time-tested farming methods. 

A hybrid approach, inclusive of application of qualitative principles and quantitative approaches, as mentioned in this draft taxonomy document, cannot be used for slower transition in industry and manufacturing sectors. In this taxonomy, metrics should be defined and applied to sectors using science-based targets, balancing ease of use with transparency and robustness to both assess climate impact and support third-party verification.

This draft does not envisage a governance process for this taxonomy. It can be perilous to ignore this key factor. India is a federal republic, with a three-tier democracy, wherein States play a key role in transition, economic growth and development. A governance process that is robust, inclusive and transparent, and has the flexibility for continued evolution, has to be included in this draft.  

A common definition of economic activities that can be considered as environmentally sustainable is essential. A section on classification of economic activities based on their environmental and social sustainability might be helpful.

This draft, in fact, does not define various concepts, axioms mentioned herein. The following undefined ideas, for instance, can have different meanings: Climate-friendly technologies and activities; public consultation; climate supportive, hard-to-abate and non-fossil fuel sources; and mature climate technologies.

Criteria of social aspects (SA) should be included. These criteria focus on social aspects that could be harmed by an activity in this taxonomy, such as human rights, labour rights and impact on people living close to investments. Since Indian taxonomy is being built to be consistent with global taxonomies, it might help to include this as a criterion too.

The eight principles presented in the draft are consistent with global taxonomies, as the document explains in a table, but are inconsistent with Indian life. This can be corrected by the inclusion of environmental, social and governance principles. These factors are critical in decision making based on sustainability considerations.

Conclusion: Complete reorientation needed to highlight cross-sectoral measures

Inclusion of social equity principles in climate taxonomy leads to the integration of fairness and justice in the distribution of climate change impacts, responsibilities and benefits across different social groups. These principles can be used to evaluate and address the disparities in the impacts of climate change and the resources needed to address these impacts. 

Equity is a central element to the problem of climate change. It corresponds to the complexity of the problem in climate finance too, as it attempts to address the inherent unfairness of the problem: it is multifaceted by addressing several issues.

A call for equitable climate finance taxonomy includes the following: First, to protect the most vulnerable people from adverse effects of economic activities and technologies; second, to provide distributive justice among the present generations, as well as the future generations; third, to ensure an inclusive, transparent, negotiated process of change. Intertwining equity and justice principles is essential for gathering broad support for climate finance taxonomy.

India is a land of social diversity, complicated by many strands. The taxonomy needs to recognise and enshrine obligations that avoid social harm, even as transition is being financed.

This draft framework of India’s Climate Finance Taxonomy needs overhaul and reorientation. It should shed inevitable inclusion of agriculture, but focus on high-emission sectors to define and support a transition pathway that includes application of existing and new climate friendly technologies and activities.

Appropriate metrics and principles have to be identified to design the taxonomy that responds to Indian scenario and sectoral contexts. Cross-sectoral measures need to be highlighted and also changing consumer behaviour.

This makes sense when manufacturing and energy generation sectors are prioritised in this taxonomy.

Final summary: India's draft Climate Finance Taxonomy framework is heavily reliant on international models, failing to address the country's unique climate challenges. It overlooks high-emission sectors and indigenous technologies, focusing instead on agriculture. The framework needs a complete overhaul to ensure equitable distribution of climate finance, protect vulnerable communities and support sustainable transitions, aligning with India's specific needs and circumstances.

Narasimha Reddy Donthi is a public policy expert and consultant at the Pesticide Action Network India and a visiting faculty (honorary) at Delhi-based Impact and Policy Research Institute.

Views expressed are the author’s own and don’t necessarily reflect those of Down To Earth.