The Carbon Risk Revolution – Why Carbon Is Now a Business, Trade, and Credit Risk for Indian Companies

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.

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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."

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

The Industry Response

Companies that have largely relied on reducing emissions within their own operations are expected to increasingly use carbon credits to tackle residual emissions on the path to India's 2070 net-zero target.

Corporate reluctance to buy carbon credits has also reflected concerns that offsets could invite accusations of greenwashing. But international science-based standards are increasingly defining how companies can use credits alongside direct emissions reductions rather than in place of them.

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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

Under the EU's Carbon Border Adjustment Mechanism (CBAM), Indian exports of steel, aluminium, and cement to the EU could face tariffs of 20-35 per cent.

Market Access Depends on Carbon Intensity

Carbon efficiency, which used to be merely a compliance consideration, has now become a factor determining pricing power, competitiveness, market access, and supply-chain resilience.

For India's metals and mining sector, CBAM has transitioned from a future concern to an operational reality. As of 2026, carbon intensity directly influences export costs, margins, and market access.

The Export Response

Indian steel and aluminium exporters to that market have now been forced to cut prices by 15-22 per cent to absorb the tax burden since January 1, 2026, when CBAM entered its payment phase, according to Global Trade Research Initiative (GTRI).

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

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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.

Carbon and Credit Risk

Carbon exposure is increasingly beginning to influence cost structures, profitability, capital allocation, supply-chain decisions, and credit-risk assessment frameworks. Regulatory expectations from institutions such as the RBI and SEBI are also gradually pushing businesses and lenders towards deeper carbon and ESG integration.

The Rubix Data Sciences Report

According to a new report by Rubix Data Sciences and Breathe ESG, carbon is rapidly moving beyond sustainability disclosures to become a measurable business cost, export competitiveness factor, and emerging credit-risk variable for Indian companies.

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

Supply Chain Emissions

Scope 3 emissions can significantly exceed direct operational emissions across sectors, making supplier-level carbon transparency and compliance increasingly important for procurement, trade finance, and business continuity decisions.

"A large part of carbon risk will not sit within a company's own operations, but within its supply chain. Many businesses, which currently view carbon only from the lens of compliance, may discover that their exposure comes indirectly through suppliers, financing relationships, and export dependencies rather than from emissions alone."

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.

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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.

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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.

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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.

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The Financial Sector Response

The Growing Relevance of Carbon

Carbon and energy exposure are becoming increasingly relevant to lenders, insurers, and rating frameworks. As climate disclosure expectations evolve, financial institutions may face growing pressure to incorporate carbon exposure into credit-risk assessment, portfolio evaluation, and underwriting decisions.

The Credit-Risk Assessment Shift

According to Rubix Data Sciences, carbon is rapidly moving beyond sustainability disclosures to become a measurable business cost, export competitiveness factor, and emerging credit-risk variable for Indian companies.

The Green Finance Trend

Green and sustainability-linked bonds and loans are emerging as popular sustainable finance instruments. Indian corporates are increasingly turning to these instruments to fund their transitions.

The Investor Caution

While climate tech continues to attract investor attention, venture capital has largely stayed cautious on carbon credit start-ups, wary of long project cycles, credibility concerns, and uncertain returns. However, the CCTS launch and growing quality standards are beginning to change this.

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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:

1. Financial market participation: When and how financial intermediaries can be brought into the market
2. The design choices India faces in responding to border carbon costs, of which CBAM is the most prominent
3. Sectoral expansion, including the implications of incorporating the power sector
4. 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."

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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

Between October 2025 and January 2026 India notified greenhouse gas reduction targets for nine industries. Under the framework, industries can earn carbon credits if they surpass these reduction targets, with each credit signifying an additional tonne of carbon dioxide equivalent reduced per unit of production (emissions intensity).

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.

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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

The New Reality

India is now moving into that phase, where carbon is gradually becoming more directly linked to financing, procurement, and market access. As global markets increasingly link carbon exposure with pricing, procurement, financing, and market access, business behaviour and investment decisions are also beginning to shift accordingly.

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
375 Million Credits	India's voluntary market issuance (2010-2025)

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