Policy Update
Tanisha
Background
The Union Budget 2024-25 committed the government to develop a taxonomy for climate finance “for enhancing the availability of capital for climate adaptation and mitigation” (Department of Economic Affairs [DEA], 2025, para. 1.4). A taxonomy is a classification list. It says which activities, projects and measures count as climate-aligned, so that lenders, investors and regulators work from one definition instead of their own.
The reasons are about scale. The draft puts the investment needed to meet India’s 2030 NDC targets at about USD 2.5 trillion (at 2014-15 prices), and the energy transition alone at roughly USD 250 billion a year until 2047. Adaptation adds to this: India’s Initial Adaptation Communication of December 2023 estimates a cumulative need of ₹56.68 trillion, about USD 648.5 billion, to 2030 under a business-as-usual scenario (DEA, 2025). Against that, NITI Aayog (2026) puts current annual climate finance flows at only about USD 135 billion.
India is arriving in a crowded field. The draft notes that the ASEAN taxonomy is already on its third version (2021, 2023 and 2024), and that the EU went from an action plan in 2018 to a taxonomy regulation in 2020, with technical screening criteria finalised over 2021 to 2023 (DEA, 2025). NITI Aayog (2026) counts more than 50 national or regional taxonomies in use or under development as of 2025. What the Indian draft adds is an explicit development argument. It points to India’s per capita emissions of about 2.9 tCO2e in 2023, against a world average of 6.7, and argues for a transition pathway that does not pull resources away from development priorities (DEA, 2025).
Functioning
The taxonomy is being built in two parts: an overarching framework, and sectoral annexures that will list the specific activities that qualify. The Department of Economic Affairs prepared the framework after sharing a concept note with think tanks, academia, international organisations, development finance institutions, line ministries and industry bodies, and the annexures are to be finalised from the work of sectoral technical committees (DEA, 2025). Public comments on the draft framework were invited until 25 June 2025 (Ministry of Finance, 2025).
The draft rests on eight principles: consistency with India’s NDC, the 2070 net zero goal and the Viksit Bharat ambition; do no significant harm to other climate objectives; a focus on country-specific pathways and trajectories; interoperability with global taxonomies where possible; support for transition activities; preference for indigenous technologies; a science-based and transparent approach; and proportionality for micro, small and medium enterprises (DEA, 2025). It takes a hybrid route, starting with qualitative criteria and adding quantitative thresholds over time, and where thresholds are used it prefers relative targets, such as percentage improvements, to absolute benchmarks. The document describes itself as a living document to be reviewed periodically (DEA, 2025).
Activities fall into two baskets, climate supportive and transition supportive, with the first split into two tiers (Table 1). The first phase covers power, mobility and buildings, treated mainly for mitigation with adaptation co-benefits; agriculture, food and water security, treated for adaptation and resilience; and iron and steel and cement as the first hard-to-abate sectors (DEA, 2025).
| Basket | Tier | What qualifies, as proposed in the draft |
|---|---|---|
| Climate supportive | Tier 1 | Activities that avoid emissions outright, including non-fossil sources; activities that cut emission intensity beyond a set factor, with defined pathways for further improvement; and all activities that enhance climate resilience. |
| Climate supportive | Tier 2 | Activities that reduce emission intensity and have defined pathways for improvement; efficiency gains in sectors where absolute avoidance is not yet viable; and adaptation measures that may still leave some emissions unmitigated because of technology or access constraints. |
| Transition supportive | Single tier | Efficiency or emission-intensity improvements in sectors where no technologically and economically feasible low-emission alternative exists in India. These must not lead to stranded assets, and count as meeting the framework as long as the transition is in line with stated government policy. |
Table 1. Classification baskets in the draft framework. Source: Department of Economic Affairs (2025), paragraphs 5.1 to 5.4.
Performance
A framework that has not been finalised has no outcomes to report yet, so this section tracks the process and the problem it is meant to address. The process so far: the Budget announcement in 2024, the concept-note consultation, release of the draft framework on 7 May 2025, and a public comment window that closed on 25 June 2025 (DEA, 2025; Ministry of Finance, 2025). The most recent official material reviewed for this update, a NITI Aayog (2026) study published in February 2026, still refers to the framework as a draft. NITI Aayog is explicit that its study is not a statement of government policy.
The problem is a gap between flows and need. NITI Aayog (2026) reports that studies put India’s total net zero investment need at USD 10 to 20 trillion by 2070, or USD 250 to 450 billion a year, against current flows of about USD 135 billion, of which about USD 87 billion went to clean energy in FY2023-24 (Figure 1). Roughly 83 percent of recent flows were domestic and 17 percent international, and most went to mitigation, leaving adaptation underfunded.
Figure 1. Current annual climate finance flows against the range of estimated annual need reported across studies. Indicative figures. Source: NITI Aayog (2026).
Impact
Any impact so far is anticipatory. With no sectoral annexures published, a lender cannot yet use the taxonomy to decide whether a particular project qualifies. What the draft sets out to do is help domestic and foreign financial institutions identify climate-related investment opportunities and reduce the risk of greenwashing (DEA, 2025). The Reserve Bank of India’s Deputy Governor described a national taxonomy as the first building block that aligns the government, regulators, financial institutions and investors, and noted that until it is ready the RBI has mapped green sectors using the Sovereign Green Bonds framework, including for its 2023 Green Deposits framework (Rao, 2025).
The draft also links the taxonomy to external capital, stating that meeting the updated NDC targets depends on access to affordable finance and technology, particularly from developed countries (DEA, 2025). NITI Aayog’s (2026) modelling suggests international finance may need to meet up to 42 percent of investment needs by 2070, up from the 17 percent share in recent years. A shared definition makes such capital easier to track and count, but it does not lower the cost of capital, which NITI Aayog (2026) identifies as one of the most binding constraints on clean investment in India.
Emerging Issues
The framework was still described as a draft in February 2026, about eight months after its comment window closed, and several design questions remain open.
- The part that does the classifying is not yet public. The framework sets principles and baskets, but the sectoral annexures are what name qualifying activities (DEA, 2025). In the meantime regulators work from interim definitions, such as the RBI’s use of the Sovereign Green Bonds mapping (Rao, 2025), and NITI Aayog (2026) warns that multiple taxonomies and inconsistent regulatory frameworks risk overlap and greenwashing. It recommends adopting the DEA taxonomy as the single reference across the RBI, SEBI, IRDAI, PFRDA and IFSCA.
- Key choices are deferred to the annexures. The draft says a transition activity meets its objectives as long as it is in line with stated government policy, and its power-sector section lists advanced ultra-supercritical thermal plants among the investments needed (DEA, 2025), without saying how they would be classified. It also commits to interoperability only where possible. NITI Aayog (2026) notes that China’s taxonomy aligns closely with the EU’s list but includes clean coal and transition activities, so the balance between credibility and flexibility is a live question. The RBI has argued for a differentiated approach to interoperability for developing economies (Rao, 2025).
- Adaptation is central to the draft but hard to finance. The draft makes adaptation a central objective, especially for agriculture (DEA, 2025). The RBI notes that adaptation and resilience projects have cash flows that are difficult to assess, which holds back capital (Rao, 2025), and NITI Aayog’s (2026) financing study did not cost adaptation at all, pending the National Adaptation Plan being prepared by the environment ministry. A taxonomy can label an adaptation activity, but it cannot supply the cash flows or concessional instruments that make it financeable.
Way Forward
- Publish the final framework with a dated timetable for the sectoral annexures, starting with the first-phase sectors named in the draft, along with a note on how comments received by 25 June 2025 were handled.
- Adopt the taxonomy as the single reference across financial regulators, as NITI Aayog (2026) recommends, and publish a crosswalk from the RBI’s current Sovereign Green Bonds-based mapping so institutions are not classifying the same asset two ways.
- State how thermal efficiency upgrades and other transition activities will be classified, using relative thresholds and review dates so that a transition label does not become permanent by default.
- Pair the taxonomy with assurance and verification standards and shared climate data, which the RBI identifies as necessary to make alignment claims credible (Rao, 2025). The draft does not say who would verify alignment.
- Link the adaptation classification to financing tools such as blended finance and guarantees, and update it once the National Adaptation Plan produces national adaptation cost estimates.
References
- Department of Economic Affairs. (2025, May). Draft framework of India’s climate finance taxonomy. Ministry of Finance, Government of India. https://static.pib.gov.in/WriteReadData/specificdocs/documents/2025/may/doc202557551101.pdf
- Ministry of Finance. (2025, May 7). Department of Economic Affairs, Ministry of Finance, invites suggestions from experts/public on draft framework of ‘India’s Climate Finance Taxonomy’ by 25th June 2025 [Press release]. Press Information Bureau, Government of India. https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=2127562
- NITI Aayog. (2026). Scenarios towards Viksit Bharat and net zero: Financing needs (Vol. 9). Government of India. https://www.niti.gov.in/sites/default/files/2026-02/Scenarios-Towards-Viksit-Bharat-and-Net-Zero-Financing-Needs-Vol9_0.pdf
- Rao, R. (2025, April 17). Building a robust ecosystem for green and sustainable finance in India [Valedictory address]. Credit Summit 2025, Bharat Climate Forum, New Delhi, India. Bank for International Settlements. https://www.bis.org/speeches/20250430-building-robust-ecosystem-green-and-sustainable-finance-india
About the Contributor
Tanisha is a Political Science graduate (BA Hons, University of Delhi; MA, IGNOU), currently pursuing a Diploma in Conflict Transformation and Peacebuilding, with research interests spanning international relations, environmental governance, and gender studies. She is keen to build a career in policy research.
Acknowledgements
The author sincerely expresses gratitude to the reviewers Ravirala Lahari and Mannat Abot for their valuable comments, constructive suggestions, and continuous guidance throughout the preparation of this article. Their insightful feedback significantly enhanced the clarity, organisation, and analytical quality of the manuscript. The author also acknowledges the support and encouragement received during the research and writing process, which contributed to the successful completion of this work.
Disclaimer:
All views expressed in the article belong solely to the author and not necessarily to the organisation.
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