Coal’s inclusion in India’s draft climate finance taxonomy raises questions

Coal, a contentious issue in global climate debates, finds space in India’s much-awaited draft climate finance taxonomy. Released on May 7, the framework aims to mobilise funds for India’s green goals. However, the inclusion of coal has raised concerns among climate experts and financial analysts.

The draft highlights efforts to improve the efficiency of thermal power generation through new technologies. Yet it also states that “coal-based power will continue to play a role in ensuring energy security, particularly for meeting base-load demand.”

Coal remains one of the most debated fuels in climate change discussions due to its high greenhouse gas emissions. At the climate conference COP28 in Dubai (2023), negotiators spent considerable time deliberating whether to “phase out” or “phase down” coal. India is among the countries that have opposed the terminology – “phase out” of coal, during international climate negotiations. Outside the negotiation halls, financial markets are also moving away from the solid fuel. A 2023 report by the Institute for Energy Economics and Financial Analysis (IEEFA) noted that over 200 global financial institutions have adopted coal exclusion policies. Europe leads this trend, with 114 institutions implementing such policies.

Those drafting the taxonomy have also debated whether or not solid fuel (substances that are burnt to release energy) should be part of the document. A member of the drafting committee confirms this, requesting anonymity as the person is not authorised to speak to the media.

The government of India (GoI) has reiterated that thermal power will continue to play a crucial role in meeting the country’s growing energy demands. The draft taxonomy argues that strategic investments in Advanced Ultra Super Critical (AUSC) thermal power plants are essential, as they offer improved efficiency and lower emissions than conventional coal technologies.

However, experts say this undermines the taxonomy’s stated purpose- “to facilitate greater resource flow to climate-friendly technologies and activities.”

Damandeep Singh, an environmental journalist and a consultant active in the climate space for the last two decades, says the draft sends a mixed signal. “The taxonomy seems to be aligning more closely with what the United States wants. The U.S. has pulled out of the Paris Agreement and is now talking about increasing investments in coal. You can certainly make a political statement, as the U.S. has done. But America’s financial system—with its big banks, insurers, and investors—is strong enough to withstand such choices. India doesn’t have that cushion.” This kind of approach is unlikely to attract international capital, especially from European investors who are looking for clear, green-aligned frameworks, he adds.

Neha Kumar, head of South Asia at Climate Bonds Initiative (CBI), also points out that some aspects, including AUCS thermal power generation, need careful consideration. She cites China’s experience as a case in point, which had to remove ‘clean coal’ to align with scientific benchmarks for emissions reduction and to reduce the potential for greenwashing to build investor confidence.  These questions and concerns would be alive in the minds of international green capital providers, which India wants to attract as it positions itself as a green investment destination. A clear, unambiguous taxonomy would be among the first essential filters for this to happen, she says.

Heavy on context, light on clarity

The 32-page report spends nearly half its length discussing India’s progress on Nationally Determined Contributions (NDCs), policy and investment support, current climate actions, historical responsibility, and per capita emissions. One expert in the drafting taxonomy quipped that this reads more like a negotiating text—akin to what countries submit to UNFCCC —than a practical guide for investors. “What we need is an opportunity list,” the expert said, “where investors can clearly see the business case and decide where to invest. India needs substantial capital for its green goals.”

The draft does, however, emphasise the scale of investment required. It notes that India will need approximately $2.5 trillion (at 2014–15 prices) to meet its NDC targets by 2030. An estimated $250 billion per year is needed for energy transition alone through 2047. The draft clarifies that these figures exclude key costs such as electric vehicle infrastructure and demand-side investments such as new iron and steel plants.

In terms of adaptation, the draft cites a 2015–2030 estimate of $206 billion (2014–15 prices) for sectors such as agriculture, forestry, fisheries, infrastructure, water resources, and ecosystems. Citing India’s Initial Adaptation Communication submitted in December 2023, the draft notes that the cumulative expenditure needed for adaptation in a Business-as-Usual (BAU) scenario is approximately $648.5 billion (2023–24 prices).

The draft also outlines sectors that the climate finance taxonomy will initially cover. It includes power, mobility, and buildings. The taxonomy proposes a transition-aligned pathway tailored to national circumstances for hard-to-abate sectors, such as iron, steel, and cement. Agriculture, food systems, and water security are viewed through the lens of adaptation and resilience.

The document acknowledges the challenges the agriculture sector faces, including erratic monsoons, small landholdings, and limited access to finance. It notes, “Despite agriculture being one of the sectors with the highest need for adaptation finance to meet national climate goals, climate-related finance to agrifood systems remains limited and continues to decrease relative to global climate finance flows.”

Experts caution that this is currently just a statement of intent. The framework needs to provide greater clarity on how it will define and treat adaptation-related investments and measures.

Neha Kumar says that India may be the first country to incorporate detailed climate resilience measures—especially in agriculture—within its taxonomy. “Adaptation is highly localised and context-specific. It is critical to mobilise financing for it. It is good news that we are starting out with agriculture. If India gets it right, it won’t just be creating a framework for its own agriculture sector, but potentially offering a model for the world on how taxonomies can support mobilising investments into climate-resilient agriculture.”

Too little, too late

Work on India’s climate finance taxonomy began in 2020 when the Ministry of Finance set up the Taskforce on Sustainable Finance (TSF), which submitted a draft green taxonomy in 2021. In the Union Budget 2024–25, Finance Minister Nirmala Sitharaman reaffirmed this commitment, announcing that a climate finance taxonomy would be developed to “enhance the availability of capital for climate adaptation and mitigation.” Yet it has taken more than five years for the Ministry to release even a draft, which remains incomplete.

“This is not the taxonomy itself—it is a draft framework for the taxonomy,” clarifies Neha Kumar, who is also a member of the taxonomy development committee. “Sectors have not yet been detailed in terms of eligible activities or measures. What has been released is the logical architecture, which will guide the classification. The ongoing public consultation is critical at this stage, as feedback now will help get the foundational structure right.”

The draft says the second phase will identify and classify climate-supportive activities, including transitional measures across sectors and industries.

Vibhuti Garg, director of South Asia at the Institute for Energy Economics and Financial Analysis (IEEFA), calls the release a welcome step but one that comes too late. “In the absence of a proper taxonomy, sectors like steel have already developed their own definitions of what qualifies as green,” she says. “Meanwhile, regulators like the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) have created separate frameworks for green debt securities and the green bond market.”

Garg stresses the need for harmonisation. “A unified taxonomy should have been introduced five years ago. In its absence, different sectors and institutions have moved ahead with fragmented approaches. The first step now must be to align these definitions to avoid sending mixed signals to investors.”

Singh echoes this concern, noting that clear definitions are crucial in today’s investment landscape. “We’re in a world where grants are rare—no one will invest without clearly defined terms. But there’s still hope in private equity, sovereign wealth funds, and particularly European investors. For that investment to come in, our understanding must align with theirs.”

Kumar adds that taxonomy development is a complex and iterative process. “Clearly laying out milestones and a glide path for its development, expansion, and implementation will be of immense value,” she says.

Read more: Taxonomy for climate finance remains the missing link in India’s green transition

Banner image: A thermal power plant in Nagpur. India’s draft climate taxonomy calls for strategic investments in Advanced Ultra Super Critical plants that offer improved efficiency and lower emissions than conventional coal technologies. Image by Yann Forget via Wikimedia Commons (CC-BY-SA-4.0).