Indian central bank calls for green taxonomy, carbon pricing

India is currently behind its peers on the development of a green taxonomy.

India has an “urgent need” for a green taxonomy and carbon pricing if it is to decarbonise and meet net-zero targets, the Reserve Bank of India (RBI) has said.

The central bank called for the measures in an annual market commentary report which studied the range of policy options available to address climate change risks.

India’s lack of a green taxonomy was flagged as a key gap within its policy mix. RBI said that a taxonomy would help financial institutions better understand climate risks within their portfolios and provide disclosures, as well as mitigate greenwashing concerns and support green investment flows.

It would also underpin government spending on climate change and related sustainability issues, which the RBI said would then be disclosed in a specialised “climate budget” as a supplement to the annual budget.

The central bank estimates the national-level cost of adapting to climate change at around $1 trillion by 2030.

Unlike most of the world’s biggest markets, India has yet to formally announce the development of a green taxonomy, although a finance ministry taskforce has been asked to “suggest” a potential draft. Details of the process and deliberations have otherwise been kept under wraps.

The RBI separately said that India needs “a broad-based carbon pricing system in line with emerging global best practices”. This would be enacted through a tax on emissions or an emissions trading system (ETS), requiring more carbon-intensive companies to purchase allowances to cover their emissions.

The supervisor said that, while a “carbon tax may be more effective, an ETS may be less politically contentious”.

It estimated that carbon taxes of $25 and $50 per tonne of carbon would reduce emissions by 25 percent and 36 percent respectively by 2030.

Financial sector climate survey

The RBI also revealed that an anonymous survey of 20 major Indian banks and financial institutions found that, while almost 90 percent considered climate risk a material threat, “most of these institutions are yet to develop specific mechanisms to identify and deal with such risks”.

However, one bank reported that it had set aside additional capital buffers for loans made to carbon intensive sectors.

Nearly half of respondents said they had developed in-house systems to identify green and brown borrowers in the absence of an official taxonomy.

The central bank is expected to publish a framework for disclosing climate-related financial risks and guidance related to climate scenario analysis and stress testing shortly.

It recently set out standards for bank green deposits and eligible green activities and projects which can be financed from the proceeds. This will come into effect in June.

The move comes soon after early reports indicated that India could cease building new coal-fired power plants, apart from those which have already been approved by the government. The plans still require sign-off from the Indian cabinet.