Seven lessons for India's climate finance taxonomy: response to the Department of Economics Affairs' public consultation on the draft framework for India’s Climate Finance Taxonomy

Kritima Bhapta, Juan Pablo Martinez Martinez, Alia Yusuf, Renu Kohli and Joe Feyertag

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: In May 2025, the Department of Economic Affairs (DEA) within India’s Ministry of Finance released a first draft framework of India’s Climate Finance Taxonomy for public consultation. The taxonomy aims to facilitate around US$250 billion per year (Ministry of Finance, 2025) of finance towards climate-friendly technologies and activities and thereby enable India to achieve its interim 2030 and long-term 2070 net zero targets. The draft framework already integrates many positive and encouraging priorities that will ensure that the development of the Climate Finance Taxonomy follows international best practice: • First, the draft taxonomy embraces science-based metrics and internationallybenchmarked technical screening criteria (TSCs). By ensuring credibility, the taxonomy is interoperable with international frameworks such as the EU taxonomy and the EU-China Common Ground Taxonomy (CGT), thereby facilitating the flow of cross-border capital towards climate change mitigation and adaptation investments in India. • Second, it acknowledges that the taxonomy will be designed as a living document, ensuring that it is continuously and regularly updated to reflect technological progress, market developments, and evolving climate science. The tiered structure allows flexibility around the decarbonisation challenges of hard-to-abate sectors (so-called ‘transition finance’). • Third, the draft framework pledges to adopt evidence-based threshold setting, which is crucial for ensuring that the taxonomy contributes towards the 1.5°C target. India will thereby join the likes of Chile, Brazil and Australia in setting TSCs based on scientific evidence or quantitative criteria based on Nationally Determined Contributions (NDCs) or the scenarios of the Intergovernmental Panel on Climate Change (IPCC) (Climate Bonds Initiative, 2021; Secretaria de Política Econômica, 2023). • Fourth, where quantitative criteria are unavailable or where decarbonisation technologies in hard-to-abate sectors are still nascent, it is encouraging that the Ministry of Finance has followed the path set by ASEAN or Brazil’s taxonomies and proposed the integration of qualitative benchmarks such as process-based steps and other hybrid approaches (ASEAN Taxonomy Board, 2024). Best-in-class performance can also underpin the TSCs, for instance by setting emission thresholds in relative terms. • Fifth, as described above, the Draft Framework embeds the Do No Significant Harm (DNSH) principle, which explicitly includes social considerations as part of the minimum safeguards that ensure that people are not left behind in the net zero transition. Like other taxonomies, such as the ASEAN taxonomy’s Social Aspects (SAs), these safeguards can be aligned with international labour and human rights frameworks such as the Core Conventions of the International Labour Organization (ILO) or the United Nations’ Guiding Principles on Business and Human Rights (UNGPs) to ensure that climate-friendly investments do not come at the cost of workers’ rights, indigenous communities or other social considerations. Building on this positive momentum, this report aims to inform and guide the DEA’s further development of the Climate Finance Taxonomy by highlighting international best practice. (A version of the report was submitted to the DEA’s Public Consultation on the Draft Framework for India’s Climate Finance Taxonomy in July 2025.) Taking these lessons into consideration can help India to avoid common mistakes, support the DEA in deciding what to include and exclude in the taxonomy, and ultimately smooth the transition towards a low-carbon and climate-resilient economy and financial system. The inclusion of real-world examples strengthens the lessons, helps make them more practical, and facilitates peer-learning.

JEL-codes: F3 G3 N0 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2025-09-12
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