Funding for Existence: A Broader View of Green Taxonomy in India

By : Vaishnavi Verma

The EU & China are leading the world in preserving ideas of taxonomy.

Does Green Taxonomy Mean More Tax Impositions?

No! Green Taxonomy is just a system for the identification and classification of information. According to the IPSF (International Platform on Sustainable Finance) Taxonomy Working Group, co-chaired by the European Union and China, "a ‘green’ or ‘sustainable’ taxonomy is a classification system that identifies activities, assets or revenue segments that deliver on key environmental objectives based on the eligible conditions set out by the taxonomy. As such, a taxonomy provides clarity and guidance to financial market participants on what activities/assets are eligible for sustainable investment.”

Taxonomies offer clear guidance on what qualifies as 'green' or 'sustainable' by examining economic activities closely. For a common man, green taxonomy implies more encouragement and benefits in terms of subsidies and price in the market if the economic activity he/she is engaged in is “green” as per the taxonomy. For a small entrepreneur, it can be an opportunity to develop a more sustainable business model; for a rickshaw puller / auto driver, it can be using an electric vehicle; and for a common household, it can be the use of solar energy at a low cost with a low electricity bill. For a multi-national company, however, it can be the obligation to use the defined green technology as well as an opportunity to develop a more green technology and sustain the growth of the company. They define limits and classify particular sustainable investment actions, minimizing the need for personal interpretation and establishing a shared vocabulary for both investors and businesses. While COP29’s Climate Finance Deal collapsed, approving only $300 billion annually instead of the proposed $1.3 trillion to meet the climate finance needs of developing countries, green taxonomies are essential. They bolster domestic financial ecosystems for climate finance, proving more sustainable than relying solely on funds from developed countries.

Countries can frame their own industry classifications for green taxonomies, while the UN International Standard Industrial Classification (ISIC) is already used in places like Singapore. The Common Ground Taxonomy (CGT) Working Group, co-chaired by the EU and China, analyzed 79 activities across six sectors in the ISIC, Rev. 4: (i) agriculture, forestry and fishing; (ii) manufacturing; (iii) electricity, gas, steam and air conditioning supply; (iv) water supply, sewage, waste management and remediation activities; (v) construction; and (vi) transportation and storage.

Various taxonomies serve different aims. For example, Sri Lanka's taxonomy groups economic activities into three categories: reducing climate change, adapting to climate change, and other environmentally friendly goals. It is consistent with local needs, global guidelines, and national laws. The EU’s Taxonomy includes six environmental goals: reducing climate change, adapting to it, responsible water use and protection, promoting a circular economy, controlling pollution, and conserving and restoring biodiversity and ecosystems. The EU Taxonomy plays a crucial role in guiding the financial system to direct investments towards a low-carbon, climate-resilient economy, in accordance with the Paris Agreement.

Approaches/Methodologies to Green Taxonomy

There are three major approaches to green taxonomy classification:

1. White List Method: This refers to a list of allowed economic activities and projects across different sectors and subsectors, similar to those in Chinese, Mongolian, and Russian classifications. Only the activities or technologies that are on this list qualify. 

2. Technical Screening Criteria (TSC): This evaluates if an activity significantly supports environmental goals (like in the EU and South African classifications) without causing major harm to other areas. It is neutral regarding technology, which means any activity that meets the TSC can be classified as green. 

3. Principles-Based Method: This consists of general guidelines instead of strict regulations, outlining fundamental principles that activities must adhere to in order to be recognized as green, offering room for flexibility and adjustment. This method is adopted by countries such as Malaysia and Japan and is comparable to the Green Bond Principles set by the International Capital Market Association (ICMA).

While developing economies move towards resilient and strong green economies, India's green taxonomy is still a “work in progress." With the urgent need for domestic funds for sustainability, India hopes to adopt a green taxonomy suitable to its scenarios and needs, managing carbon emissions in comparison to the per capita emissions of developed nations without hampering its growth trajectory.