Green classification needed to achieve carbon neutrality

There is a need for relative disinhibition of India’s panchamrit commitments, indexed by 2030, but once we reach peak carbon emissions, it will have to begin complete disengagement for the economy to achieve its net-zero target by 2070. Attempts at complete decoupling before reaching relatively high income levels and human development will be economically sound for India.

Even for relative dissection, the country would need billions of dollars of investment. Given the poor track record of developed countries on their climate finance promises, with only little progress in COP-26, India should attract private green capital. Both underdeveloped Indian financial markets and a small pool of domestic institutional investors make foreign private capital important. Given India’s risk perception as an emerging economy, we have not attracted as much eco-friendly finance as its global abundance could enable. According to the 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 measure, India should clarify a green classification that addresses the risk of ‘greenwashing’ associated with such money.

A green classification would standardize what qualifies as ‘green’ and establish eligibility criteria for green finance. An effective and well-defined classification can rule out its plural definitions, reduce information asymmetry and reduce greenwashing. This will boost investor confidence and help in making green investments.

In India, a major portion of green finance is directed at the energy sector, particularly towards renewable energy and energy efficiency. A proper taxonomy will provide visibility to other sectors in need of investment that are reeling under capital constraints. By depicting eligible economic activities, it will help financial institutions understand the investment characteristics of green projects and leverage financial innovations accordingly.

By listing economic activities requiring green finance, a green taxonomy would not only aid in the development of green financial markets, but a suitable incentive structure would be created for the purpose of the entire green-finance ecosystem.

For example, financial institutions and businesses may refer to the classification to manage their carbon footprint, while regulators may mandate disclosure that aligns with it. The government can use this as a criterion to gauge our progress on outcomes and mitigation.

The development of a green classification must follow some basic rules. It should focus not only on climate-change mitigation and adaptation, but also on other environmental problems such as air and water pollution, water scarcity and loss of ecosystem and biodiversity. The taxonomy should define technology-agnostic technical screening criteria for commercial activities spanning high-impact sectors such as power, manufacturing, transportation, and others. The technical test criteria in terms of greenhouse gas emission limits should be based on the latest climate science and should be in line with the 1.5°C target. Given the diversity of farms and diverse biophysical conditions across India, sustainable agriculture and livestock farming practices whose environmental benefits have been established by reliable and strong evidence should be included in the classification.

Its successful implementation will depend on correcting a culture of poor compliance with environmental norms (such as environmental impact assessments or EIA protocols) through incentive-compatible mechanisms. Existing norms may need to be upgraded to adapt to global standards, even if new ones are established. For example, the current EIA protocol needs improvement. Processes for measuring vehicular emissions need to be replaced with processes that mimic real-life situations, and the preferential treatment given to electric vehicles over this should be phased out. In addition, financial incentives for vehicle testing agencies should be separated from manufacturers’ compliance with emission norms, and the carbon-neutrality of biofuels should be established before related upstream and downstream activities are included in the taxonomy. We must also conduct research to establish evidence in favor of sustainable agricultural and livestock practices that are likely candidates for classification. Such measures will reduce the risk of greenwashing and encourage genuine investment.

The introduction of green taxonomy could herald the transition of green finance in India from a flux to a flux. Recognizing its transformative power, countries such as China, Bangladesh, Malaysia and Mongolia, even the European Union, have already developed their own taxonomies. We should follow suit.

Renita D’Souza is a Research Fellow at the Observer Research Foundation.