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What is Green Taxonomy?

  • IAS NEXT, Lucknow
  • 15, Nov 2021
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If current patterns are not reversed, global temperatures will likely rise by greater than 3°C above pre-industrial levels by 2100—this will be a significant breach of the limit of 1.5°C set by the Paris Climate Agreement. The priority of the COP26 summit is to urge nations to be ambitious in updating their 2030 targets and commitments to climate action.

India is the third largest carbon emitter, the second most populated country that is projected to reach its peak population of 1.6 billion by 2048, and one of the fastest growing economies in the world. By adopting a development pathway consistent with the 1.5°C-target amidst its pursuit of becoming a US $5-trillion economy, India will be pivotal in the global calculus of climate change mitigation. It can motivate its peers to heighten their climate action and set a pioneering example of circumventing the complex trade-offs between environment and growth.

India needs to increase its efficiencies in energy and resource use. This green transformation requires massive investments in the most advanced green technologies and business models, as well as in green infrastructure. This transformation is estimated to require an annual investment of US $200 billion on green infrastructure alone (or 7–8 percent of GDP), and a climate-smart investment of US $300 billion.

Guiding Principles for a Green Taxonomy.

A well-defined taxonomy will 

  • Reduce the incidence of information asymmetry, 
  • Rule out plural interpretations of green finance,
  • Minimize the risk of greenwashing
  • Provide a transparent understanding of the environmental footprint of economic activities underlying investments.
  • Provide the guidance and confidence sought by investors in making environmentally conscious investment decisions
  • Provide visibility to capital-starved green sectors, allowing them to attract requisite investments away from renewable energy, which currently accounts for 80 percent of green finance in India. 
  • It can be the touchstone for Financial Institutions (FIs) and companies in managing and monitoring the environmental quotient of their financial profile while allowing regulators like the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) to oversee these entities by mandating disclosures that align with the taxonomy.  
  • It can be the reference for strengthening SEBI green bond guidelines that currently allow for multiple definitions of “green” investments. It can facilitate standardisation of data collection, reporting, and impact measurement methodology involved in the construction of ESG indices. 
  • It can also be the government’s barometer for tracking the compatibility of environmental outcomes with the vision of global net-zero, while showing the way to appropriate corrections in the case of deviations.

Principles of a Green Taxonomy

Principle 1: A green taxonomy should be developed in a way that has a multipronged impact on green finance. 

Principle 2: The taxonomy should focus on India’s most pressing environmental challenges – climate change mitigation and adaptation, pollution prevention and control, resource efficiency, conservation of natural resources, and ecosystem/biodiversity conservation. 

  • It can also be the government’s barometer for tracking the compatibility of environmental outcomes with the vision of global net-zero, while showing the way to appropriate corrections in the case of deviations.
  • The taxonomy must include the environmental objectives of climate change mitigation, reducing air and water pollution, addressing water scarcity, and arresting ecosystem/biodiversity losses.
  • These are serious challenges in sectors such as energy, manufacturing, transport, agriculture, waste, and buildings. The taxonomy may thus focus on these sectors to maximise the positive environmental outcomes expected to be generated from the taxonomy.
  • Include a pre-specified set of sustainable agricultural and livestock farming practices suitable for the Indian context, as opposed to quantitative technical screening criteria.

Principle 3: The taxonomy must be anchored in Nationally Determined Contributions, key national plans and policies for environmental action, and national norms and standards.

  • The Indian taxonomy must rely on pollution standards set by the Central Pollution Control Board (CPCB) under the Ministry of Environment, Forests & Climate Change (MOEF&CC); water consumption norms set by the MOEF&CC and Ministry of Jal Shakti; and the Environmental Impact Assessment (EIA) protocol defined by the MOEF&CC. 
  • The monetary valuation of ecosystem services may also be used for assessing ecosystem and biodiversity losses.

Principle 4: The eligibility criteria must be technology agnostic and 1.5°C-compatible.

  • India must establish its own screening criteria for determining eligibility for green finance. 
  • The Indian version must be technology agnostic. Such taxonomy provides the freedom to choose between alternative pathways to green transition and prevents it from being redundant amidst technological innovations.
  • India must use the latest climate science for its technical screening criteria relating to GHG emission thresholds. The criteria should be consistent with 1.5°C, rather than 2°C.

Principle 5: The taxonomy should be harmonised with international standards.

  • Existing Indian standards may be revised to be at par with international benchmarks within the scope provided by domestic circumstances. 

Principle 6: Alignment of tracking of green finance and disclosure norms with the taxonomy.

  • There is a need for tracking climate/green finance through transparent and well-defined disclosures and reporting.
  • Regulators such as the RBI and SEBI should mandate financial market participants to delineate the environmental goals met 
  • The Ministry of Corporate Affairs must mandate companies to enlist the environmental objectives achieved by economic activities.

Principle 7: Regular reviews and updates of the taxonomy.

  • Timely updates to incorporate changes in development levels, technology, policy, standards and environmental conditions