Can India's Carbon Credit Trading Scheme drive climate target success?

IETA estimates that by 2030, the global carbon credit market will be around $300 billion, growing to $1 trn to $1.5 trn by 2050. India is expected to be one of the big sellers

Late last month, on one of those increasingly rare days in New Delhi with clear skies and fresh air, Saurabh Diddi, director of the Bureau of Energy Efficiency (BEE), launched Prakriti 2025. India’s first state-sponsored international carbon markets event served as a platform to showcase the country’s progress in launching a Carbon Credit Trading Scheme (CCTS). 

The seeds for India’s carbon market were sown over four years ago during the Covid-19 pandemic. They germinated in 2022 and have since sprouted green shoots. The CCTS will start in phases between September this year and October 2026. It comprises a compliance regime and a voluntary carbon credit offsets market. 

Some call it a slow start, but India’s CCTS is a more complex structure, perhaps aligned with the country’s developmental stage, compared to emission trading programmes such as the European Union Emissions Trading System (ETS), designed for developed nations. Moreover, the BEE sought to ensure that the CCTS integrated well into the global carbon market, especially after the United Nations operationalised Article 6, a UN-led global carbon trading mechanism, in Baku last November at its annual climate event. 

“This cautious approach is justified,” said RR Rashmi, distinguished fellow at The Energy and Resources Institute (Teri) and a former lead negotiator for India at UN Climate Conferences. “The CCTS is not aimed at emissions control but at exploring the extent to which carbon regulation can influence industry behaviour and carbon prices.” 

Dirk Forrister, CEO of IETA, a global industry body advocating carbon markets said : “The market, when it starts, will provide much more accurate data because you are getting independently verified emissions performance. Right now, they are using the best data available, and there are inevitably some political delays. But I think it is impressive that India stuck with it.”  

Regardless of how one defines the CCTS and its objectives, the programme’s eventual goal, like any public policy initiative, is citizen welfare — to ensure more days of clear skies and improve India’s image from being home to some of the world’s most polluted areas. 

A more immediate, tangible objective is to secure necessary climate finance — with the projected annual funding need exceeding $170 billion — to drive the local climate economy and secure Indian developers a share of the $1.5 trillion global carbon credit market. 

The need for CCTS intensified after developed nations agreed to fund only a fraction of the $1.3 trillion that developing nations demanded at COP29 in Baku, leaving India and others to cover much of the cost for climate damage caused by the US, UK, and Europe. 

Demand for carbon credits could increase by a factor of 15 or more by 2030 and up to 100 by 2050, with the carbon credit market projected to be worth over $50 billion in 2030, according to India’s Energy Transition Advisory Committee (ETAC) report, which involves the oil ministry, industry, and the Prime Minister’s Office (PMO). 

That’s just the tip of the iceberg. IETA estimates that by 2030, the global carbon credit market will be around $300 billion, growing to $1 trillion to $1.5 trillion by 2050. India is expected to be one of the big sellers, accounting for a fifth of it. 

The left outs

  The CCTS’ compliance regime is also key to India meeting its climate targets on the global stage via Nationally Defined Contributions (NDCs) presented to the UN Climate Change Office. 

Only nine sectors have been included under the mandatory regime, accounting for over a third of India’s total emissions. However, the CCTS has failed to shackle the biggest culprit — India’s toxic, fume-spewing thermal generators. Micro, Small and Medium Enterprises (MSMEs) have also been excluded, fearing it would erode their competitiveness. 

The power sector accounts for around 45 per cent of India’s emissions, growing at about 5 per cent annually amid soaring power demand and the government’s plan to add at least 80 gigawatts of new coal-fired capacity by 2032. 

Industrial and power sectors account for most of India’s emissions of 2.7 gigatonnes of carbon dioxide equivalent (GtCO2e), with the power sector contributing 1.2 GtCO2e, according to the ETAC report, which cites 2019 data as the government has yet to provide more recent figures. “If we look specifically at greenhouse gas (GHG) emissions, power (almost entirely due to coal) and iron and steel manufacturing contribute around 75 per cent,” the report notes. 

“For robust demand for carbon credits and a healthy carbon price, the inclusion of sectors like electricity and buildings is indeed important,” Rashmi, a former bureaucrat, said. “But MSMEs will need to be treated differently; they can’t be subjected to a cap.” 

CCTS design 

India’s CCTS is complicated, political, and requires significant resources to administer. The programme adopts a unit-wise, emission-intensity approach to control emissions rather than a broad-based sectoral cap on carbon, as seen in the EU ETS. 

CCTS has two components: A compliance regime, where large Indian industries must compulsorily meet carbon emission intensity targets set by the government; and a voluntary offset credit regime, where developers register projects with the government that meet certain criteria to claim credits. 

There are also two different types of carbon credits issued by the government under CCTS, which are not interchangeable. In principle, a carbon credit allows the owner to emit one tonne of carbon dioxide or its equivalent in other greenhouse gases.  However, under CCTS, credits issued under the compliance regime and the voluntary offset programme are traded separately on the Indian Energy Exchange. A unit cannot buy an offset credit to prove compliance. 

Compliance is often costly because industries are required to implement high-end solutions, whereas offset credits can involve simpler actions like planting trees, Diddi explained.  

“If I let the offset people buy, then what happens is that compliance credits may not be sold, because offsets are very cheap.” 

Industries such as aluminum, cement, steel, paper, chlor-alkali, fertilisers, refining, petrochemicals, and textiles, which fall under the compliance regime, will receive targets for the financial year 2025-26 if notifications are issued this month. Otherwise, targets will be prorated for the financial year. 

“If they emit less than the target, they earn carbon credit certificates. If they exceed those levels, they will have to buy credits,” Diddi said. Around 800 units will be assigned emission-intensity targets in the coming months, specifying how much CO2 emissions are permitted per tonne of steel or other products. 

Credits will be issued 4-6 months after the financial year ends, allowing time for the government and independent verifiers to confirm compliance data submitted by companies. Compliance credits for the first financial year are expected to be issued a few months after March 2026, with trading anticipated by October 2026, Diddi said. 

The voluntary offset credit market could begin trading credits by the end of this year, provided developers register their projects with the government. Under the offset mechanism, 10 sectors have been approved, which include energy like renewables with storage, industries, waste handling and disposal, agriculture, forestry, transport, construction, fugitive emissions, solvent use, and carbon capture utilisation and storage. 

Existing carbon schemes 

India currently has two primary programmes for emission reductions, though they are narrower in scope and scale. The first is the Renewable Purchase Obligation (RPO) programme for the power sector, where utilities are required to buy renewable energy or purchase Renewable Energy Certificates (RECs) to meet their obligations. Critics argue that this scheme is poorly designed, with REC prices so low that state utilities can cheaply purchase RECs instead of investing in actual green power, allowing coal-fired plants to continue operating. 

The second is the Perform Achieve Trade (PAT) scheme, BEE’s flagship programme that enhances energy efficiency in energy-intensive industries through tradable energy-saving certificates. Diddi said that BEE was tasked with implementing the CCTS due to its success with PAT. The CCTS compliance regime is an advancement from PAT, as it covers both process-related and energy-related emissions. Of the 13 sectors covered under PAT, nine have transitioned to CCTS. 

“For one sector, there will be no parallel schemes; they will either be in PAT or in CCTS,” Diddi said. “We do not want to shut down PAT. Right now, we are testing the waters to see how it unfolds. Once it's established, we will consider other sectors, but not all may be transitioned.” 

Diddi declined to specify the carbon cost for companies in the compliance regime but said extensive deliberations and industry consultations were held to calculate carbon abatement costs and set compliance targets. These factors will influence carbon credit prices and Indian industry competitiveness. Industry officials highlighted that globally traded carbon prices average $8 to $10 per tonne of CO2 emitted, compared to Euros 60-70 for credits under the EU ETS scheme. 

To manage carbon price volatility, the government plans to introduce a Market Stability Reserve (MSR) fund. 

“If prices drop significantly, this MSR will come into play,” Diddi said. “It still needs to be formulated, but we have included this provision for stability.” 

The EU carbon programme is costly and took decades to gain credibility. How long will India’s fledgling carbon market programme take before the country is able to breathe in clean air? It will be a while before that question can be answered.