Carbon Emerging as a Business, Trade, and Credit Risk – Why India Inc Must Act Now
Introduction: The New Risk Landscape
Carbon is increasingly emerging as a business, trade and credit-risk variable for Indian companies, moving beyond sustainability disclosures to influence costs, export competitiveness and financing decisions.
This is not a future scenario. It is happening now.
India has emerged as a significant participant in the voluntary carbon market, with over 375 million carbon credits issued between 2010 and 2025. However, much of the value created through these credits has accrued outside India, with limited linkage to domestic emissions reduction priorities.
The launch of the Carbon Credit Trading Scheme (CCTS) in 2026 marks a fundamental shift. Carbon is no longer just an environmental issue—it is a business, trade, and credit risk that must be actively managed.
As the Institute for Energy Economics and Financial Analysis (IEEFA) notes, over the next two to five years, choices made by regulators, policymakers and market participants on market architecture, compliance obligations and price formation will shape how far the CCTS develops into a market capable of guiding capital-intensive industrial investment over 15- to 30-year horizons.
This guide examines the three dimensions of carbon risk—business, trade, and credit—and what Indian companies must do to manage them.
Carbon as a Business Risk
The Compliance Cost
Under the CCTS, companies that fall short of their emission intensity targets must purchase Carbon Credit Certificates to cover the gap. This creates a direct financial cost that affects profitability.
The cost of purchasing credits for major companies in the steel, aluminium, and cement sectors is between 0.6% and 7% of profits, assuming credit prices are $10 per tonne of carbon dioxide equivalent.
| Sector | Compliance Cost as % of Profits |
|---|---|
| Steel | 7% |
| Cement | 2% |
| Aluminium | 0.6% |
Source: Climate Risk Horizons analysis
The "Pay to Pollute" Risk
"For many high-margin polluters, 'paying to pollute' could become a preferred business strategy," said Anirudh T.R., an author of the report.
The analysis warns that low carbon credit prices and weak penalties could make it cheaper for companies to buy credits than invest in cleaner technologies, risking an oversupply of credits and undermining the market's effectiveness.
The Reputation Risk
The market creates its own leaderboard. Net sellers of credits look, by definition, like the sector's efficiency leaders. Net buyers look like laggards.
For the first time, an Indian company's climate performance will be priced, traded, and made visible, not because the company chose to disclose it, but because the market requires it.
The Strategic Imperative
| Risk | Impact |
|---|---|
| Compliance Cost | Direct hit to profitability |
| Reputation | Public ranking against peers |
| Competitive Advantage | Sellers gain; buyers lose |
| Investment | Carbon performance affects capital access |
Carbon as a Trade Risk
The CBAM Reality
The European Union's Carbon Border Adjustment Mechanism (CBAM) came into effect on January 1, 2026, shifting from a reporting-only framework to a payment-linked regime.
India's steel and aluminium exports to the European Union (EU) fell 24.4 percent in Financial Year (FY) 2025, with steel alone down 35.1 percent, before any CBAM financial obligation had taken effect.
The Decline Before the Bite
The decline, which suggests European buyers are already reorienting toward lower-emission producers, underscores what is at stake.
The CBAM Tax Burden
Vinod Gupta, Senior Member of FICCI's Steel Committee, highlighted the sector's predicament: "CBAM could add a 20 to 35% tax burden on Indian steel exports to the EU".
Market Access Depends on Carbon Intensity
"CBAM means that market access in high-value destinations will increasingly depend not only on the quality and price of the steel, but also on the carbon intensity of the production process," a government official noted.
Given the high carbon intensity of Indian steel, it will become difficult for Indian steel exports to the EU.
The Export Response
Indian steel exports surged by 36 percent year-on-year in the first 10 months of FY2026, primarily driven by frontloading of shipments to the EU before CBAM took effect. This frontloading is a temporary response, not a sustainable strategy.
What Exporters Must Do
| Action | Why It Matters |
|---|---|
| Decarbonise | Reduce carbon intensity to lower CBAM exposure |
| Diversify Markets | Reduce dependence on EU markets |
| Participate in CCTS | Demonstrate carbon costs paid |
| Prepare CBAM Data | Standardised data packs for verification |
Carbon as a Credit Risk
The Financial Sector Response
Carbon is increasingly emerging as a credit-risk variable for Indian companies, moving beyond sustainability disclosures to influence financing decisions.
The PCAF-CII Partnership
In July 2026, the Partnership for Carbon Accounting Financials (PCAF) and the Confederation of Indian Industry - Centre of Excellence for Sustainable Development (CII-CESD) entered into a strategic partnership to support financial institutions in India with the measurement and disclosure of emissions associated with financial activities.
What This Means for Borrowers
| Implication | Impact |
|---|---|
| Higher Interest Rates | Carbon-intensive companies may face higher borrowing costs |
| Reduced Access | Some lenders may limit exposure to high-carbon sectors |
| Due Diligence | Lenders will scrutinise carbon performance |
| Reporting | Borrowers must disclose carbon data |
The Green Finance Opportunity
As the India carbon credit market grows from USD 5.90 billion in 2026 to an estimated USD 66.79 billion by 2033, the green finance opportunity will grow correspondingly. Companies with strong carbon performance will have access to cheaper capital.
The Investor Perspective
Venture capital has largely stayed cautious on carbon credit startups, wary of long project cycles, credibility concerns, and uncertain returns. However, the CCTS launch and growing quality standards are beginning to change this.
The Numbers That Matter: 375 Million Credits and Counting
India's Voluntary Carbon Market
India has emerged as a significant participant in the voluntary carbon market, with over 375 million carbon credits issued between 2010 and 2025.
The Global Share
India supplies about 17% of the world's carbon credits, the second-largest share globally. This positions India as a major player in the global carbon market.
The Market Growth
The India carbon credit market is estimated to be valued at USD 5.90 billion in 2026 and is expected to reach USD 66.79 billion by 2033, exhibiting a compound annual growth rate (CAGR) of 41.4% from 2026 to 2033.
The Compliance Market
As of fiscal year 2025–26, compliance obligations under the CCTS are in force for approximately 490 entities across seven energy-intensive sectors. That coverage is set to expand toward nearly 740 entities and over 700 million tonnes once the remaining two sectors are finalised.
The Value Leakage Problem
The Problem
Much of the value created through Indian carbon credits has accrued outside India, with limited linkage to domestic emissions reduction priorities.
Why This Happens
| Factor | Explanation |
|---|---|
| International Registries | Most Indian projects register with Verra or Gold Standard |
| International Buyers | Credits sold to international corporations |
| Limited Domestic Demand | No compliance market until 2026 |
| Price Arbitrage | International buyers access cheaper credits |
The Consequence
| Consequence | Impact |
|---|---|
| Value Outflow | Carbon revenue leaves the country |
| Limited Domestic Impact | Credits don't support India's NDC |
| Missed Opportunity | Domestic decarbonisation could have been accelerated |
| Incomplete Ecosystem | No domestic market for Indian credits |
The Solution: The CCTS
The introduction of the Carbon Credit Trading Scheme (CCTS) and the broader Indian Carbon Market framework reflects a shift towards retaining both economic and environmental values within the domestic system.
A stronger domestic carbon market supports industrial competitiveness and helps ensure that more of any carbon value is recognised and retained within India.
The CBAM Connection: Trade Risk in Action
The CBAM Challenge
India's steel and aluminium exports to the European Union (EU) fell 24.4 percent in Financial Year (FY) 2025, with steel alone down 35.1 percent , before any CBAM financial obligation had taken effect.
The IEEFA's Warning
Irrespective of the ongoing international discussions around CBAM, the report's focus is on domestic market design.
"What matters now is how the EU's recognition of carbon prices paid in third countries will interact with India's market design, and how the CCTS can be calibrated so that domestic carbon costs are credited at the border."
The Strategic Imperative
A credible domestic carbon market can strengthen India's long-term industrial competitiveness.
International experience points to the design choices—from benchmark calibration to the eventual role of auctioning—that shape how much carbon value is recognised and retained at home.
The India-EU FTA CBAM Annexure
The India-EU FTA includes provisions for carbon price recognition. The agreement provides for engagement between India and EU authorities to account for the carbon price paid in India and adjust it against the final carbon tax liability payable in the EU.
The Financial Sector Response
The PCAF-CII Partnership
In July 2026, PCAF and CII-CESD entered into a strategic partnership to support financial institutions in India with the measurement and disclosure of emissions associated with financial activities.
What This Means
| Implication | Description |
|---|---|
| Emissions Measurement | Financial institutions can measure the carbon footprint of their lending portfolios |
| Risk Assessment | Carbon risk can be incorporated into credit decisions |
| Disclosure | Transparent reporting of financed emissions |
| Climate Finance | Enables better targeting of climate finance |
The Green Finance Opportunity
As financial institutions become more sophisticated in measuring and managing carbon risk, they will be better positioned to participate in the carbon market as intermediaries, investors, and financiers.
The Investor Caution
Venture capital has largely stayed cautious on carbon credit startups, wary of long project cycles, credibility concerns, and uncertain returns. However, the CCTS launch and growing quality standards are beginning to change this.
The IEEFA Report: A Strong Carbon Market Framework
The Core Finding
A new report by the Institute for Energy Economics and Financial Analysis (IEEFA) maps the trajectory of the CCTS and makes recommendations on the decisions that will shape the scheme's trajectory.
The Four Themes
The analysis is structured around four interconnected themes:
- Financial market participation: When and how financial intermediaries can be brought into the market
- The design choices India faces in responding to border carbon costs, of which CBAM is the most prominent
- Sectoral expansion, including the implications of incorporating the power sector
- Managing offsets and Article 6 opportunities while safeguarding the integrity of India's carbon market
The PAT Lesson
India's own Perform, Achieve and Trade (PAT) scheme, an important step in building market experience, saw certificate trading fall short of the volumes mandated.
Both point to the same lesson: market depth and price signals depend first on whether targets create genuine compliance pressure, and then on whether that pressure is consistently maintained.
The Financial Intermediation Principle
"Every major Emissions Trading System (ETS) began with compliance entities only. The CCTS is right to do the same. Financial intermediaries matter eventually for what they make possible: continuous price discovery and the hedging that gives firms confidence to commit to large decarbonisation investments over long horizons."
The Enforcement Challenge
The Weak Penalty Problem
A critical evaluation of emissions reduction targets by Climate Risk Horizons (CRH) has deemed the targets "modest and unambitious"—unlikely to drive changes in operations that would reduce emissions substantially.
The report warns that low carbon credit prices and weak penalties could make it cheaper for companies to buy credits than invest in cleaner technologies, risking an oversupply of credits and undermining the market's effectiveness.
The Modest Targets
India's greenhouse gas reduction targets under its carbon market are too modest to drive major industrial decarbonisation, allowing companies to meet targets through incremental efficiency gains.
For the steel sector, the 255 steel and iron companies obligated to meet targets are required to reduce their emissions intensity by 6% by 2026-2027 , achievable through "incremental improvements in process efficiency."
The Call for Reform
Researchers recommend more ambitious future targets, stronger carbon pricing safeguards, inclusion of major emitters like the power sector, and an independent regulator to ensure transparent governance and accelerate investment in low-carbon technologies.
What This Means for Indian Businesses
For Obligated Entities
| Implication | Action Required |
|---|---|
| Compliance Cost | Budget for carbon compliance costs |
| Reputation Risk | Public ranking against peers |
| Trade Risk | CBAM exposure for exporters |
| Credit Risk | Carbon performance affects financing |
For Non-Obligated Entities
| Implication | Action Required |
|---|---|
| Offset Opportunity | Generate credits through eligible projects |
| Revenue Stream | Sell credits to obligated entities |
| ESG Enhancement | Demonstrate carbon reduction |
For All Businesses
| Implication | Action Required |
|---|---|
| Strategic Shift | Carbon management is now a strategic imperative |
| Data Readiness | Ensure your data is verifiable and audit-ready |
| Market Intelligence | Understand pricing and market dynamics |
| Professional Advice | Engage expert advisors |
Conclusion: Carbon Risk Is Now a Board-Level Issue
Carbon is no longer just an environmental issue. It is a business, trade, and credit risk that must be actively managed at the highest levels of corporate governance.
Key Takeaways
| Aspect | What You Need to Know |
|---|---|
| Business Risk | Compliance costs: 0.6-7% of profits |
| Trade Risk | CBAM: 20-35% tax burden on steel exports |
| Credit Risk | Financial institutions measuring financed emissions |
| Market Size | USD 5.90B in 2026, USD 66.79B by 2033 |
| Value Leakage | Most value flows overseas |
| Enforcement Gap | Weak targets and penalties |
The Choice Is Yours
| Option | Outcome |
|---|---|
| Manage carbon risk | Reduce compliance costs, protect trade competitiveness, access cheaper capital |
| Ignore carbon risk | Face higher costs, lost market share, reduced financing access |
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 carbon risk?+
Carbon risk refers to the financial, operational, and reputational risks that arise from carbon emissions, carbon pricing, and carbon-related regulations.
Why is carbon a business risk?+
Compliance costs under the CCTS can be 0.6-7% of profits, and public trading data creates a reputation leaderboard.
Why is carbon a trade risk?+
CBAM imposes carbon border taxes on exports to the EU, with steel exports facing a 20-35% tax burden.
Why is carbon a credit risk?+
Financial institutions are increasingly measuring the carbon footprint of their lending portfolios and incorporating carbon risk into credit decisions.
How many carbon credits has India issued?+
Over 375 million carbon credits between 2010 and 2025 in the voluntary market.
What is the size of India's carbon market?+
USD 5.90 billion in 2026, projected to reach USD 66.79 billion by 2033.
What is the value leakage problem?+
Much of the value from Indian carbon credits has accrued outside India, with limited domestic benefit.
What is the IEEFA report?+
A report that maps the trajectory of the CCTS and makes recommendations on critical design choices.
What is the enforcement challenge?+
Weak targets and penalties could make "paying to pollute" a preferred business strategy.
How can Carboned.in help?+
We provide carbon risk assessment, compliance support, credit procurement, CBAM readiness, and legal documentation.
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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