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.
A new study by Rubix Data Sciences and Breathe ESG has found that carbon is rapidly becoming a measurable business cost, export competitiveness factor, and emerging credit-risk variable for Indian companies. The report, titled 'Carbon as a Business Variable: Trade, Risk, and the Evolution of India's Carbon Market', comes as India prepares to operationalise its domestic carbon market in 2026 amid rising global climate-linked trade regulations.
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 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.
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.
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 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% |
The "Pay to Pollute" Strategy
"For many high-margin polluters, 'paying to pollute' could become a preferred business strategy." 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. The industries covered include cement, aluminium, iron and steel, paper and pulp, chlor-alkali, petroleum refinery, petrochemical units, fertilisers, and textiles.
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).
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.
Carbon as a Trade Risk
The CBAM Reality
The European Union's Carbon Border Adjustment Mechanism (CBAM) came into effect on January 1, 2026. 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.
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. Indian steel and aluminium exporters have been forced to cut prices by 15-22 per cent to absorb the tax burden since January 1, 2026.
The Expanded Rules
The EU has strengthened CBAM, expanding its reach to more products and introducing strict anti-circumvention measures. While the initial mechanism focused on raw materials, the new rules will now cover over 180 additional processed goods.
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. As of 2026, carbon intensity directly influences export costs, margins, and market access.
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.
Carbon and Credit Risk
Carbon exposure is gradually beginning to influence cost structures, profitability, capital allocation, supply-chain decisions, and credit-risk assessment frameworks. Regulatory expectations from institutions such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) are also gradually pushing businesses and lenders towards deeper carbon and ESG integration.
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 Lender Perspective
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 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 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.
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%.
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 sectors are finalised.
The Value Leakage Problem
The Problem
Much of the economic value generated 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 Execution Bottleneck: Only One-Third of Projects Succeed
The Scale of the Problem
Rubix's analysis of more than 1,100 Verra-certified Indian carbon projects found that only about one-third successfully reach the registration stage.
The Reasons for Delay
| Reason | Description |
|---|---|
| Verification Requirements | Stringent and costly verification processes |
| Monitoring Costs | High ongoing monitoring costs |
| Regulatory Uncertainty | Evolving rules and requirements |
The Consequences
These delays have direct implications for monetisation, investor confidence, project viability, and the long-term credibility of India's emerging carbon market.
The Lesson
The execution bottleneck represents both a risk and an opportunity. Project developers who can navigate these challenges successfully will have a significant competitive advantage.
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.
The IEEFA's Warning
Irrespective of the ongoing international discussions around CBAM, 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 Strategic Imperative
A credible domestic carbon market can strengthen India's long-term industrial competitiveness.
The India-EU FTA CBAM Annexure
India has secured an Annex on Carbon Border Measures in the India-EU FTA which aims to strengthen cooperation and support between the two to enhance efforts to reduce greenhouse gas emissions.
The CBAM Expansion
The EU Council agreed to strengthen CBAM, expanding its reach to more products and introducing strict anti-circumvention measures. The new rules will now cover over 180 additional processed goods.
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
Venture capital has largely stayed cautious on carbon credit start-ups, wary of long project cycles, credibility concerns, and uncertain returns.
The Supply Chain Dimension: Scope 3 Emissions
The Emerging Risk
Supply-chain emissions, particularly Scope 3 emissions, are emerging as a key area of concern.
The Scale of the Problem
"A large part of carbon risk will not sit within a company's own operations, but within its supply chain".
The Cascading Impact
Carbon exposure is gradually becoming linked to pricing, procurement, financing and market access.
What This Means
| Implication | Description |
|---|---|
| Supplier Scrutiny | Companies will scrutinise supplier carbon performance |
| Scope 3 Reporting | Mandatory Scope 3 disclosure is coming |
| Supply Chain Risk | Carbon-intensive suppliers create risk |
| Procurement Decisions | Carbon performance will influence procurement |
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 "Pay to Pollute" Risk
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 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.
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.
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.
The report concludes that India's carbon transition is increasingly evolving into an economic and financial issue with implications for competitiveness, financing costs, supply-chain resilience and long-term enterprise value across sectors.
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 |
| Execution Gap | Only 1/3 of projects reach registration |
| 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 |
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 value leakage problem?+
Much of the value from Indian carbon credits has accrued outside India, with limited domestic benefit.
What is the execution bottleneck?+
Only about one-third of Verra-certified Indian carbon projects successfully reach the registration stage.
What is the CBAM expansion?+
The EU has expanded CBAM to cover over 180 additional processed goods.
What is the Scope 3 risk?+
Supply-chain emissions, particularly Scope 3 emissions, represent a significant carbon risk that often exceeds a company's direct emissions.
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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