PYQ Relevance[UPSC 2022] Discuss global warming and mention its effects on the global climate. Explain the control measures to bring down the level of greenhouse gases which cause global warming, in the light of the Kyoto Protocol, 1997. Linkage: If such a theme on international climate governance and mechanisms can be asked, then India’s Climate Finance Taxonomy also becomes a significant area. It connects global agreements like the Paris Agreement (Article 6.4) with India’s domestic instruments such as the Carbon Credit Trading Scheme and green bonds. |
Mentors Comment
In May 2025, the Ministry of Finance released the draft Climate Finance Taxonomy, India’s first attempt to formally define what counts as climate-aligned investment. The framework seeks to mobilise green finance, prevent greenwashing, and give clarity to investors. Its success, however, depends on strong review systems, accountability, and stakeholder engagement.
Introduction
The draft taxonomy marks a turning point in India’s climate governance. This is India’s first unified framework for climate finance, introduced amid rising greenwashing risks and investor uncertainty. Arriving alongside the operationalisation of the Carbon Credit Trading Scheme and the rise of green bonds, it comes at a moment of growing pressure to align finance with net-zero goals. As a “living framework,” it promises adaptability to evolving national and global priorities. But without transparency, legal coherence, and institutional accountability, the taxonomy risks undermining India’s climate finance ecosystem instead of strengthening it.
The Review Architecture for a Living Framework
- Two-tier review system: Suggestion of annual reviews for short-term corrections and five-year reviews for deep reassessment.
- Annual reviews: Triggered by implementation gaps, international obligations, or stakeholder feedback, with structured timelines, documentation protocols, and public consultation.
- Five-year reviews: Linked with India’s NDC cycle and global stocktake under the UNFCCC; ensures long-term resilience in a changing climate finance ecosystem.
Key aspects of the Substantive Review
- Legal coherence: Taxonomy must align with Energy Conservation Act, SEBI norms, Carbon Credit Trading Scheme, and India’s international commitments.
- Harmonisation: Review should remove overlaps, clarify redundancies, and integrate with green bonds, blended finance, and environmental risk disclosures.
- Content clarity: Definitions must remain readable, coherent, and technically precise. Quantitative thresholds (e.g., emissions reduction, energy efficiency benchmarks) must be regularly updated with empirical data.
- Inclusivity: Framework must remain accessible to MSMEs, informal sector, agriculture, and small manufacturing with staggered compliance timelines and proportionate expectations.
Strengthening Governance through Accountability Structures
- Standing unit in the Ministry of Finance: Dedicated body within the Department of Economic Affairs or an expert committee involving financial regulators, climate science institutions, civil society.
- Public dashboards: Mechanisms to receive inputs, document experiences, and publish reports.
- Transparency: Annual review summaries and five-year revision proposals should be made public in consolidated formats to enhance investor trust and policy coherence.
Significance of the Climate Finance Taxonomy for India’s Green Transition
- Carbon Credit Trading Scheme: Soon to be fully operational, requiring clear rules for market credibility.
- Green bonds: Entering mainstream portfolios and stock exchanges, need alignment with taxonomy standards.
- Public investment flows: Rising pressure to align fiscal spending with long-term climate goals.
- Risk of failure: A weak or opaque taxonomy could undermine India’s net-zero transition by encouraging greenwashing and eroding investor trust.
Conclusion
India’s climate taxonomy is more than a definitional exercise, it is a governance tool that can determine the credibility of India’s climate finance system. A “living document” is meaningful only if it is kept alive through active review, structured revision, and transparent engagement. By embedding legal coherence, inclusivity, and accountability, India can ensure the taxonomy becomes a reliable foundation for mobilising investments, reducing greenwashing, and achieving its climate goals.
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Mapping Microthemes
- GS Paper II: Governance, public consultation, accountability mechanisms.
- GS Paper III: Climate finance, carbon markets, sustainable development, green bonds, energy efficiency.
- GS Paper IV: Ethical finance, transparency, preventing greenwashing.
Practice Mains Question
India’s draft Climate Finance Taxonomy has been called a “living framework.” Discuss its significance for India’s climate governance and examine the challenges of ensuring credibility, inclusivity, and accountability.
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