Climate Change Impact on India and World – International Reports, Key Observations, etc.

What is a Climate Finance Taxonomy, announced by FM Sitharaman?

Prelims Only | Economics | Mains Paper 3: Indian Economy
Note4Students

From UPSC perspective, the following things are important :

Prelims level: Climate Finance Taxonomy

Why in the News?

  • The 2024 Union Budget, presented by Finance Minister, includes developing a taxonomy for climate finance.
    • The aim is to enhance the availability of capital for climate adaptation and mitigation.

What is a Climate Finance Taxonomy?

  • A climate finance taxonomy is a classification system that identifies which economic activities can be marketed as sustainable investments.
  • It serves as a guide for investors and financial institutions to direct capital towards projects that contribute to climate adaptation and mitigation, aligning with broader environmental goals.

Significance of a Climate Finance Taxonomy

  • Net-Zero Economy: With global temperatures rising and the adverse effects of climate change worsening, countries need to transition to a net-zero economy.
  • Alignment with Transition Pathways: Taxonomies help ascertain if economic activities are aligned with credible, science-based transition pathways.
  • Deployment of Climate Capital: They provide an impetus for the deployment of climate capital by directing investments towards sustainable projects.
  • Reduction of Greenwashing Risks: Taxonomies help reduce the risks of greenwashing by providing clear criteria for what constitutes a sustainable investment.

Why does India need a Green Taxonomy?

  • According to the IFC, India needs an estimated $10.1 trillion to achieve net-zero by 2070.
  • Public investments alone can’t match this goal, calling for standardization in investments.

Benefits for India

  • For India, a taxonomy could attract more climate funds from international sources.
  • Currently, green finance flows in India are falling short of the country’s needs, accounting for only around 3% of total FDI inflows, according to the Landscape of Green Finance in India 2022 report by the Climate Policy Initiative.
  • A lack of clarity on what constitutes sustainable activity is a significant reason for the low green finance flows. A taxonomy would address this issue.

India’s Climate Commitments:

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

Steps taken by India:

  • In January 2021, India established a task force on sustainable finance under the Department of Economic Affairs, Ministry of Finance.
    • The task force’s objectives include creating a framework for sustainable finance, establishing pillars for a sustainable finance roadmap, suggesting a draft taxonomy of sustainable activities, and creating a framework of risk assessment by the financial sector.
  • In April 2021, the RBI joined the Central Banks and Supervisors Network for Greening the Financial System (NGFS) as a member.
  • RBI is also a member of a task force on climate-related financial risks set up by the Basel Committee on Banking Supervision and the International Platform on Sustainable Finance.

Potential for Green Investments in India

    • According to a report by the International Finance Corporation (IFC), India has a climate-smart investment potential of $3.1 trillion from 2018 to 2030.
    • The largest investment opportunity lies in the electric vehicle segment, with a potential of $667 billion as India aims to electrify all new vehicles by 2030.
  • The renewable energy sector also presents a substantial investment opportunity, estimated at $403.7 billion.

International Adoption of Taxonomies

  • Many countries have either started developing or have finalized their taxonomies.
  • Countries with developed taxonomies include South Africa, Colombia, South Korea, Thailand, Singapore, Canada, and Mexico.
  • The European Union has also developed its own taxonomy.

PYQ:

[2016] With reference to the Agreement at the UNFCCC Meeting in Paris in 2015, which of the following statements is/are correct?

  1. The Agreement was signed by all the member countries of the UN, and it will go into effect in 2017.
  2. The Agreement aims to limit the greenhouse gas emissions so that the rise in average global temperature by the end of this century does not exceed 2ºC or even 1.5ºC above pre-industrial levels.
  3. Developed countries acknowledged their historical responsibility in global warming and committed to donate $ 1000 billion a year from 2020 to help developing countries to cope with climate change.

Select the correct answer using the code given below:

(a) 1 and 3 only
(b) 2 only
(c) 2 and 3 only
(d) 1, 2 and 3

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