Pricing Industrial Decarbonization: Market Design And Cap-and-Trade Under CCTS 2023

Policy Update
Anushree Khare

BACKGROUND

The Transformation of Industrial Carbon Pricing

In the words of William D. Nordhaus: “Those who emit emissions do not have to pay to do so. Those who are affected by those emissions do not receive compensation. In short, carbon emissions represent a market failure which will require a price to be explicitly set.”

During the formative years of industrial development, all forms of industry were able to treat the natural environment as their “free disposal” site for the effluents resulting from the combustion of fossil fuels. Economists recognized the discrepancy between the social cost of pollution and the private cost of pollution. They proposed remedies via tax (Pigou) or market based systems using well-defined property rights (Coase). These models provide the basis for modern-day international environmental policy. Although CO₂ was historically viewed as a necessary by-product of large scale heavy industry, it is today becoming formally quantifiable and tradable on corporate balance sheets.

Developing countries face two competing demands during this transition:

Expanding their primary sector to create jobs and build physical infrastructure and
Limiting emissions within an increasingly constrained global carbon budget.

Market-based instruments in India initially focused on conserving energy before attempting to limit emissions directly. The Energy Conservation Act, 2001 empowered the Bureau of Energy Efficiency (BEE) to implement the Perform, Achieve and Trade (PAT) Scheme in 2012. Under PAT, each facility would receive plant-specific energy reduction targets. Facilities achieving better than specified standards were rewarded. Energy-Saving Certificates (ESCerts) could also be traded among facilities across different industrial sectors.

Although significant cumulative energy savings were realized by PAT’s application, its reliance on Specific Energy Consumption (SEC) had a fundamental flaw. It failed to ensure emissions reductions when a facility optimizes its SEC but increases its total carbon emissions due to fuel choice or expanded production such as switching to carbon-intensive captive coal or scaling clinker output.

India sought to address this divergence and bring its domestic policy into alignment with its revised Nationally Determined Contribution (NDC), specifically reducing the emissions intensity of GDP by 45% by 2030 compared to 2005 levels. To achieve this goal, India passed the Energy Conservation Amendment Act in 2022. Subsequent to the Ministry of Power issuing notification no. F.No. 12/14/2019-EMD dated June 28, 2023, titled “Carbon Credit Trading Scheme”, India transitioned from regulating input energy efficiency denominated in Mtoe… to regulating greenhouse gas emissions intensity measured in (tCO2e) the form of Carbon Credit Certificates (CCCs).With CCCs, India created a formal compliance mechanism where industrial emissions can be priced directly at the plant level.

FUNCTIONING

Market Design and Compliance Architecture

The CCTS architecture distinguishes between two discrete but complementary markets:

a mandatory compliance market for energy-intensive sectors
a voluntary offset mechanism for non-obligated project developers

Governance Nodes

National Steering Committee for Indian Carbon Market (NSC-ICM): The NSC-ICM is co-chaired by the Secretary of the Ministry of Power and the Secretary of the Ministry of Environment, Forest and Climate Change (MOEFCC). It is responsible for governing the market design as well as establishing the trajectory for the market and providing guidance with respect to the Indian Carbon Market (ICM) registry.

Bureau of Energy Efficiency (BEE): The BEE acts as the Administrator of the market. It shall recommend sectoral trajectories; define the methodology for Monitoring, Reporting and Verification (MRV) under the Indian Carbon Market and manage the ICM registry.

Central Electricity Regulatory Commission (CERC):
The CERC regulates the trading of Carbon Credit Certificates (CCCs) in secondary markets through the approved domestic power exchanges such as India Energy Exchange (IEX) and Power Exchange India Limited (PXIL).

Accredited Carbon Verification Agencies (ACVAs): Independent third-party auditors accredited by the BEE to audit annually the amount of greenhouse gases claimed by each production unit according to ISO 14064/14065 standards.

The Rate-Based Intensity Metric

The CCTS is different from the EU ETS because, instead of imposing an absolute emissions limit (i.e., limiting total gross tonnage of CO₂ emitted), the CCTS applies a rate-based emissions intensity cap-and-trade system. That design represents the economic realities of emerging economies such as India: industrial capacity must expand to meet infrastructure and urbanization demands, but it must do so cleanly.

The compliance metric is the Greenhouse Gas Emission Intensity (GEI), defined as follows:

GEI = (Direct Scope 1 Emissions + Indirect emissions Scope 2)

Gross Equivalent Production Unit

Direct emissions (Scope 1) include emissions resulting from fossil fuel combustion, calcination, catalytic reactions, and on-site chemical reductions.
Indirect emissions (Scope 2) represent electricity consumed by a facility using state- and year-specific grid emission factors provided by the Central Electricity Authority (CEA).
Production units are measured per standard industry segment (for example, crude steel in metric tonnes,cement in clinker-adjusted metric tonnes; primary aluminium).

If: GEI actual < GEI target: Surplus = (GEI target — GEI actual) × Annual Production Issuance = Surplus (in tCO₂e) → Registry credits 1 CCC per tCO₂eIf: GEI actual > GEI target: Deficit = (GEI actual — GEI target) × Annual Production Obligation = Surrender equivalent CCCs purchased via power exchanges

PERFORMANCE

The transition into CCTS is structured in multi-year compliance cycles, with the inaugural cycle covering FY 2025–26 and FY 2026–27. The scheme initially subsumes the heavy industrial sectors formerly regulated under PAT. Compliance targets are reset in triennial trajectories, requiring facilities to outpace business-as-usual technological advancements to generate surplus credits.

Table 1: Sector-Specific Greenhouse Gas Emission Intensity Benchmarks and Trajectories under CCTS

Sector	Target Segment	Metric Unit	Trajectory Benchmark (Intensity Reduction)
Cement	Integrated Units	(tCO₂e) / tonne clinker	~2.7% reduction over baseline
Cement	Grinding Units	(tCO₂e) / tonne cement	~6.6% reduction over baseline
Aluminium	Smelting & Refining	(tCO₂e) / tonne primary metal	~4.9% to 5.85% reduction
Pulp & Paper	Integrated Mills	(tCO₂e)/ tonne paper produced	~6.5% to 7.15% reduction
Chlor-Alkali	Caustic Soda Production	(tCO₂e) / Electrochemical Unit (ECU)	~6.5% to 7.54% reduction

Source: Compiled by the author from Bureau of Energy Efficiency (BEE) and Ministry of Power consultative draft notifications on Greenhouse Gas Emission Intensity (GEI) trajectories; Energy Conservation Act, 2001 (as amended in 2022).

IMPACT

Pricing carbon reallocates domestic capital expenditures and alters competitive positioning:

Internalizing Clean Abatement Capital (Marginal Abatement Cost Curves)

The CCTS provides a formal structure to establish a transparent and measurable “shadow” or opportunity cost for each tonne of CO₂ avoided via investment in internal abatement technologies (such as fuel switching or waste heat recovery).

Theoretically, under active secondary markets (and therefore, a mature clearing price), if the price of each Carbon Credit Certificate (P_CCC) exceeds the marginal costs associated with that firm’s internal abatement opportunities (MAC), then it will be economically rational for those companies to invest in internal decarbonization technologies instead of purchasing additional compliance credits. Practically speaking, however, due to the current infancy of secondary trading of carbon credits within domestic power exchanges, dynamic price discovery is not yet fully active; therefore, the economic hurdle represented by (P_CCC) acts more as an anticipated benchmark for compliance planning rather than a real-time price discovery mechanism.

Source: ResearchGate / Environmental Economics literature (Theoretical Marginal Abatement Cost Curve model; Ellerman & Decaux / Morris et al. MIT Joint Program framework).

The vertical axis represents the theoretical Permit Price / Marginal Abatement Cost (P, representing the anticipated clearing price P_CCC under active CCTS trading).
The horizontal axis represents the Quantity of Emissions Abated (q).

The curve (MAC) shows the rising marginal cost of emissions reduction. Up to quantity q, where internal abatement cost is below or equal to the permit price p, the firm abates internally (the shaded area represents the total expenditure incurred to abate). Beyond quantity q, where the (MAC) curve rises above the permit price p, it is economically optimal for the firm to purchase compliance certificates instead.

Three levels of industrial investment operate under this economy’s influence:

Low-Cost/No-Cost Interventions: WHRS installed to recover waste heat from cement kilns or automatically optimize cells within aluminum potlines; these have either zero or negative marginal costs and will be implemented immediately.

Mid-Tier Capital Investment Opportunities: When carbon prices reach middle-tier thresholds, replacing fossil thermal energy sources using RDF or biomass becomes financially feasible for investors.

High-Cost Deep Decarbonization Solutions: In order for Green Hydrogen DRI or point-source CCUS solutions to become viable long-term investments, they need a sustained high-carbon price environment in addition to concessionary green financing.

Interaction with Global Border Adjustments (CBAM)

The European Union’s Carbon Border Adjustment Mechanism (CBAM) began its financial liability phase in 2026, imposing an import carbon levy on carbon-intensive goods (steel, aluminium, cement, fertilizer, hydrogen) entering the EU. CBAM clearly permits importers to deduct the carbon price effectively paid in the country of origin.

A functioning domestic compliance price under the CCTS provides Indian exporters with a formal paper trail regarding carbon accounting and captures the revenue created by the export in India, within its economic perimeter rather than forfeiting that revenue upon entering Europe.

EMERGING ISSUES

The market structure created by CCTS and other tradable systems presents new operational and economic risks including:

Zero-Price Trap (ZPT) and Market Oversupply

Illusory Compliance due to Intensity Metric vs Absolute Cap: CCTS measures compliance based on a “cap” defined by emission intensity. In a down economy or recession with lower levels of industrial activity, this produces an illusion of compliance.
Baseline Allocation Risks: Should there be no increase in industry-wide output, but the baseline levels were initially set too leniently, then all that would happen is an oversaturation of the registration system; thus the price of CCCs will collapse to their statutory minimum value.
Precedent from the PAT Scheme: This is similar to what occurred in PAT Cycles II and III, when over-allocation of baselines created an excess supply of ESCerts, where certificate issuance exceeded compliance demand by nearly 2:1 (10.3 million issued vs. 5.2 million required), crashing clearing prices to the ₹1,840 floor and eliminating the incentive for further capital investments in energy efficiency.

Scope 2 Methodological Distortions

Grid and Electrification Dependencies – Certain sectors that have significant portions of their overall operations’ emissions attributed to electrical inputs (e.g., secondary steel and chlor-alkali) are dependent upon modifications by the CEA with respect to State- and Grid-level emission factors.
Disconnecting Market Compliance from Plant-Level Abatement Efforts – A facility may maintain steady conditions on-site but undergo artificially induced fluctuations in its carbon intensity solely due to additions in renewable energy resources available nationally on the grid. Therefore, the compliance market signal is disconnected from the direct, site-specific abatement efforts

Verification Integrity and Information Asymmetry

Audit dependency on Accredited Carbon Verification Agencies (ACVAs): It will be the foundation of trustworthiness for the Carbon Credit Trading Scheme (CCTS), provided ACVAs are able to conduct rigorous gate-to-gate audits of each facility’s greenhouse gas emissions.
Industrial Complexity and Monitoring Gaps: Industrial facilities use complex fuel blends including coal, natural gas, biomass, and alternative fuels alongside multiple on-site generation streams. This complexity creates monitoring challenges when continuous digital monitoring is absent. In addition, discrepancies in reporting activities within defined plant boundaries can generate inaccurate baseline data (such as the clinker-to-cement ratio) or allow process emissions to remain concealed from reporting.
Commercial Conflict Risks: If commercial interests influence the verification decisions made by accredited agencies, paper compliance risks substituting for real, physical reductions in greenhouse gas emissions.

WAY FORWARD

In order to create a strong price discovery mechanism through the use of a certified carbon credit (CCC), regulatory bodies must put in place several structural safeguards:

Hybrid Cap Architecture: Introduce an absolute emission limit on large and established sectors such as coal-fired electricity and basic steel concentrated over time while maintaining rate based structures.
Price Stabilization Strategies: The creation of a mandatory Cost Containment Reserve (CCR) alongside an administrative price floor would allow for the stabilization of prices during an economic downturn, as well as offer protection for industrial companies against speculation-driven price increases.
Strict Penalty Enforcement: Strictly enforce penalties. If any entity is found to have violated regulations, it must pay double the average cost of carbon credits traded throughout that cycle during the same trading period. Additionally, it must carry over its target deficit into the subsequent cycle to discourage willful non-compliance.
Mandatory Integration of Continuous Emissions Monitoring Systems (CEMS): Require all factories and industries to install automated, tamper proof Internet of Things (IoT) telemetry devices linking factory smokestacks and distributed control systems directly with the ICM Registry⁠. This will help to minimize discrepancies due to errors made by humans when manually entering data for accredited carbon verification agency (ACVA) verification.

CONCLUSION

The shift from the Perform, Achieve and Trade (PAT) scheme to the Carbon Credit Trading Scheme (CCTS) marks a structural transition in India’s climate policy. Rather than merely incentivizing energy conservation, the CCTS establishes an institutional clearinghouse to internalize the cost of greenhouse gases by pricing emissions directly at the plant level.

However, carbon markets are policy induced markets and therefore their operational success depends upon three critical factors:

Integrity of baselines being established – Ensuring Additionality
Scarcity of tradable allowance – Driving Price Discovery
Dependability of the verification protocol – Guaranteeing Environmental Integrity

If a conservative target-setting approach is taken to avoid industrial disruptions in order to create a market, then the risk exists of creating a market based solely on paper compliance while failing to achieve real greenhouse gas abatement.

REFERENCES

The references are organized below into Statutory Acts & Official Regulatory Documents and Policy Analyses & Academic Works formatted according to APA Style (7th edition), along with their direct, authentic source URLs and DOIs.

Statutory Acts and Government Portals

Bureau of Energy Efficiency. (2024). Detailed procedure for compliance mechanism under the Carbon Credit Trading Scheme (CCTS). Ministry of Power, Government of India. https://beeindia.gov.in/

Central Electricity Regulatory Commission. (2024). Central Electricity Regulatory Commission (terms and conditions for purchase and sale of carbon credit certificates) regulations, 2024 (Draft & explanatory memorandum). https://www.cercind.gov.in/2024/draft_reg/Final-EM-CCC.pdf

Ministry of Law and Justice. (2022). The Energy Conservation (Amendment) Act, 2022 (Act No. 19 of 2022). The Gazette of India: Extraordinary (Part II—Sec. 1, Dec. 20, 2022). https://egazette.gov.in/WriteReadData/2022/241246.pdf

Ministry of Power, & Ministry of Environment, Forest and Climate Change. (2023). Carbon Credit Trading Scheme, 2023 (Notification S.O. 2806(E)). The Gazette of India: Extraordinary (Part II—Sec. 3(ii), June 28, 2023). https://egazette.gov.in/WriteReadData/2023/246898.pdf

2. Policy Analyses & Academic Reviews

Center for Policy Research on Energy and the Environment. (n.d.). Design flaws in rate-based emission trading systems: Allocation, baselines, and abatement efficiency [Policy brief/working paper]. Princeton University. https://cpree.princeton.edu/

Coase, R. H. (1960). The problem of social cost. The Journal of Law and Economics, 3, 1–44. https://doi.org/10.1086/466560 Cited by: 32

Harvard Environmental Law Review. (n.d.). The architecture of carbon markets: Lessons from regional cap-and-trade systems for developing economies. Harvard Law School. https://journals.law.harvard .edu/elr/

Pigou, A. C. (1920). The economics of welfare. Macmillan and Co. https://archive.org/details/dli.bengal.10689.4260

Yale School of the Environment. (n.d.). Pricing carbon in emerging economies: Market signals, industrial competitiveness, and real-world emissions. Yale Environment 360. https://e360.yale.edu/

About The Contributor

Anushree Khare is a Research & Editorial Intern at the Impact and Policy Research Institute (IMPRI). She holds a B.A. (Hons) degree in Economics with Research. Her academic and professional interests lie in the domains of finance, quantitative research, data-driven policy analysis, and business strategy.

Acknowledgement

The author extends sincere gratitude to the IMPRI team for their guidance and support along with the reviewers Ms. Khushi and Mr. Ayan Bordoloi for their valuable feedback and insights.