India's Carbon Market Framework: What It Means For Industry And Climate Governance

Policy Update
Tanvi Nerurkar

Background

As climate change becomes a greater global concern, many countries are using market-based solutions to reduce greenhouse gas emissions while supporting economic growth. Carbon markets have become a key policy tool, putting a price on emissions reductions and encouraging more efficient technologies and energy efficiency. Today, carbon pricing covers about a quarter of worldwide greenhouse gas emissions. Emissions Trading Systems (ETS) are already in place in the European Union, China, South Korea, and California.

India is at a key point in its climate policy. As the third-largest greenhouse gas emitter and a fast-growing economy, India is working to harmonise economic growth with reducing emissions. The country’s net-zero target for 2070, announced at COP26, and its updated Nationally Determined Contributions (NDCs) in 2022, have increased attention on industrial decarbonization and climate policy. The new NDCs commit India to cut the emissions intensity of its GDP by 45 per cent from 2005 levels by 2030 and to reach almost 50 per cent of its installed electric power capacity from non-fossil fuel sources.

To help meet these goals, the government launched the Carbon Credit Trading Scheme (CCTS) in 2023 under the Energy Conservation (Amendment) Act, 2022. The Energy Conservation Act, 2001, provided a legal framework for a national carbon market through provisions in Sections 14AA and 14AA(2), which authorised the issuance and trading of carbon credit certificates. The scheme builds on earlier policy work, including the Bureau of Energy Efficiency’s (BEE) 2022 draft carbon market policy.

The CCTS is a major shift in India’s climate policy, moving from voluntary energy-saving programs to a formal, compliance-based carbon market. Its aim is to create a national platform for trading carbon credits and to reduce emissions in energy-intensive sectors like steel, cement, aluminium, and fertilisers. The CCTS is also linked to global trade changes, especially the European Union’s Carbon Border Adjustment Mechanism (CBAM), which will begin in 2026 and add carbon costs to imports from countries without similar climate rules. This increases pressure on Indian exporters to improve emissions tracking, reporting, and efficiency.

As a result, carbon markets are now shaping trade, investment, and industry strategies. The success of India’s carbon market will depend on its design, strong institutions, reliable emissions monitoring, transparent regulations, and industry readiness. Harmonising growth and climate goals will be necessary for the CCTS to help India move toward a low-carbon economy.

Functioning of India’s Carbon Market Framework

India’s carbon market is built on the Carbon Credit Trading Scheme (CCTS), announced by the Ministry of Power in 2023 under the Energy Conservation (Amendment) Act, 2022. This scheme establishes rules and institutions for both compliance and voluntary carbon markets, indicating the shift from focusing only on energy efficiency to emissions reduction.

The CCTS has a layered governance system. The National Steering Committee for the Indian Carbon Market (NSCICM), led by the Ministry of Power and Environment, Forests and Climate Change (MoEFCC), is the main policy group. The Bureau of Energy Efficiency (BEE) manages the market, oversees Monitoring, Reporting and Verification (MRV), accredits verification agencies, and issues Carbon Credit Certificates (CCCs). The Grid Controller of India operates the main carbon registry, and the Central Electricity Regulatory Commission (CERC) supervises trading on approved power exchanges.

CCTS Governance structure

Each Carbon Credit Certificate (CCC) represents the reduction, removal, or avoidance of one tonne of carbon dioxide equivalent (tCO₂e). Industries that stay below set emissions intensity limits can earn credits to trade, while those that exceed the limits must buy credits to comply. Trading is expected to take place on exchanges such as IEX, PXIL, and HPX.

The framework has two main parts: a compliance market and a voluntary carbon market. The compliance market targets energy-intensive sectors like steel, cement, aluminium, fertilisers, petrochemicals, refineries, textiles, pulp and paper, and chlor-alkali. Instead of strict emissions caps, the scheme uses emissions intensity targets, which measure emissions per unit of output. This approach lets industries grow while still encouraging gradual decarbonization. In contrast, the voluntary carbon market complements the compliance mechanism by allowing organisations to generate and trade carbon credits from verified climate projects. This helps mobilise private climate finance and promotes emission reductions beyond mandatory regulatory obligations.

By 2026, about 490 industrial companies will have GHG Emission Intensity (GEI) targets. The framework is expected to eventually include over 700 companies and cover nearly 700 million tonnes of CO₂e each year. These targets match India’s Nationally Determined Contributions (NDCs) and are based on sector-specific cost assessments. The CCTS also denotes a shift from the earlier Perform, Achieve and Trade (PAT) scheme introduced in 2012 under the National Mission for Enhanced Energy Efficiency. While PAT mainly focused on reducing Specific Energy Consumption (SEC) through tradable Energy Saving Certificates (ESCerts), the CCTS expands the framework to cover comprehensive greenhouse gas mitigation. However, ESCerts and CCCs are still separate instruments and cannot be exchanged.

A strong Monitoring, Reporting, and Verification (MRV) system is essential for the framework’s credibility. Participating companies must accurately measure emissions, submit verified data, and follow established auditing standards. The effectiveness of the CCTS will depend on good institutional coordination, transparent regulations, and a reliable MRV system in India.

Performance and Current Progress

India’s emerging carbon market framework builds upon the experience of the Perform, Achieve and Trade (PAT) scheme, the country’s largest market-based energy efficiency programme. Introduced in 2012 under the National Mission for Enhanced Energy Efficiency, PAT covered over 1,000 designated consumers across energy-intensive sectors and introduced target-based compliance linked to tradable Energy Saving Certificates (ESCerts).

The scheme achieved tangible improvements in industrial energy efficiency. PAT Cycle I achieved 8.67 million tonnes of oil equivalent (MTOE), surpassing its target of 6.686 MTOE. Cycle II reached 13.28 MTOE, close to its target of 13.38 MTOE. According to the Bureau of Energy Efficiency (BEE), total savings under PAT were nearly 26 MTOE by 2022–23, avoiding over 70 million tonnes of CO₂ emissions. The program also helped institutions become more familiar with energy audits, industrial reporting, and market-based compliance pertinent to the Carbon Credit Trading Scheme (CCTS).

Research has identified issues such as unambitious targets, an oversupply of tradable certificates, and insufficient enforcement, all of which constrained the scheme’s transformational potential. According to research published in Energy Policy (2024), many PAT targets were relatively easy to achieve, consequently decreasing incentives for long-term investment in advanced low-carbon technologies. Sector-specific analyses, especially in the iron and steel industries, reported only modest gains in technical efficiency despite reductions in energy intensity.

Compliance issues also reduced the market’s effectiveness. The non-compliance rate in PAT Cycle I was about 9 per cent and reportedly increased in later cycles, showing gaps in enforcement and participation. Too many ESCerts led to low trading prices, which weakened incentives for deeper industrial decarbonization. These challenges remain relevant, as the CCTS involves many of the same industries and institutions.

Compliance vs. voluntary markets — the two pillars of the CCTS compared side by side

Although the CCTS was officially announced in 2023, India’s carbon market is still in transition, and large-scale compliance trading has not yet begun. The government has begun steps such as setting GHG Emission Intensity (GEI) Target Rules for 2025–26 and 2026–27, and accrediting Carbon Verification Agencies for Monitoring, Reporting, and Verification (MRV) processes.

India also remains active in voluntary carbon markets through projects in renewable energy, afforestation, waste management, and sustainable development. Its experience with international mechanisms such as the Clean Development Mechanism (CDM) provides a firm foundation for the new domestic carbon market.

The framework has become even more important due to global trade developments, particularly the European Union’s Carbon Border Adjustment Mechanism (CBAM), which is expected to affect exporters of steel, cement, and aluminium. As a result, Indian industries are focusing more on emissions accounting, carbon disclosure, and low-carbon manufacturing.

Despite progress, multiple essential elements of the framework, such as carbon pricing, market stability, and compliance pathways, are still under development. The long-term success of the CCTS will depend on India’s ability to create a credible, transparent, and enforceable carbon market that supports significant industrial decarbonization.

Impact on Industry and Climate Governance

The Carbon Credit Trading Scheme (CCTS) has significant effects on India’s industrial sector, climate governance, and global economic position. By assigning economic value to emissions reductions, the scheme creates market incentives for cleaner production, energy efficiency, fuel switching, and low-carbon innovation.

The framework is especially important for energy-intensive sectors like steel, cement, aluminium, fertilisers, petrochemicals, refineries, textiles, and power generation, where decarbonization pressures are rising. Unlike the earlier Perform, Achieve and Trade (PAT) scheme, which focused on energy efficiency through Specific Energy Consumption (SEC) targets, the CCTS uses a broader greenhouse gas accounting system that covers Scope 1 and Scope 2 emissions, with some Scope 3 coverage in certain sectors. This change brings India’s carbon accounting closer to international standards and recognises that energy efficiency does not always mean lower emissions.

The CCTS marks a broader change in India’s climate governance. Instead of relying only on strict regulations, the framework uses flexible, market-based ways to reduce emissions. At the same time, improvements in Monitoring, Reporting, and Verification (MRV) systems are expected to increase transparency, improve data management, and strengthen accountability.

From a policy perspective, the framework is closely aligned with India’s Nationally Determined Contributions (NDCs) under the Paris Agreement. India reduced its emissions intensity by almost 38 per cent from 2005 to 2020, but most of this was driven by small efficiency gains rather than major industrial changes. The CCTS aims to set more precise sector targets that match long-term decarbonization plans and sector-specific costs.

The framework also has significant geopolitical and trade implications, particularly regarding the European Union’s Carbon Border Adjustment Mechanism (CBAM). India is highly exposed to CBAM because export sectors such as steel, cement, and aluminium have high carbon intensities. A strong domestic carbon pricing system could help Indian industries improve emissions reporting, meet international standards, and lower the risk of external carbon tariffs.

How CBAM pressure connects to CCTS urgency: A credible CCTS reduces India’s vulnerability to external carbon tariffs

The carbon market framework can also help attract climate finance by creating investment opportunities in renewable energy, energy efficiency, sustainable infrastructure, afforestation, and other mitigation projects. By turning emissions reductions into carbon credits, the system can attract private investment to low-carbon development and support India’s transition to a climate-resilient economy.

The long-term success of the CCTS will depend on ambitious emissions targets, stable markets, strong enforcement, and credible emissions monitoring. If implemented well, the framework could become a key tool in India’s industrial decarbonization strategy and strengthen its role in global climate governance.

Emerging Issues and Challenges

Despite its potential, India’s Carbon Credit Trading Scheme (CCTS) faces several institutional, technical, and regulatory challenges that could affect its long-term credibility and effectiveness.

A main concern is building a strong Monitoring, Reporting, and Verification (MRV) system, which is essential for any carbon market’s credibility. Under the CCTS, industries must measure and report Scope 1 and Scope 2 emissions using verified greenhouse gas inventories. However, India’s emissions data systems are still fragmented, and many industries, especially small and medium businesses, lack the technical skills, digital tools, and continuous monitoring needed for accurate emissions accounting.

Weak MRV systems can undermine market integrity, lead to more verification disputes, and reduce the system’s effectiveness. Limited institutional capacity also makes implementation harder. There are not enough Accredited Carbon Verification Agencies (ACVAs) for the size of the planned market, which will eventually include over 700 industrial companies. Insufficient verification capacity can cause delays, increase compliance costs, and raise concerns about transparency and conflicts of interest. Experiences from other emissions trading systems, such as China’s early ETS phases, show that weak verification infrastructure can undermine market credibility. market credibility.

Market stability and carbon pricing are also major challenges. India’s earlier Perform, Achieve and Trade (PAT) scheme had too many Energy Saving Certificates (ESCs), leading to low trading prices and weak incentives for decarbonization. Similar risks exist under the CCTS, which uses emissions-intensity targets rather than absolute caps. In a fast-growing economy, higher industrial output could create additional carbon credits even as emissions intensity declines, potentially lowering market prices.

Key parts of the pricing framework, like floor prices, forbearance prices, and market stability tools, are still being developed. Without clear price signals and regulatory certainty, industries may be reluctant to invest in long-term low-carbon technologies. International carbon markets, such as the EU Emissions Trading System (EU ETS) and California’s cap-and-trade program, have used price corridors and market stability reserves to handle similar challenges.

Institutional coordination is another key concern. The framework involves many agencies, such as the Ministry of Power, the Ministry of Environment, Forests and Climate Change (MoEFCC), the Bureau of Energy Efficiency (BEE), the Grid Controller of India, the Central Electricity Regulatory Commission (CERC), verification agencies, and power exchanges. Delays or inconsistencies among these groups could create regulatory uncertainty and slow market implementation.

The voluntary carbon market also faces concerns about project quality, double counting, permanence, and whether emissions reductions are truly additional. Nature-based projects such as afforestation and sustainable agriculture require particularly stringent verification standards to be credible in international markets.

India must balance industrial growth with its climate commitments. As a fast-growing economy with rising energy demand, it is important that carbon market rules do not put excessive pressure on smaller industries or undermine economic competitiveness. The long-term success of the CCTS will depend on its ability to achieve real emissions reductions while supporting a fair and sustainable low-carbon transition.

Way Forward

This analysis highlights several priority actions in MRV infrastructure, market design, governance, and international alignment.

Strengthening MRV capacity is the most urgent prerequisite for market credibility. India must rapidly expand its pool of accredited carbon verification agencies, ideally through an internationally aligned accreditation framework (ISO 14065 or equivalent), while investing in digital MRV infrastructure including IoT-based continuous emissions monitoring and data management platforms for industrial entities. Capacity-building programmes for DCs, particularly medium-sized firms in paper, textiles, and chlor-alkali, are essential before the first compliance deadlines.

Establishing a price-stability mechanism before the first compliance cycle concludes is critical to preventing the oversupply pathologies that plagued the PAT-ESCert market. Drawing on lessons from the EU ETS Market Stability Reserve, California’s price floor-ceiling corridor, and South Korea’s K-ETS reserve mechanisms, the NSCICM should formally notify floor and forbearance prices for CCCs, alongside a framework for supply-side interventions if market imbalances emerge.

Ensuring target ambition is the structural challenge the CCTS must solve that PAT largely failed to. Intensity-based targets that merely track business-as-usual energy-efficiency trends will generate abundant CCCs, depress prices, and undermine the investment signal the scheme is designed to provide. BEE’s next round of target-setting, informed by the 2023–24 baseline data, must incorporate genuine stretch ambitions informed by technology benchmarking, international best practice, and independent scientific assessment.

Streamlining institutional coordination requires a dedicated inter-ministerial implementation cell with clear accountability structures, regular public reporting on market operations, and fast-track mechanisms to resolve regulatory ambiguities, particularly around registry operations, corporate succession, compliance obligations, and the ESCert-CCC transition.

Aligning with international standards is not merely aspirational; it is commercially urgent. For Indian CCCs to serve as viable instruments under Article 6 and reduce exporters’ CBAM exposure, their MRV protocols, additionality standards, and registry architecture must meet the expectations of international counterparties, including Singapore’s Carbon Pricing Act framework and South Korea’s K-ETS registry standards, with which India is actively negotiating. The CCTS’s domestic integrity is the foundation for its international relevance.

Conclusion

India’s new carbon market framework is a major change in the country’s climate governance. By introducing market-based mechanisms to reduce emissions, the Carbon Credit Trading Scheme intends to align industrial growth with long-term sustainability and net-zero goals.

The framework could speed up industrial decarbonization, improve emissions transparency, attract climate finance, and make India more competitive in a carbon-focused global economy. However, its success will depend on strong regulatory institutions, credible MRV systems, industry readiness, and stable policies.

As climate governance evolves worldwide, carbon markets are expected to become more important in economic and environmental policy. For India, the main challenge is not merely establishing a carbon trading system but also building a transparent, fair, and effective governance framework that balances climate goals with development needs.

If implemented well, India’s carbon market framework could be a key tool for supporting a low-carbon industrial transition and strengthening the country’s role in the global climate economy.

References

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About the Contributor

Tanvi Nerurkar is currently working as a Research & Editorial Intern at IMPRI. She holds a Bachelor’s degree in Architecture from VESCOA, University of Mumbai and is presently pursuing a Master’s in Urban Management at CEPT University, where she explores cities through research-driven policy approaches, adaptive governance frameworks, and sustainable development initiatives. Her objective is to contribute implementation-oriented policy research that supports the efficient functioning of cities and creates meaningful value for society at large.