The green taxonomy needed to attain carbon neutrality

The window of opportunity to combat climate change is fast closing, with the CoP-26 summit in Glasgow, billed as a “make or break” affair, having urged nations to accelerate climate action that would bend the planet’s temperature-rise curve to go no further than 1.5° Celsius above the pre-industrial level. As one of the world’s fastest growing economies, the second most populated country (with a population projected to peak at 1.6 billion in 2048) and the third largest carbon emitter, India is not just vulnerable to the impact of climate change, the country can assume an influential role in the global calculus of its mitigation. Prime Minister Narendra Modi’s announcement of a ‘panchamrit’ five-point action plan showed India’s readiness for such a role as we adopt an exemplary development path that balances mitigation with economic growth.

India’s panchamrit commitments indexed to 2030 are expected to entail relative decoupling, but once we reach peak carbon emissions, absolute decoupling would have to begin for the economy to hit its net-zero target by 2070. An attempt at absolute decoupling before reaching a relatively high level of income and human development would be economically stifling for India.

Even for relative decoupling, the country will require billions of dollars in investment. Given the poor track record of developed nations on their climate finance pledges, with only patchy progress made at CoP-26, India must attract private green capital. Under-developed Indian financial markets and a small pool of domestic institutional investors both render foreign private capital critical. Given the risk perceptions of India as an emerging economy, we have not attracted as much eco-friendly finance as its global abundance can enable. According to a Climate Policy Initiative report, in 2016-17 and 2017-18, the share of international private finance was just 5% of tracked domestic green finance. As a partial remedy, India must articulate a green taxonomy that addresses the risk of ‘greenwashing’ associated with such money.

A green taxonomy would standardize what qualifies as ‘green’ and establish eligibility criteria for green finance. An effective and well-defined taxonomy can rule out plural definitions of it, minimize information asymmetry and reduce greenwashing. It would promote investor confidence and assist the making of green investments.

In India, a dominant share of green finance is directed at the energy sector, particularly towards renewables and energy efficiency. A proper taxonomy will provide visibility to other sectors in need of investment that remain starved of capital. By delineating the eligible economic activities, it will help financial institutions understand the investment peculiarities of green projects and leverage financial innovations accordingly.

By listing the economic activities that need green finance, a green taxonomy will aid the development not just of green financial markets, but of the entire green-finance ecosystem as an appropriate incentive structure is formulated for the purpose.

Financial institutions and businesses can refer to the taxonomy to manage their carbon footprint, for example, while regulators can mandate disclosures aligned with it. The government could use it as a touchstone to assess outcomes and our progress on mitigation.

The development of a green taxonomy must adhere to some basic rules. It must focus not just on climate-change mitigation and adaptation, but also on other pressing environmental problems, such as air and water pollution, water scarcity and ecosystem-and- biodiversity losses. The taxonomy should define technology-agnostic technical screening criteria for commercial activities spanning high-impact sectors such as power, manufacturing, transport, and others. The technical screening criteria in terms of greenhouse gas emission thresholds must be based on the latest climate science and be consistent with the 1.5° C aim. Given the heterogeneity of farms and diverse bio-physical conditions across India, sustainable agricultural and livestock farming practices whose environmental gains are established by reliable and robust evidence must be included in the taxonomy.

Its successful implementation would be contingent on correcting a poor compliance culture of environmental norms (such as the Environmental Impact Assessment or EIA protocols) through incentive-compatible mechanisms. Existing norms may need to be upgraded for compatibility with global standards, even as new ones are established. The current EIA protocols, for example, require an overhaul. Procedures for measuring vehicular emissions need to be replaced by those that mimic real-life conditions, and preferential treatment given to electric vehicles on this should be gradually phased out. Also, the financial incentives of vehicle testing agencies must be detached from manufacturers’ compliance with emission norms, and the carbon-neutrality of bio-fuels must be established before related upstream and downstream activities are included in the taxonomy. We must also commission research to establish evidence in favour of the sustainable agricultural and livestock practices that are likely candidates for the taxonomy. Such measures will lower the risk of greenwashing and boost authentic investments.

The introduction of a green taxonomy can begin the transformation of green finance in India from a trickle to a flow. In acknowledgement of its transformative power, countries like China, Bangladesh, Malaysia and Mongolia, even the EU, have already developed their own taxonomies. We must follow suit.

Renita D’souza is a research fellow at Observer Research Foundation

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