Making climate finance work to compete in global green tech

This article is authored by Jagjeet Sareen, partner, Dalberg Advisors and Manjeev Puri, former Indian ambassador to the European Union.

A robust climate finance taxonomy framework could unlock large-scale funding and attract European capital to affirm our position as a global clean-tech powerhouse. Finance minister Nirmala Sitharaman announced the development of a Climate Finance Taxonomy when she presented the Union Budget for FY 2024. In May this year, the ministry of finance released the Climate Finance Taxonomy Framework for public consultation and input. This classification system, currently under review, defines what qualifies as "green" or climate-aligned activity to support investors, banks, and governments in making investments in clean-tech.

Climate crisis

The Budget FY 2025 recognises clean-tech manufacturing as central to India's global competitiveness, which is a significant new step. Yet despite the clean-tech push in the 2025 Budget's proposed National Manufacturing Mission, cleantech manufacturing itself isn't explicitly recognised in the draft framework of the Taxonomy, even though it underpins the tech it aims to deploy.

We already face a colossal funding gap—approximately $ 2.5 trillion by 2030 to meet our climate targets—and bridging it will require around $ 340–510 billion in foreign capital alone.

India already pays more for capital. Funding clean-tech manufacturing requires billions of dollars annually—traditional project finance models are insufficient. India's borrowing costs remain steep, with utility-scale solar financing averaging around 9.9% compared to 4–5% in Europe/China, while sovereign yields run ~6.36% versus 3–4% elsewhere.

India's aspiration to lead in the manufacturing of solar PVs, electrolysers, batteries and grid components adds a new dimension to this financing challenge. Expanding domestic manufacturing capacity is central to ensuring that India has a self-reliant supply chain and is competitive in a decarbonising world. To contend with Chinese imports, India needs access to large-scale, low-cost capital from both domestic and international sources. That's why clean-tech manufacturing must be recognised as a Tier 1 Green activity in the Taxonomy, indicating its importance to financial institutions.

To secure international funding, India's Climate Finance Taxonomy must align with international standards. Especially the EU, given that the US, under President Donald Trump, has rolled back international public climate funding. The recently approved Big Beautiful Bill gutted incentives that were spurring private sector investment in clean energy under the Inflation Reduction Act.

In contrast, the EU draft 2040 climate goals include international carbon credits for the first time, which opens the door for Indian clean-tech projects to qualify for European climate finance, including private capital mobilised under the EU's Green Deal and Global Gateway. India's Climate Taxonomy must be compatible with that of the EU and G20 countries. It should be a diplomatic priority as it will also ensure deeper integration into global green capital networks.

International investors seek taxonomies that align with global benchmarks. India's taxonomy draft is a ‘living framework’ which is proposed to be in sync with the EU and ASEAN frameworks. However, until clean-tech manufacturing is included in the Tier 1 Green category and compatibility with international frameworks, particularly the EU, is ensured, it will be incomplete. As a result, financiers may lose confidence in channeling large-scale investment.

India's success in meeting its 2030 climate goals, which range from installing 500 GW of non-fossil electricity capacity to reducing emissions produced per unit of GDP by 45%, and establishing itself as a clean-tech manufacturing powerhouse, all rely on finance. Taxonomies and global compatibility aren't just the domain of institutional academics; they are strong, strategic enablers for countries.

If the taxonomy fails to address these outstanding points, India won't receive the necessary capital, and our climate ambitions will stall even further. This isn't just about finance—it's about India's industrialisation ambitions, giving a real chance for Make in India to become a reality and positioning India as a clean-tech producer in global arenas.

This article is authored by Jagjeet Sareen, partner, Dalberg Advisors and Manjeev Puri, former Indian ambassador to the European Union.