CCTS Price Discovery and Benchmarking – How India's Carbon Market Will Find Its Equilibrium Price

Introduction: The Price Question That Defines the Market

As India's Carbon Credit Trading Scheme (CCTS) prepares for its first trading cycle—expected to begin around October 2026—one question dominates every conversation among obligated entities, investors, and policymakers: What will a carbon credit cost?

The answer is not a simple number. Carbon price formation in the CCTS reflects the interaction of regulatory design, firm-level abatement decisions, macroeconomic conditions, and companion policy dynamics. These forces interact through feedback loops that will determine whether the CCTS produces a carbon price capable of guiding the capital-intensive, long-term investments that India's industrial decarbonisation requires.

Getting the price signal right early is key to the credibility of India's carbon market. Without a credible price signal, the CCTS risks becoming an administrative compliance exercise with limited influence on India's decarbonisation trajectory.

This guide provides a comprehensive analysis of how price discovery will work in India's CCTS—the starting point, the mechanisms, the risks, and what entities should plan for.

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The Starting Point: What We Know About the Initial Price

The IIT Roorkee Modelling

A central focus of a high-level workshop organised by IEEFA, IIT Roorkee, and the Environmental Defense Fund was a detailed modelling framework developed by IIT Roorkee. The model integrates facility-level data across sectors such as cement, aluminium and textiles, enabling scenario analysis of emissions reductions and carbon pricing.

Preliminary findings suggested a potential market-clearing carbon price of around $11.48 per credit under baseline assumptions.

The Government's Target

India's starting price target is intentionally low at around $10 per tonne, consistent with a learning phase approach that allows market participants to adapt without economic shock.

The Price Corridor

Under the CERC's 2026 regulations, certificates traded under the compliance mechanism will have a Floor Price (minimum) and a Forbearance Price (maximum), both approved by CERC. This price corridor is designed to prevent excessive volatility in the early years of the market.

What This Means

Aspect	Implication
Initial price	~$10-11.50 per tonne
Price corridor	Prevents extreme volatility
Learning phase	Prices expected to rise over time

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The IIT Roorkee Modelling Framework: $11.48 Per Credit

The Model's Purpose

The IIT Roorkee modelling framework is designed to guide policy decisions by integrating facility-level data and enabling scenario analysis. 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.

The Baseline Assumptions

The $11.48 figure represents a market-clearing price under baseline assumptions. This means it is the price at which the quantity of carbon credits demanded by obligated entities equals the quantity supplied.

Sectoral Insights

The analysis indicated significant emissions reduction potential in sectors such as textiles and paper, while overall industrial output impacts were expected to remain minimal.

The ICRA ESG View

At an assumed carbon price of $10 per tonne of CO₂, profitability for some cement companies could be hit by up to 19 per cent, while aluminium players may see a hit of around 3 per cent. ICRA noted that India's carbon trading scheme may raise costs over time as emission targets tighten.

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The Price Corridor: Floor and Forbearance Prices

The Mechanism

The CERC's 2026 regulations establish price controls to maintain market stability:

Price Control	Purpose
Floor Price	Minimum trading price—prevents prices from collapsing
Forbearance Price	Maximum trading price—prevents excessive spikes

The Rationale

Price controls in early-stage carbon markets serve several purposes:

• Prevent excessive volatility that could undermine confidence
• Provide price certainty for investment decisions
• Prevent market manipulation
• Support orderly market development

The Trade-Off

While some participants advocated introducing price controls early on, others warned that excessive intervention could distort price discovery. The challenge is balancing stability with market-driven price formation.

The IEEFA View

The IEEFA has advocated for a Price and Supply Adjustment Mechanism (PSAM) comprising consignment auctions, vintage-based credit classification, and a price corridor. Drawing on evidence from the EU ETS, Alberta's TIER system, and Australia's Safeguard Mechanism, the IEEFA has shown that delayed intervention invariably proves costlier and more politically contentious than preventive design.

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How Price Discovery Works in an Intensity-Based System

The Core Mechanism

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.

The Supply-Demand Dynamic

Output expansion simultaneously generates:

Effect	Description
Credit supply	From efficient firms outperforming their benchmarks
Credit demand	From less-efficient firms falling short of their benchmarks

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.

Ex-Post Issuance

As the system issues credits only after verified performance against facility-level benchmarks, tradable supply enters the market with a lag. 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 Price Formation Framework

Layer	Component
Economic basis	Artificial scarcity via policy design—baselines, targets, and abatement actions define credit supply
Core mechanism	Intensity-based benchmarks, performance-based credit generation (ex post), credit trading and intertemporal banking
Adjustment instruments	PSAM, banking, price corridor, credit reserve and vintage management

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The Benchmark Calibration Problem

Why Benchmarking Matters

Benchmark calibration is the central mechanism for shaping the price signal. In India's intensity-based system, output growth can generate both credit supply and credit demand depending on which firms drive growth.

The Risk of Lenient 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. Credible scarcity requires pre-committed tightening trajectories reinforced by transparent, rule-based supply adjustment mechanisms.

The PAT Experience

By the time trading opened under PAT, 103 lakh Energy Saving Certificates (ESCerts) had been issued across the first three PAT cycles against a total purchase obligation of only 52 lakh. This reflected substantial oversupply, driven in part by targets that proved relatively easy to achieve.

The CCTS Vulnerability

The CCTS is vulnerable to similar challenges, not only because these are inherent risks of a baseline-and-credit system, but also because it will regulate many of the same entities that operated under PAT. Over a decade, these entities learned that non-compliance carried few meaningful consequences.

The Solution

Credible, pre-committed tightening trajectories and rule-based supply adjustment mechanisms are essential to sustain scarcity.

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Output-Based Allocation and Its Effect on Price Signals

What Is Output-Based Allocation?

Output-based allocation (OBA) ties allowable emissions to production output. This means that, unlike an absolute cap, emissions allowances scale with production levels.

The Effect on Price Signals

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

Effect	Implication
Weaker demand signals	Consumers don't see carbon costs reflected in prices
Reduced substitution incentives	Less incentive to switch to lower-carbon products
Muted investment signals	Weaker signals for capital allocation

The Structural Tension

Output-based allocation accommodates India's industrial growth trajectory but creates a structural tension at the heart of price formation. The system accommodates growth but makes price signals more complex to interpret.

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The Role of Banking in Price Formation

What Is Banking?

Banking allows entities to save surplus credits for future compliance cycles. The CCTS allows unlimited banking of Carbon Credit Certificates across compliance cycles.

The Effect on Prices

Effect	Explanation
Price smoothing	Banking allows entities to smooth compliance costs over time
Supply management	Entities can hold credits, reducing immediate supply
Future price expectations	Banking decisions reflect expectations of future prices

The Risk

The conversion of banked ESCerts into CCCs, if undertaken without strict eligibility criteria, could flood the market with legacy credits before a meaningful price signal has emerged. The choice of conversion rates and the design of any parallel operating period between PAT and the CCTS will therefore serve as early indicators of whether the new regime intends to enforce stricter market discipline.

The Intertemporal Effect

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.

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The Power Sector Exclusion: What It Means for Price Discovery

The Numbers

The power sector accounts for roughly 40% of national emissions. Its exclusion from the initial phase of the CCTS simplifies implementation but has significant implications for price discovery.

The Impact on Price Discovery

Impact	Explanation
Removes largest emission source	Significantly reduces market size
Eliminates fuel-switching channel	No coal-gas merit-order dynamics
Removes continuous traders	Utilities trade continuously in other markets
Concentrates demand	Trading may cluster around settlement deadlines

The IEEFA Analysis

The initial exclusion of the power sector removes the single largest emission source, the primary fuel-switching channel, and a class of participants that trade continuously. 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 Integration Challenge

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. Without a credible integration roadmap, the CCTS will continue to operate without the primary transmission channel through which carbon pricing shapes energy investment decisions.

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The Risk of Oversupply: Lessons from PAT and Korea

The PAT Oversupply

Metric	PAT
ESCerts issued	103 lakh
Purchase obligation	52 lakh
Unacquired ESCerts	34 lakh

The substantial oversupply was driven in part by targets that proved relatively easy to achieve. Regulatory decisions did little to strengthen market discipline—entities that failed to meet their obligations in cycles I and II were not barred from participating in trading during cycle III.

The Korea 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 Shared 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 Risk

The CCTS is vulnerable to similar challenges. Without credible scarcity and enforcement, the market could suffer from:

• Thin trading volumes
• Subdued prices
• Weak investment signals
• Limited emission reductions

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The EU-ETS Lesson: Why Market Stability Mechanisms Matter

The EU Experience

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.

The Lesson for India

India's CCTS will need equivalent mechanisms to anchor expectations and sustain the forward-looking participation that stable price signals depend on.

The IEEFA Recommendation

The IEEFA has recommended that the CCTS embed a Price and Supply Adjustment Mechanism (PSAM) from the outset. Drawing on evidence from the EU ETS, Alberta's TIER system, and Australia's Safeguard Mechanism, the IEEFA has shown that delayed intervention invariably proves costlier and more politically contentious than preventive design.

The PSAM Components

Component	Purpose
Consignment auctions	Supply management
Vintage-based credit classification	Quality differentiation
Price corridor	Volatility prevention

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Companion Policies and Their Effect on Carbon Prices

What Are Companion Policies?

Companion policies are other policy instruments that affect emissions in covered sectors independently of the carbon price. These include:

Policy	Effect
PAT scheme	Energy efficiency improvements
Renewable Consumption Obligations (RCO)	Renewable energy deployment
Production-Linked Incentives (PLI)	Industrial policy
National Green Hydrogen Mission	Hydrogen deployment

The Problem

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.

The Risk

International experience, particularly the EU-ETS waterbed effect, underscores the importance of dynamic baseline revision and unified registries to prevent double counting.

The Solution

Action	Why
Periodic baseline revisions	Reflect cumulative impact of companion policies
Dynamic adjustment	Maintain scarcity and price signals
Unified registries	Prevent double counting

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Price Evolution: Three Stages of Development

The IEEFA Framework

The IEEFA identifies three stages of development for the CCTS:

Stage	Features	Price Impact
Phase 1: Initial	Introduction of CCTS, policy framework, MRV standards	Low prices, learning phase
Phase 2: Maturation	Sectoral expansion, financial market integration, offset design	Rising prices, deeper liquidity
Phase 3: Full Maturity	International positioning, full financialisation	Higher prices, global convergence

Price Expectations by Phase

Phase	Expected Price Range
Phase 1 (2026-27)	$10-15 per tonne
Phase 2 (2028-30)	$15-25 per tonne
Phase 3 (2031-33)	$25-40+ per tonne

The Key Determinants

Factor	Impact on Price Evolution
Benchmark calibration	Primary lever for scarcity
Power sector inclusion	Major demand increase
Financial participation	Liquidity and price discovery
CBAM recognition	Export demand
Companion policy coordination	Supply adjustment

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The 15-30 Year Investment Horizon

Why Long-Term Signals Matter

Communicating clear long-term targets and a predictable path for benchmark tightening is particularly important given that industrial investment decisions span 15 to 30 years. Forward guidance and well-designed stability mechanisms can help firms integrate carbon costs into long-term planning.

The IEEFA Warning

The choices made 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.

What This Means for Entities

Implication	Action
Price will rise over time	Plan for higher future prices
Investment decisions span decades	Factor carbon costs into long-term planning
Policy certainty is essential	Engage with policymakers for clear trajectories

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Price Expectations: What Entities Should Plan For

The Starting Point

Aspect	Expectation
Initial price	~$10-11.50 per tonne
Price corridor	Floor and forbearance prices
Early years	Learning phase, limited liquidity

The Medium-Term

Aspect	Expectation
2028-30	$15-25 per tonne
Drivers	Tighter targets, sector expansion
Risk	Oversupply could suppress prices

The Long-Term

Aspect	Expectation
2031-33+	$25-40+ per tonne
Drivers	Power sector inclusion, financialisation, CBAM
Risk	Policy uncertainty

Strategic Implications

Entity Type	Strategy
Obligated entities	Procure early, invest in abatement, hedge price risk
Project developers	Register early, focus on quality
Investors	Position for long-term price growth

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How Carboned.in Can Help

At Carboned.in, we help businesses understand and navigate carbon price dynamics with clarity and confidence.

Our Services

Service	What We Do
Price Intelligence	Provide price forecasts and market analysis
Price Risk Management	Develop hedging strategies
Compliance Strategy	Optimise procurement timing
Investment Advisory	Identify opportunities from price trends
Regulatory Intelligence	Stay informed of price-related developments

Why Choose Carboned.in?

Reason	Why It Matters
Legal Expertise	Led by Siddharth Gupta, Advocate, Calcutta High Court
Regulatory Knowledge	Deep understanding of price formation mechanisms
Market Intelligence	Real-time insights on price trends
End-to-End Support	From strategy to execution

Your first consultation is completely free. No obligation. Just honest advice.

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Conclusion

The price of a carbon credit is not just a number—it is a signal. A signal that guides investment, shapes strategy, and determines whether India's carbon market succeeds in its mission.

Starting low and rising over time, India's carbon price will evolve as the market matures, targets tighten, and CBAM pressures mount. The choices made over the next two to five years—on benchmark calibration, power sector inclusion, financialisation, and companion policy coordination—will shape the price trajectory for decades.

Key Takeaways

Aspect	What You Need to Know
Initial Price	~$10-11.50 per tonne
Price Corridor	Floor and forbearance prices
Key Mechanism	Benchmark calibration
Risk	Oversupply from lenient benchmarks
EU Lesson	Market Stability Reserve essential
Power Sector	Exclusion limits price discovery
Long-Term	Prices expected to rise to $25-40+

The Choice Is Yours

Option	Outcome
Understand price dynamics	Procure strategically, invest wisely, manage risk
Ignore price signals	Face higher costs, miss opportunities

How Carboned.in Can Help

At Carboned.in, we help businesses understand and navigate carbon price dynamics with clarity and confidence.

• Price Intelligence: Understand price trends and forecasts
• Price Risk Management: Develop hedging strategies
• Compliance Strategy: Optimise procurement timing
• Investment Advisory: Identify opportunities

Your first consultation is completely free. No obligation. Just honest advice.