Finance Ministry Unveils Draft Framework for India’s Climate Finance Taxonomy

 The Department of Economic Affairs (DEA), under the Ministry of Finance, has released a draft framework for developing India’s Climate Finance Taxonomy, inviting public feedback until June 25. This draft lays out the principles, objectives, and methodology for categorizing climate-aligned activities, projects, and technologies. It aims to channel more resources toward climate-friendly initiatives while aligning with India’s development goals, including the vision of ‘Viksit Bharat’ by 2047.

According to the official release, the taxonomy will serve as a strategic tool to classify and prioritize investments that support India’s climate goals and its journey toward net-zero emissions by 2070. It is also designed to ensure access to affordable and reliable energy in the long term.

India's commitment to climate action is demonstrated through its Nationally Determined Contributions (NDCs) and its pledge to achieve net-zero emissions by 2070. To meet these targets, India will require approximately $2.5 trillion (at 2014-15 prices) by 2030. Further, NITI Aayog estimates that an annual investment of $250 billion will be needed for energy transition efforts until 2047.

Adaptation finance remains a critical component of the climate strategy, especially for sectors vulnerable to climate change. The draft estimates that nearly $206 billion will be needed from 2015 to 2030 for adaptation efforts in agriculture, forestry, water resources, infrastructure, and ecosystems.

Despite having per capita energy consumption that is only one-fifth of developed countries, India's demand is expected to rise significantly during the ‘Amrit Kaal’—a phase of rapid economic growth. The draft cites that to reach a Human Development Index (HDI) score of 0.9, India’s per capita final energy consumption should range between 45.7 and 75 gigajoules per year, compared to the current 16.7 gigajoules (FY23).

Recognizing the scale of investment required, the Union Budget 2024–25 had announced the development of a climate finance taxonomy to mobilize capital for both climate mitigation and adaptation.

Two-Phase Implementation Strategy

The proposed framework will be implemented in two phases. The first phase will establish the core framework and approach. The second phase will involve detailed classification of climate-supportive and transition activities, projects, and sectors.

This phased approach is designed to improve transparency and guide investors, while ensuring the taxonomy aligns with both India’s developmental priorities and its evolving climate action plan. The draft acknowledges the dynamic nature of the economy and emphasizes that the taxonomy will be a "living document," subject to regular updates and revisions.

Key Objectives of the Taxonomy

The primary aim of the taxonomy is to facilitate the flow of capital to green technologies and climate-aligned projects. Specifically, it will focus on:

• Mitigation: Activities aimed at improving energy efficiency, lowering emission intensity, and avoiding greenhouse gas emissions.

• Adaptation: Actions that build resilience, such as sustainable water use, ecosystem protection, and restoration.

• Transition Support: Assisting hard-to-abate sectors—like iron, steel, and cement—with low-carbon innovation, R&D, and tailored decarbonization pathways.

Structural Design and Classification Approach

The framework outlines a dual-layered design, incorporating both qualitative and quantitative metrics. Qualitative elements provide overarching principles aligned with India’s NDCs and SDGs, while quantitative criteria—such as emission thresholds and sustainability indicators—help ensure accountability and measurable impact.

This hybrid approach allows the taxonomy to remain adaptable to India’s varied industrial landscape and responsive to emerging climate targets and policy shifts. It aims to balance scientific integrity with practical implementation on the ground.

Activities contributing to climate goals will be grouped into two main categories:

• Climate-Supportive Activities: Including those that reduce emissions, avoid GHGs, or implement adaptive solutions to climate risks.

• Climate-Transition Activities: Focused on guiding carbon-intensive sectors through sustainable transformation.

Initially, priority sectors for classification include power, mobility, and buildings (for mitigation), as well as agriculture, food, and water security (for adaptation). Hard-to-abate industries such as iron and steel and cement will also be a focus in the transition category.

The release of this draft framework marks a significant step in India's climate finance architecture, reinforcing its global climate commitments while addressing domestic development imperatives