Design Without Discipline – Why India’s Carbon Market Risks Repeating the PAT Failure
Introduction: The Architecture of a Carbon Market
Carbon markets are only as effective as the institutions that enforce them. Across the world, emissions trading systems (ETSs) have often faltered not because their economic logic was flawed, but because the conditions required for that logic to function—credible enforcement, meaningful price signals, and robust monitoring—were absent.
India is launching its Carbon Credit Trading Scheme (CCTS) against this backdrop. The ICM Portal went live in March 2026, initiating the formal transition from the Perform, Achieve and Trade (PAT) scheme to the CCTS. That transition carries baggage. PAT's decade-long record was marked by limited emissions reductions, persistent non-compliance, and a price discovery mechanism that functioned poorly.
Once fully notified, the CCTS will cover some 740 entities and more than 700 million tonnes of CO₂e, placing India among the world's largest emissions trading systems by coverage. The first compliance date is July 31, 2026 for the 2025-26 compliance year.
Amidst mounting climate stress and geopolitical tensions, the stakes are correspondingly high. The central question is whether the CCTS's design is sufficient to address the two deficiencies that have historically weakened carbon markets: inadequate economic incentives and weak external enforcement.
This guide examines the enforcement gap in India's carbon market, drawing on global experience, India's own PAT legacy, and the latest analyses from institutions such as the Observer Research Foundation (ORF), the Institute for Energy Economics and Financial Analysis (IEEFA), and Climate Risk Horizons.
The PAT Legacy: A Warning from India's Own Experience
What Was PAT?
The Perform, Achieve and Trade (PAT) scheme was India's mandatory energy efficiency program covering more than 1,000 entities from 13 energy-intensive sectors. It operated for over a decade and was an important step in building market experience.
PAT's Record
PAT's record was mixed at best:
- Limited emissions reductions: While energy efficiency improved, the scheme did not deliver the scale of emissions reductions needed
- Persistent non-compliance: Many entities failed to meet their targets without facing meaningful consequences
- Poor price discovery: Certificate trading fell short of mandated volumes, and prices remained subdued
- Surplus of certificates: Oversupply depressed prices and weakened incentives for deeper reductions
The ORF Assessment
The Observer Research Foundation (ORF) identified a critical gap in the CCTS design: the absence of an independent regulator. The ORF analysis notes that across the world, emissions trading systems have often faltered because the conditions required for their economic logic to function—credible enforcement, meaningful price signals, and robust monitoring—were absent.
The Baggage of Transition
The entities entering the CCTS are the same ones that operated under PAT, yet they have little reason to believe that the rules have fundamentally changed. If the enforcement mechanisms remain weak, the behavioural patterns that characterised PAT will persist.
The Lesson
As the IEEFA notes, both PAT and Korea's early ETS experience 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 CCTS Design: What Has Changed
The Institutional Framework
The CCTS operates through a three-tier institutional structure:
| Institution | Role |
|---|---|
| Bureau of Energy Efficiency (BEE) | Administrator — designs procedures, manages registration, oversees transfers |
| Grid Controller of India | Registry — maintains electronic accounts, tracks CCCs |
| Central Electricity Regulatory Commission (CERC) | Regulator — sets price bands, oversees market operations |
The Intensity-Based Design
The 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.
The IEEFA notes that "India's CCTS reflects a pragmatic approach to carbon market design. It accommodates industrial growth while building on existing institutional capabilities".
The Offset Mechanism
The CCTS includes an offset mechanism that allows non-obligated entities to participate voluntarily, generating credits from projects in renewable energy, forestry, waste management, and other sectors.
The Banking Provision
The CCTS allows unlimited banking of CCCs across compliance cycles, offering flexibility to manage production volatility and cost uncertainties. Borrowing is not allowed.
The Price Band
The government has proposed a price band to contain price fluctuations and provide market stability. The CERC CCC Regulations, 2026, notified on February 27, 2026, established the operational framework for the exchange of CCCs.
The Weak Penalty Problem: 0.6% to 7% of Profits
The CRH Analysis
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 analysis warns that 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.
The Sectoral Breakdown
| 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," said Anirudh, author of the report.
This is precisely the outcome that carbon markets are designed to prevent. If it is cheaper to buy credits than to reduce emissions, the market fails its primary purpose.
The Penalty Problem
The study cautioned that the penalty of twice the price of carbon credits would be ineffective because of the low initial prices and market volatility.
The Industry Perspective
Weak penalties and expected low allowance prices mean India's planned national carbon market will deliver little incentive to steelmakers, cement producers, and other heavy industries to invest in deep decarbonisation.
The Modest Targets
The assigned reduction targets are low. For instance, top steel and cement companies were given 2-5% reduction targets by 2026-27, "creating little pressure" for transformation. The study found that the overall cost of polluting for major iron and steel, cement and aluminium companies during both compliance years is 7%, 2% and 0.6% of their total annual profits, respectively.
The Oversupply Risk: Too Many Credits, Too Little Scarcity
The Problem
The CRH analysis finds that in addition to the targets being "readily achievable," over the two-year compliance period, the cost of non-compliance is too low to incentivise the kind of systematic operational changes needed to drastically reduce greenhouse gas emissions.
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 2-5% by 2026-27 , achievable through "incremental improvements in process efficiency".
The Benchmark Calibration Challenge
The IEEFA report emphasises that benchmark design is the primary lever through which regulators control scarcity. In jurisdictions where benchmark-setting has relied too heavily on industry-provided estimates without independent verification, allocations have consistently been more generous than necessary.
The Oversupply Mechanism
When targets are modest and penalties are weak:
- Companies can easily meet their targets through incremental improvements
- Few companies need to purchase credits
- Credits accumulate, creating a surplus
- Surplus depresses prices
- Low prices reduce the incentive to invest in deeper reductions
The Result
The market becomes a "business-as-usual" mechanism rather than a driver of industrial transformation.
The Missing Regulator: An Institutional Gap
The ORF Analysis
A study by the Observer Research Foundation (ORF) identifies a critical gap in the CCTS design: the absence of an independent regulator.
The Enforcement Challenge
The ORF analysis notes that across the world, emissions trading systems have often faltered because the conditions required for their economic logic to function—credible enforcement, meaningful price signals, and robust monitoring—were absent.
What Is Missing
India's CCTS, despite its promising architecture, faces similar risks. The institutions responsible for enforcement—BEE, Grid-India, and CERC—have overlapping but incomplete mandates. None is explicitly designed as an independent carbon market regulator with the authority to:
- Set and adjust targets independently
- Impose meaningful penalties for non-compliance
- Investigate market manipulation
- Ensure transparent governance
The Call for an Independent Regulator
Anirudh, author of the CRH report, recommended forming an independent regulatory framework and referring to international best practices that call for reserve price floors and stability reserves, which are currently not adequately featured in India's framework.
The Transparency Gap
Transparency is essential for market confidence. Only with knowledge of carbon prices can participants judge the return on investment to reduce emissions. In the first year of ICM, emissions for compliance purposes were measured over FY26, with trading to take place only late in 2026, by which time emissions will have been set in stone.
The Power Sector Omission: 55% of Emissions Left Out
The Scale of the Gap
The power sector accounts for roughly 40-55% of India's GHG emissions and sits outside the initial compliance boundary.
Why This Matters
| Effect | Implication |
|---|---|
| Largest emitter excluded | Single biggest source of emissions not covered |
| Weakened price signal | Reduced demand for credits |
| Incomplete market | Missing the primary channel through which carbon pricing shapes energy investment |
| Competitive distortion | Power sector faces no carbon compliance costs |
The IEEFA Perspective
According to the IEEFA, "In other carbon markets, power utilities are among the most active participants, and fuel-switching dynamics between coal and gas are among the strongest drivers of carbon price movements. Their initial absence will concentrate compliance..."
Without a credible integration roadmap, the CCTS will lack the primary channel through which carbon pricing shapes energy investment.
The Regulatory Hurdle
Future power sector integration will need to address how carbon costs interact with India's electricity regulatory framework, particularly dispatch and merit-order decisions.
The statutory tariff determination process under the Electricity Act 2003 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.
The IEEFA Call to Action
"Big emitters such as the power sector must be included, and financial incentives to adopt low-carbon industrial processes must be strengthened for the policy to be truly effective," Anirudh said.
The Ex-Post Issuance Problem: Trading After the Fact
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 |
The Result
The IEEFA notes that "ex-post credit issuance, the exclusion of financial intermediaries, and capital-intensive industrial abatement mean both supply and demand will remain relatively inelastic in the early years, with trading likely to cluster around settlement deadlines".
The IEEFA Recommendation
The IEEFA has argued that the CCTS should embed a price or supply adjustment mechanism — comprising consignment auctions — to ensure market stability and prevent the costly corrections that have challenged compliance carbon markets worldwide.
The Impact on Price Discovery
The market may struggle to generate continuous price discovery, which is essential for long-term investment decisions. Communicating clear long-term targets and having a predictable path for benchmark changes are particularly important as industrial investment decisions often span 15–30 years and require confidence in the durability of the price signal.
The Role of Banking: A Double-Edged Sword
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 |
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 IEEFA and ORF Analyses: A Consensus on Enforcement
The IEEFA Framework
The IEEFA has examined how benchmark calibration, power sector sequencing, and companion policy coordination will shape price formation in the CCTS. 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 (CBAM)
- Sectoral expansion including the implications of incorporating the power sector
- Managing offsets and Article 6 opportunities
The ORF Analysis
The ORF analysis poses three critical research questions:
- In what ways have inadequate economic incentives and weak enforcement emerged as recurring challenges in emissions trading systems globally?
- What design choices has India incorporated into the CCTS to address these challenges?
- Are these design choices adequate to overcome them?
The Emerging Consensus
Both analyses point to a common conclusion: the CCTS's success depends on credible stringency, robust MRV, and genuine enforcement.
The Window of Opportunity
"Determining its trajectory now is sequencing choices, and the window to shape them is open before path dependencies harden. Priority should go to foundational elements: credible stringency, robust MRV, and genuine enforcement".
The Global Lesson
The IEEFA notes that "India has the advantage of learning from the costly missteps of earlier movers". The EU-ETS recovered meaningful price signals only after structural reforms, notably the Market Stability Reserve (MSR) , which replaced ad-hoc interventions with automatic supply correction.
The Path Forward: What Needs to Change
Recommendation 1: Strengthen Targets
The current targets are "modest and unambitious." Future compliance cycles need emission targets that strongly signal towards preventing long-term carbon lock-in and accelerating the adoption of low-carbon production routes.
Recommendation 2: Increase Penalties
The cost of non-compliance must be sufficiently high to make "paying to pollute" an unattractive strategy. Environmental Compensation penalties should be meaningful enough to drive real investment in decarbonisation.
Recommendation 3: Establish an Independent Regulator
An independent carbon market regulator with real enforcement authority would ensure transparent governance and consistent application of rules.
Recommendation 4: Include the Power Sector
The power sector, responsible for 40-55% of emissions, must be brought into the compliance mechanism. Without it, the CCTS will lack the primary channel through which carbon pricing shapes energy investment.
Recommendation 5: Implement a Price and Supply Adjustment Mechanism
A Price and Supply Adjustment Mechanism (PSAM) — comprising consignment auctions — would ensure market stability and prevent the costly corrections that have challenged compliance carbon markets worldwide.
Recommendation 6: Ensure Transparent Price Discovery
Open auctions to discover the price of permits are essential. Only with knowledge of these prices can participants judge the return on investment to reduce emissions.
Recommendation 7: Maintain Credible Enforcement
The government needs to make sure it enforces the requirement that all industries hold enough permits to cover their emissions per unit of output.
Recommendation 8: Ensure Transparent Benchmark Methodology
The IEEFA emphasises that "transparent, rules-based benchmark methodology and independent verification alongside industry data will be important".
How Carboned.in Can Help
At Carboned.in, we help businesses navigate the CCTS with clarity and confidence — regardless of how the enforcement landscape evolves.
Our Services
| Service | What We Do |
|---|---|
| Compliance Assessment | Understand your obligations and assess your position |
| Gap Analysis | Calculate your shortfall and develop a mitigation strategy |
| Credit Procurement | Help you buy CCCs at the best price |
| Regulatory Advisory | Stay informed about enforcement developments |
| Legal Documentation | Draft watertight agreements and handle regulatory filings |
| Policy Monitoring | Track regulatory changes and enforcement trends |
Why Choose Carboned.in?
| Reason | Why It Matters |
|---|---|
| Legal Expertise | Led by Siddharth Gupta, Advocate, Calcutta High Court |
| Regulatory Knowledge | Deep understanding of CCTS, BEE, and enforcement mechanisms |
| Market Intelligence | Real-time insights on pricing and compliance trends |
| End-to-End Support | From assessment to compliance |
Your first consultation is completely free. No obligation. Just honest advice.
Conclusion
India's Carbon Credit Trading Scheme is one of the world's largest new carbon markets, covering approximately 477 million tonnes of CO₂e across seven sectors. Once fully notified, it will cover some 740 entities and more than 700 million tonnes of CO₂e.
But the architecture of a carbon market is only as strong as the institutions that enforce it. Without credible enforcement, meaningful price signals, and robust monitoring, the CCTS risks repeating the failures of PAT and other global emissions trading systems.
Key Takeaways
| Aspect | What You Need to Know |
|---|---|
| PAT Legacy | Limited reductions, weak enforcement, poor price discovery |
| Weak Penalties | Compliance costs are 0.6%-7% of profits |
| Oversupply Risk | Modest targets could create credit surplus |
| Missing Regulator | No independent enforcement authority |
| Power Sector | 40-55% of emissions excluded |
| Ex-Post Issuance | Supply lags behind demand |
| First Deadline | July 31, 2026 |
The Choice Is Yours
| Option | Outcome |
|---|---|
| Understand the enforcement landscape | Navigate compliance effectively, avoid penalties, capitalise on opportunities |
| Ignore the enforcement risks | Face higher costs, missed opportunities, competitive disadvantage |
How Carboned.in Can Help
At Carboned.in, we help businesses navigate the CCTS with clarity and confidence — regardless of how the enforcement landscape evolves.
- Compliance Assessment: Understand your obligations
- Gap Analysis: Calculate your shortfall
- Credit Procurement: Buy CCCs at the best price
- Regulatory Advisory: Stay informed about enforcement developments
- Legal Documentation: Ensure regulatory compliance
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
Why does enforcement matter for carbon markets?+
Carbon markets are only as effective as the institutions that enforce them. Without credible enforcement, markets can suffer from oversupply, weak price signals, and limited emissions reductions.
What was the PAT legacy?+
The Perform, Achieve and Trade (PAT) scheme was marked by limited emissions reductions, persistent non-compliance, and poor price discovery.
What is the weak penalty problem?+
The cost of purchasing credits for major companies is between 0.6% and 7% of profits, making 'paying to pollute' a potentially preferred business strategy.
What is the oversupply risk?+
Modest targets and weak penalties could create a surplus of credits, depressing prices and reducing the incentive to invest in deeper reductions.
Why is an independent regulator important?+
An independent regulator with real enforcement authority would ensure transparent governance and consistent application of rules.
Why is the power sector excluded?+
The power sector, responsible for 40-55% of emissions, is currently excluded from mandatory compliance, weakening the market's effectiveness.
What is ex-post issuance?+
Credits are issued only after verified performance, meaning supply enters the market with a lag. This can weaken price discovery.
What is the Price and Supply Adjustment Mechanism?+
A mechanism recommended by IEEFA to ensure market stability and prevent costly corrections.
How can Carboned.in help?+
We provide compliance assessment, credit procurement, regulatory advisory, 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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