A Look into Climate Finance Taxonomy of Budget 2024
Recently our country’s current finance minister has released the budget for this year. The new budget includes a climate finance taxonomy to achieve India's climate commitments and green transitions. Before delving deep into it, let us know about the climate finance taxonomy.
Climate Finance Taxonomy
A climate finance taxonomy is a system that classifies which parts of the economy can be marketed as sustainable investments. Banks and investors get guidance on directing trillions toward impactful investments for tackling climate change.
Why is Taxonomy Important?
Currently, we all are familiar with the situation of rising global temperatures and the adverse effects of climate change intensity. It is suggested that the countries shift to a net-zero economy. It helps to maintain the balance between the amount of GHG that is produced and the amount that is removed from the atmosphere.
However, it is difficult to trace that the economic activities are aligning with the credible and science-based transition pathways. Taxonomies have a crucial role in tracing their alignment and effectiveness. Along with this, the deployment of climate capital and reduction of greenwashing can be easily traced.
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As per the current scenario, for India, taxonomy can bring in more green funds from international sources. However, the country’s green finance flow is falling short based on its needs. Only 3% of the total Foreign Direct Investment inflows in India, according to the report by Climate Policy Initiative about the Landscape of Green Finance in India 2022. Lack of clarity in what forges sustainable activity is one of the reasons behind the decrease in green finance. This can be reconstructed by the climate finance taxonomy.
What Boosts Green Investment?
The report of the International Finance Corporation stated that India has a climate-smart investment potential of $3.5 tn from 2018 to 2030. As India aims to electrify all the new vehicles by 2030, a huge part of the investment is in the EV segment which is $667 bn. In addition, the report states that the renewable energy sector of the country continues to grow with an investment of $403.7 bn. EV and renewable energy both sectors are good investment avenues for economic growth and positive environmental impact.
India’s Climate Commitments
Other than India, many countries are starting or finalizing the work on the climate finance taxonomy. Along with the EU, countries such as South Africa, Colombia, South Korea, Mexico, Canada, Thailand, and Singapore have developed taxonomies.