The Hidden Engine of India's Carbon Market – How Carbon Prices Are Really Formed in the CCTS
Introduction: The Price That Will Reshape Indian Industry
Carbon price is the single most important signal in any emissions trading system. It determines the cost of compliance, the value of carbon credits, the return on investment for emission reduction projects, and the competitiveness of different industrial sectors.
In India's Carbon Credit Trading Scheme (CCTS), price formation reflects the interaction of regulatory design, firm-level abatement decisions, macroeconomic conditions, and companion policy dynamics. Getting the price signal right early is key to the credibility of India's carbon market.
Yet, the CCTS price formation mechanism is unlike any other carbon market in the world. Unlike the European Union Emissions Trading System (EU ETS), which imposes an absolute cap on total emissions, India's CCTS adopts an intensity-based approach — linking emissions targets to output rather than imposing absolute caps. This reflects India's development priorities and industrial growth trajectory, but it creates a structural tension at the heart of price formation.
As the Institute for Energy Economics and Financial Analysis (IEEFA) notes, this intensity-based design means aggregate allowable emissions will scale with output. In simple terms: as India's economy grows, so does the amount of emissions allowed under the scheme. The price signal must therefore navigate a fundamental trade-off between accommodating growth and creating genuine scarcity.
This guide provides a comprehensive analysis of how carbon prices are formed in India's CCTS, examining the unique drivers, structural challenges, and strategic implications for businesses and investors.
How the CCTS Carbon Price Is Formed: The Core Mechanism
The Baseline-and-Credit System
The CCTS adopts a baseline-and-credit system with facility-level intensity targets, allowing emissions to scale with economic growth while rewarding firms that outperform their benchmarks. Entities that beat their targets earn Carbon Credit Certificates (CCCs); those that fall short must buy them.
The Price Formation Mechanism
The IEEFA framework identifies several interconnected layers that determine the carbon price in the CCTS:
| Layer | Description |
|---|---|
| Economic Basis | Artificial scarcity created through policy design; baselines, targets, and abatement actions define credit supply; firms compare marginal abatement cost against credit price |
| Core Price Mechanism | Intensity-based benchmarks; performance-based credit generation (ex-post); credit trading and intertemporal banking; price adjusts via surplus/shortage balance |
| Enterprise Decisions | Production and output cycles; technology and CAPEX timing; marginal abatement cost structure; banking decisions |
| Energy and Mitigation Markets | Fuel price spreads; renewable share; abatement technology costs and access; power sector linkages |
| Price Determination Instruments | Benchmark methodology; output-based allocation; offsets (domestic, limited share); benchmark tightening trajectory |
| Price Adjustment Instruments | Price and Supply Adjustment Mechanism (PSAM); banking (no borrowing permitted); price corridor (floor and ceiling); credit reserve and vintage management |
The Economic Logic
The price of a carbon credit ultimately reflects the regulatory scarcity created by policy design. If the target is tighter than the 2023-24 baseline, a company may need to buy credits or invest in efficiency. If it beats the target, it can generate Carbon Credit Certificates with monetary value. That is the direct link between compliance and operating margin.
The Intensity-Based Design: A Structural Tension at the Heart of Price Formation
The Core Challenge
The CCTS regulates emissions intensity rather than imposing an absolute cap like the EU-ETS. This means aggregate allowable emissions will scale with output, accommodating India's industrial growth trajectory but creating a structural tension at the heart of price formation.
How Output Growth Affects Price
In an intensity-based system, output expansion simultaneously generates carbon credit supply and credit demand:
| Effect | Explanation |
|---|---|
| Credit Supply | Efficient firms outperforming their benchmarks generate surplus credits |
| Credit Demand | Less-efficient firms falling short of their benchmarks need to buy credits |
Whether the market tightens or loosens in any period depends on which firms are driving growth and how regulators calibrate benchmarks relative to realised sectoral performance.
The EU-ETS vs. CCTS Comparison
| Aspect | EU-ETS | CCTS |
|---|---|---|
| Cap Type | Absolute emissions cap | Intensity-based (emissions per unit of output) |
| Price Driver | Absolute scarcity | Relative performance across firms |
| Growth Impact | Cap constrains growth | Growth expands both supply and demand |
| Price Stability | Structural reforms (MSR) needed | Price/Supply Adjustment Mechanism needed |
The Real Test
The intensity-based design means the CCTS is a fundamentally different market from the EU-ETS or other absolute-cap systems. As the IEEFA notes, "Price formation in the CCTS reflects the interaction of regulatory design, firm-level abatement decisions, macroeconomic conditions, and companion policy dynamics."
Benchmark Calibration: The Primary Lever of Scarcity
Why Benchmarks Matter
In the CCTS, benchmark design is the primary lever through which regulators control scarcity. Because the system issues credits only after verified performance against facility-level benchmarks, the way benchmarks are calibrated determines whether credits are scarce or abundant.
The Risk of Generous Benchmarks
In jurisdictions where benchmark-setting has relied too heavily on industry-provided estimates without independent verification, allocations have consistently been more generous than necessary. This leads to a surplus of credits and weak price signals — exactly the outcome that could undermine the CCTS's credibility.
The Need for Credible Scarcity
Credible scarcity requires:
- Pre-committed tightening trajectories
- Transparent, rule-based supply adjustment mechanisms
- Independent verification of benchmark data
The IEEFA Recommendation
The EU-ETS recovered meaningful price signals only after structural reforms, notably the Market Stability Reserve (MSR) , replaced ad-hoc interventions with automatic supply correction. India's CCTS will need equivalent mechanisms to anchor expectations and sustain the forward-looking participation that stable price signals depend on.
Output-Based Allocation: Why Carbon Costs Don't Flow Through to Prices
What Is Output-Based Allocation?
The CCTS uses Output-Based Allocation (OBA), meaning allowances are allocated based on production output rather than historical emissions. This is a defining feature of intensity-based systems.
The Problem
Output-based allocation mutes the transmission of carbon costs into product prices, weakening demand-side signals for material efficiency and substitution even when the underlying carbon price is positive.
What This Means for Businesses
| Effect | Implication |
|---|---|
| Weakened Price Signal | Carbon costs don't flow through to consumer prices, reducing demand-side pressure to reduce emissions |
| Reduced Innovation Incentive | Firms have less incentive to develop and adopt low-carbon technologies |
| Competitive Distortion | More efficient firms may not capture the full value of their efficiency advantage |
The IEEFA Assessment
"Output-based allocation (OBA) also mutes the transmission of carbon costs into product prices, weakening demand-side signals for material efficiency and substitution even when the underlying carbon price is positive."
The Strategic Implication
For businesses, this means the carbon price signal alone may not be sufficient to drive consumer behaviour change. Companies that proactively reduce emissions may not see the full market benefit reflected in their product prices.
Supply and Demand Dynamics: Who Creates Credits and Who Buys Them
Demand Side
| Source | Description |
|---|---|
| Compliance Demand | Obligated entities buying to meet their emission intensity targets |
| Voluntary Demand | ESG-conscious companies purchasing credits |
| Export Demand | Companies seeking to reduce CBAM liability |
| Speculative Demand | Investors buying for price appreciation |
Supply Side
| Source | Description |
|---|---|
| Compliance Surplus | Entities exceeding their targets |
| Offset Projects | Renewable energy, forestry, waste management projects |
| International Credits | Potentially under Article 6 |
The Structural Tension
As the IEEFA notes, "Output expansion simultaneously generates carbon credit supply from efficient firms outperforming their benchmarks, and credit demand from less-efficient firms falling short. Whether the market tightens or loosens in any period depends on which firms are driving growth."
The Early Market Reality
In the early years, both supply and demand will remain relatively inelastic:
- Ex-post credit issuance means credits are only available after verification
- Exclusion of financial intermediaries limits trading activity
- Capital-intensive industrial abatement means firms can't quickly adjust emissions
Trading is likely to cluster around settlement deadlines, weakening the informational content of periodic market-clearing prices.
The Ex-Post Credit Issuance Problem: Why Supply Lags Behind Demand
What Is Ex-Post Issuance?
Under the CCTS, credits are issued only after verified performance against facility-level benchmarks. This means tradable supply enters the market with a lag — after compliance periods have ended, not before they begin.
The Problem
| Issue | Impact |
|---|---|
| Supply Lag | Credits aren't available when firms need them |
| Banking Behaviour | Firms may hold credits rather than selling them |
| Verification Timelines | Delays in verification create supply uncertainty |
| Willingness to Sell | Firms may be reluctant to sell surplus credits |
As the IEEFA notes, "Banking behaviour, verification timelines, and firms' willingness to sell all create a gap between what the system can generate and what reaches the market."
The Result
This creates a situation where both supply and demand remain relatively inelastic, with trading likely to cluster around settlement deadlines. The market may struggle to generate continuous price discovery, which is essential for long-term investment decisions.
The Role of Banking
The CCTS allows entities to bank surplus CCCs across compliance cycles, offering flexibility to manage production volatility and cost uncertainties. This banking provision can help smooth price volatility but also creates the risk of credit accumulation and price suppression.
The Power Sector's Absence: A Gap That Weakens Price Signals
The Scale of the Gap
The power sector accounts for roughly 40% of national emissions and sits outside the initial compliance boundary. Its exclusion is pragmatic — simplifying implementation while recognising the complexities of electricity market regulation.
What the Exclusion Removes
| Removed Element | Impact on Price Formation |
|---|---|
| Largest Emission Source | Single largest source of carbon emissions excluded |
| Fuel-Switching Channel | Coal-gas merit-order dynamics removed |
| Continuous Traders | Utilities that trade continuously to hedge emissions exposure |
The Result
Demand concentrates instead among industrial firms whose compliance requirements evolve more slowly and whose trading may cluster around settlement deadlines, weakening the informational content of periodic market-clearing prices.
The Future Challenge
As the IEEFA notes, "Without a credible integration roadmap, the CCTS will lack the primary channel through which carbon pricing shapes energy investment. Future integration will need to address how carbon costs interact with India's electricity regulatory framework, particularly dispatch and merit-order decisions.
The Regulatory Hurdle
Any future power sector integration will need to address the statutory tariff determination process under the Electricity Act 2003, which lacks an established framework for treating carbon compliance costs as a legitimate, automatic pass-through. Carbon cost recognition would need to be coordinated across the CERC and state electricity regulatory commissions.
Companion Policies and the Risk of Price Distortion
The Problem
Instruments such as the Perform, Achieve and Trade (PAT) scheme, Renewable Consumption Obligations (RCOs), Production-Linked Incentives (PLI) schemes, and the National Green Hydrogen Mission affect emissions in covered sectors independently of the carbon price.
The Consequence
Without periodic baseline revisions reflecting the cumulative impact of these policies, the resulting surpluses can depress prices and blur what the CCTS price signals about in-sector abatement costs.
The Solution
International experience, particularly the EU-ETS waterbed effect, underscores the importance of:
- Dynamic baseline revision
- Unified registries to prevent double counting
The IEEFA Warning
"Instruments such as ESCerts, RCOs, PLI schemes, and the National Green Hydrogen Mission affect emissions in covered sectors independently of the carbon price. Without periodic baseline revisions reflecting their cumulative impact, the resulting surpluses can depress prices and blur what the CCTS price signals about in-sector abatement costs."
Banking Rules: The Intertemporal Dimension of Price Formation
The Banking Provision
The CCTS allows entities to bank surplus CCCs across compliance cycles, offering flexibility to manage production volatility and cost uncertainties.
What Banking Enables
| Benefit | Description |
|---|---|
| Production Volatility Management | Firms can smooth compliance costs across cycles |
| Cost Uncertainty Mitigation | Firms can bank credits when prices are low |
| Intertemporal Arbitrage | Firms can sell credits when prices are high |
| Price Discovery | Banking creates forward-looking price signals |
The Risk
Unlimited banking can also lead to:
- Surplus accumulation that depresses prices
- Price suppression as firms hold credits off the market
- Delayed price discovery as banking creates a lag between compliance and trading
The No-Borrowing Rule
The CCTS does not allow borrowing. This means entities cannot borrow CCCs to meet current compliance obligations, which reinforces the importance of banking as the only intertemporal flexibility mechanism.
The Preliminary Price Finding: $11.48 per Credit
The Modelling Framework
A high-level workshop in New Delhi, jointly organised by IEEFA, Indian Institute of Technology Roorkee, and Environmental Defense Fund, brought together policymakers, researchers, and industry representatives to shape the design of a credible national carbon market.
The IIT Roorkee Model
A central focus was a detailed modelling framework developed by IIT Roorkee, designed to guide policy decisions. The model integrates facility-level data across sectors such as cement, aluminium, and textiles, enabling scenario analysis of emissions reductions and carbon pricing.
The Finding
Preliminary findings suggested a potential market-clearing carbon price of around $11.48 per credit under baseline assumptions. The analysis also indicated significant emissions reduction potential in sectors such as textiles and paper, while overall industrial output impacts were expected to remain minimal.
The Caveat
Experts stressed that such models should be used to understand trade-offs and directional trends rather than produce precise forecasts, particularly given current data limitations.
Price Controls: Floor and Forbearance Prices
The Regulatory Framework
The CERC CCC Regulations, 2026 provide for floor and forbearance prices to prevent excessive volatility in the early stages of the market.
| Price Control | Purpose |
|---|---|
| Floor Price | Prevents prices from falling too low |
| Forbearance Price | Prevents prices from rising too high |
The Debate
At the New Delhi workshop, some participants advocated introducing price controls such as floors or stability reserves early on, while others warned that excessive intervention could distort price discovery.
The Consensus
There was broad agreement that strong political commitment and sufficiently ambitious targets would be essential to ensure a meaningful carbon price signal.
Price Projections
| Phase | Expected Price Range |
|---|---|
| Phase 1 (2026-27) | $10–15 per tonne |
| Phase 2 (2028-30) | $15–25 per tonne |
| Phase 3 (2030+) | $25–50 per tonne |
The IEEFA Framework: Why India Needs a Price Stability Mechanism
The Core Argument
IEEFA has argued that the CCTS should embed a Price and Supply Adjustment Mechanism (PSAM) — comprising consignment auctions — to ensure market stability and prevent the costly corrections that have challenged compliance carbon markets worldwide.
The PSAM Components
| Component | Purpose |
|---|---|
| Price Adjustment | Prevents extreme price volatility |
| Supply Adjustment | Prevents oversupply of credits |
| Consignment Auctions | Provides a mechanism for supply correction |
The Timing Argument
"Embedding a PSAM early in the lifecycle of CCTS could signal that India's carbon market is built for durability and long-term effectiveness."
The Lesson from Global Markets
The EU-ETS recovered meaningful price signals only after structural reforms, notably the Market Stability Reserve (MSR) , replaced ad-hoc interventions with automatic supply correction. India's CCTS will need equivalent mechanisms to anchor expectations and sustain the forward-looking participation that stable price signals depend on.
The Call for Action
"Getting the price signal right early is key to the credibility of India's carbon market."
Lessons from Global Markets: The EU ETS, China, and Korea
The EU ETS Experience
| Lesson | Implication for CCTS |
|---|---|
| Oversupply risk | Early phases can see low prices due to surplus credits |
| Structural reforms needed | Market Stability Reserve was essential for price recovery |
| Price discovery takes time | Meaningful price signals emerged only after reforms |
The China ETS Experience
| Lesson | Implication for CCTS |
|---|---|
| Phased expansion | Gradual sector inclusion builds market depth |
| Price discovery | Takes time to develop robust price signals |
The Korea ETS Experience
In Korea, restricting early participation to compliance entities, alongside a surplus of allowances, left trading thin and prices subdued in the scheme's initial years.
The PAT Experience
India's own Perform, Achieve and Trade (PAT) scheme was cited as a useful precedent, having successfully improved energy efficiency but struggled to generate robust trading activity. Experts cautioned that the new carbon market must avoid similar pitfalls, particularly the accumulation of surplus credits and weak price signals.
The Key Lesson
The lesson from both Korea and PAT is the same: market depth and price signals depend first on whether targets create genuine compliance pressure, and then on whether that pressure is consistently maintained.
Future Price Trajectories: Where Are Prices Headed?
The Three-Phase View
The IEEFA framework identifies three phases of market development:
| Phase | Focus | Timing |
|---|---|---|
| Phase 1: Initial Stage | Introduction of CCTS; policy framework; credible MRV standards | 2026-2027 |
| Phase 2: Market Maturation | Sectoral expansion; financial market integration; offset design; international positioning | 2028-2030 |
| Phase 3: Foundational Design Changes | Transition to absolute emissions cap; introduction of auctioning | 2030+ |
Price Projections
| Phase | Expected Price Range | Key Drivers |
|---|---|---|
| Phase 1 (2026-27) | $10–15 per tonne | Compliance demand, initial trading |
| Phase 2 (2028-30) | $15–25 per tonne | Sector expansion, financial integration |
| Phase 3 (2030+) | $25–50 per tonne | Absolute cap, auctioning, CBAM alignment |
The Strategic Implications
The choices made by regulators, policymakers, and market participants over the next two to five years will determine whether the CCTS produces a carbon price signal strong enough to guide capital-intensive industrial investment over 15- to 30-year horizons.
How Carboned.in Can Help
At Carboned.in, we help businesses navigate carbon price dynamics with clarity and confidence.
Our Services
| Service | What We Do |
|---|---|
| Price Intelligence | Track price trends and forecasts |
| Procurement Strategy | Optimise timing and pricing |
| Risk Management | Hedge against price volatility |
| Compliance Planning | Budget for compliance costs |
| Investment Advisory | Identify opportunities |
| CBAM Readiness | Prepare for international carbon compliance |
Why Choose Carboned.in?
| Reason | Why It Matters |
|---|---|
| Legal Expertise | Led by Siddharth Gupta, Advocate, Calcutta High Court |
| Market Intelligence | Real-time price insights |
| Regulatory Knowledge | Deep understanding of CCTS and CERC |
| End-to-End Support | From strategy to execution |
Your first consultation is completely free. No obligation. Just honest advice.
Conclusion
Carbon price is the single most important signal in India's carbon market. Understanding how it is formed, what drives it, and how it will evolve is essential for any business or investor participating in the CCTS.
Key Takeaways
| Aspect | What You Need to Know |
|---|---|
| Preliminary Price | $11.48 per credit |
| Initial Range | $10–15 per tonne |
| Key Driver | Benchmark calibration |
| Structural Challenge | Intensity-based design |
| Price Controls | Floor and forbearance prices |
| Banking | Unlimited |
| Borrowing | Not allowed |
| Power Sector | Excluded initially |
The Choice Is Yours
| Option | Outcome |
|---|---|
| Understand the price signal | Optimise procurement, manage risk, capitalise on opportunities |
| Ignore the price signal | Face higher costs, missed opportunities, competitive disadvantage |
How Carboned.in Can Help
At Carboned.in, we help businesses navigate carbon price dynamics with clarity and confidence.
- Price Intelligence: Track trends and forecasts
- Procurement Strategy: Optimise timing and pricing
- Risk Management: Hedge against volatility
- Compliance Planning: Budget for costs
Your first consultation is completely free. No obligation. Just honest advice.
How Carboned.in can help
Our team covers every dimension of India's carbon market — pick the service that matches where you are.
Frequently Asked Questions
What is the projected carbon price in India?+
Preliminary findings suggest a market-clearing price of around $11.48 per credit under baseline assumptions.
How is carbon price determined?+
Through exchange-based trading on Power Exchanges, within floor and forbearance price bands.
What is the intensity-based design?+
The CCTS regulates emissions intensity rather than imposing an absolute cap, meaning aggregate allowable emissions scale with output.
What is output-based allocation?+
A system where allowances are allocated based on production output, which mutes the transmission of carbon costs into product prices.
What are the price controls?+
Floor and forbearance prices approved by CERC to prevent excessive volatility.
What is the power sector exclusion?+
The power sector, accounting for ~40% of national emissions, sits outside the initial compliance boundary.
What is the banking rule?+
Unlimited banking of CCCs is allowed; borrowing is not allowed.
What is the PSAM?+
A Price and Supply Adjustment Mechanism recommended by IEEFA to ensure market stability.
What is the lesson from PAT?+
The new carbon market must avoid the accumulation of surplus credits and weak price signals.
How can Carboned.in help?+
We provide price intelligence, procurement strategy, risk management, and compliance planning.
Siddharth Gupta is the founder of Carboned.in and specialist counsel for India's carbon compliance framework — advising obligated entities, project developers, and buyers on CCTS, CR-I registration, and credit transactions.
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