The Road Ahead for India's Carbon Credit Trading Scheme – Critical Design Choices That Will Determine Success or Failure

Introduction: A Decisive Moment for India's Carbon Market

India's Carbon Credit Trading Scheme (CCTS) is entering a decisive period. With compliance obligations now in effect for approximately 490 entities across seven energy-intensive sectors, the initial architecture of the market — comprising intensity-based targets, baseline-and-credit allocation framework, facility-level benchmarks, and a price corridor — has been laid down.

But the easy part is over. The next phase will now be defined by more consequential questions. How will the market deepen its liquidity and attract the participants needed for robust price discovery? How can the power sector, which accounts for roughly 40% of national emissions, be brought within the compliance boundary without creating new conflicts with electricity tariff regulation? What role should offset mechanisms and international carbon credits play, and at what point?

These are not hypothetical questions. They are design choices that regulators, policymakers, and market participants will confront over the next two to five years. The answers will determine whether the CCTS produces a carbon price signal strong enough to guide capital-intensive industrial investment over 15- to 30-year horizons, or whether it settles into an administrative compliance exercise with limited influence on India's decarbonisation trajectory.

As the Institute for Energy Economics and Financial Analysis (IEEFA) notes in its recent report, "The road ahead for India's Carbon Credit Trading Scheme," determining the CCTS's 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 monitoring, reporting, and verification (MRV), and genuine enforcement.

This guide provides a comprehensive analysis of the critical design choices facing India's CCTS, drawing on the latest IEEFA research, international experience, and India's own PAT legacy.

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The Current State of Play: Where the CCTS Stands Today

Compliance Obligations Are in Force

As of fiscal year 2025–26 (starting 1 April 2025), compliance obligations under the CCTS are in force for approximately 490 entities across seven energy-intensive sectors, following the notification of greenhouse gas (GHG) emission intensity targets by the Ministry of Environment, Forest and Climate Change (MoEFCC).

The targets were notified in two phases:

• Phase 1 (October 2025): Aluminum, cement, chlor-alkali, and pulp and paper
• Phase 2 (January 2026): Petroleum refining, petrochemicals, and textiles

All targets are notified at the sub-sector level. Covered entities now have legally binding GHG emission intensity targets for the compliance years 2025–26 and 2026–27, using fiscal year 2023–24 as the baseline. Compliance obligations apply retroactively, with the first compliance date on July 31, 2026 for the 2025-26 compliance year.

The Indian Carbon Market Portal

On 21 March 2026, Power Minister Manohar Lal Khattar launched the Indian Carbon Market Portal at the Prakriti 2026 International Conference on Carbon Markets in New Delhi. The portal serves as the central digital backbone of the Indian Carbon Market, enabling end-to-end processes from entity registration to the issuance of CCCs, including validation, verification, and accreditation of third-party monitoring, reporting, and verification (MRV) bodies.

The platform is designed to serve both obligated and non-obligated entities and includes provisions for interacting with international carbon markets under Article 6 of the Paris Agreement, allowing project developers to register activities intended for cross-border crediting.

The CERC CCC Regulations

The Central Electricity Regulatory Commission (CERC) has notified the CERC (Terms and Conditions for Purchase and Sale of Carbon Credit Certificates) Regulations, 2026, providing the rulebook for buying and selling Carbon Credit Certificates (CCCs) under India's CCTS.

Under the new framework, CCCs will be traded primarily through recognised power exchanges, with provisions for other modes subject to regulatory approval. The market will be divided into two segments – a compliance market for obligated entities and an offset market for non-obligated entities. Pricing of CCCs will be market-driven through power exchanges, but within a regulatory band defined by floor and forbearance prices approved by the Commission to prevent excessive volatility.

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The IEEFA Framework: Four Themes That Will Shape the CCTS

A new report by the Institute for Energy Economics and Financial Analysis (IEEFA), produced in collaboration with the Environmental Defense Fund (EDF), maps the trajectory of this next phase and makes recommendations on the decisions that will shape the scheme's trajectory.

The analysis is structured around four interconnected themes:

Theme 1: Financial Market Participation

Financial intermediaries — whose presence will be critical to improve liquidity and continuous price discovery — can be brought into the market through well-designed market-making rules and oversight. Such participants account for roughly 65% of secondary market activity in the EU Emissions Trading System (ETS).

Theme 2: The Design Choices India Faces in Responding to Border Carbon Costs

CBAM is the most prominent of these border carbon costs. Irrespective of the ongoing international discussions around CBAM, a credible domestic carbon market can strengthen India's long-term industrial competitiveness. 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.

Theme 3: Sectoral Expansion

The power sector, which accounts for roughly 40% of national emissions, sits outside the initial compliance boundary. Its eventual integration will require careful attention to electricity market regulation, dispatch decisions, cost recovery, and regulatory coordination.

Theme 4: Managing Offsets and Article 6 Opportunities

India must manage offsets and Article 6 opportunities while safeguarding the integrity of its carbon market and sovereign mitigation goals.

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Theme 1: Financial Market Participation and Liquidity

The Importance of Financial Intermediaries

Financial intermediaries matter for what they make possible: continuous price discovery and the hedging that gives firms confidence to commit to large decarbonisation investments over long horizons. A market that only settles positions around compliance deadlines would struggle to provide that.

As Saurabh Trivedi, co-author of the IEEFA report and Lead Specialist, Sustainable Finance and Carbon Markets at IEEFA, South Asia, notes: "Every major Emissions Trading System (ETS) began with compliance entities only. The CCTS is right to do the same. The precondition for financial intermediaries' inclusion is genuine scarcity and credible enforcement, and that is what the CCTS needs to establish first."

The Korea and PAT Lessons

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. 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 Legal Framework Already Exists

The legal framework for financial intermediation already exists in India and can be designed into the system now for activation once the market's foundations are established.

Continuous Price Discovery

Financial intermediation is what eventually turns a compliance market into one with continuous price discovery and hedging. The CCTS is well placed to follow the path of every major emissions trading system, which has begun with compliance entities only.

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Theme 2: Responding to Border Carbon Costs (CBAM)

The CBAM Reality

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 Carbon Border Adjustment Mechanism (CBAM) financial obligation had taken effect. The decline, which suggests European buyers are already reorienting toward lower-emission producers, underscores what is at stake as India's CCTS enters its operational phase.

A Credible Domestic Carbon Market

Irrespective of the ongoing international discussions around CBAM, a credible domestic carbon market can strengthen India's long-term industrial competitiveness.

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 CBAM Annexure

The India-EU Free Trade Agreement includes a dedicated annexure dealing exclusively with CBAM-related issues. The annexure includes provisions covering verification processes, calculation of embedded carbon emissions, and engagement with EU authorities to ease compliance for smaller exporters.

The Carbon Price Offset Mechanism

Discussions are underway on India's emerging carbon pricing framework to ensure that domestic carbon costs can potentially be offset against CBAM liabilities in Europe. "As you know, India is also developing its own carbon pricing mechanism. So, how to offset what is paid in India from what is paid in Europe is also part of the discussions," said Darpan Jain, Additional Secretary in the Department of Commerce.

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Theme 3: Sectoral Expansion and the Power Sector Question

The Scale of the Gap

The power sector accounts for roughly 40% of national emissions and sits outside the initial compliance boundary. Its exclusion simplifies implementation while recognising the complexities of electricity market regulation.

The Integration Challenge

Future integration will call for a view of where carbon pricing fits among the measures available for the sector, alongside careful consideration of electricity market regulation, dispatch decisions, cost recovery mechanisms, and regulatory coordination, drawing on international experience.

The Regulatory Hurdle

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. Carbon cost recognition would need to be coordinated across the CERC and state electricity regulatory commissions.

Without the Power Sector

Without a credible integration roadmap, the CCTS will lack the primary channel through which carbon pricing shapes energy investment.

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Theme 4: Offsets and Article 6 Opportunities

The Article 6 Framework

Article 6 of the Paris Agreement provides for cooperative approaches to climate action, including internationally transferred mitigation outcomes (ITMOs) and cross-border crediting. The Indian Carbon Market Portal includes provisions for interacting with international carbon markets under Article 6.

The Offset Mechanism

The CCTS includes an offset mechanism that allows non-obligated entities to participate voluntarily. The challenge is managing offsets so they do not flood the market with credits and weaken incentives for real emissions reductions.

Safeguarding Integrity

India must manage offsets and Article 6 opportunities while safeguarding the integrity of its carbon market and sovereign mitigation goals.

The Australia Precedent

In Australia, the inclusion of international offset units in the carbon pricing mechanism contributed to a collapse in domestic prices and undermined the credibility of the scheme. India can learn from this experience.

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The PAT Precedent: Learning from India's Own Experience

The PAT Scheme

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 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 Lesson for CCTS

The lesson from PAT is clear: market depth and price signals depend first on whether targets create genuine compliance pressure, and then on whether that pressure is consistently maintained.

What CCTS Must Do Differently

PAT Failure	What CCTS Must Do Differently
Surplus of certificates	Ambitious targets that create genuine scarcity
Weak price signals	Transparent price discovery and meaningful price bands
Limited compliance pressure	Credible penalties and enforcement
Poor institutional oversight	Independent regulator with real authority

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The International Experience: Lessons from Korea, China, and the EU

The Korea ETS 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 China ETS Experience

China's national ETS, the world's largest, has faced challenges with data quality, verification, and enforcement. The lesson: robust MRV systems are essential from the start.

The EU ETS Experience

The European Union Emissions Trading System (EU ETS) — the world's oldest and largest carbon market — spent its first decade plagued by oversupply and weak price signals. Prices crashed to near-zero in the early years, providing little incentive for industries to invest in decarbonisation.

The recovery came only after structural reforms, notably the Market Stability Reserve (MSR) , which replaced ad-hoc interventions with automatic supply correction. This reform took years to implement, during which time billions of euros of abatement opportunities were foregone.

The Australia Precedent

In Australia, the inclusion of international offset units in the carbon pricing mechanism contributed to a collapse in domestic prices and undermined the credibility of the scheme.

The Lesson for India

India has the advantage of learning from the costly missteps of earlier movers. The CCTS can avoid the oversupply, weak price signals, and enforcement failures that have challenged carbon markets worldwide.

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The Three Stages of CCTS Development

The IEEFA report identifies three stages of CCTS development:

Phase 1: Initial Stage (2026-2027)

• Introduction of CCTS and compliance obligations
• Deciding the policy framework and shaping design options
• Examining market design options such as price and supply adjustment mechanisms
• Establishing credible MRV standards

Phase 2: Future Directions and Market Maturation (2028-2030)

• Expanding sectoral scope (for example, inclusion of new industries)
• Integrating financial markets (for example, deepening liquidity, price discovery, risk management tools)
• Designing role of offsets and external credits (for example, domestic and international mitigation interactions)
• Positioning in international architecture (for example, Article 6 of the Paris Agreement, and CBAM)

Phase 3: Foundational Design Changes (2030+)

• Transition to absolute emissions cap
• Introduction of auctioning and competitive allocation of allowances

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Phase 1: The Initial Stage (2026-2027)

Priority: Foundational Elements

Priority should go to foundational elements: credible stringency, robust MRV, and genuine enforcement.

The Price and Supply Adjustment Mechanism

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 Banking Provision

The CCTS allows entities to bank surplus CCCs across compliance cycles, offering flexibility to manage production volatility and cost uncertainties. However, unlimited banking can also lead to surplus accumulation that depresses prices.

The No-Borrowing Rule

The CCTS does not allow borrowing, which reinforces the importance of banking as the only intertemporal flexibility mechanism.

The Initial Price Signal

A preliminary market-clearing carbon price of around $11.48 per credit has been suggested under baseline assumptions. Industry estimates indicate the initial phase should start at about $10 per metric ton of CO₂e.

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Phase 2: Market Maturation (2028-2030)

Expanding Sectoral Scope

The CCTS is expected to expand to additional sectors and entities beyond the current nine. The iron and steel sector (255 units) has already been covered by a draft notification. The fertilizer sector is pending.

Integrating Financial Markets

Financial intermediaries will be critical to improve liquidity and continuous price discovery. The legal framework for it already exists in India and can be designed into the system now for activation once the market's foundations are established.

The Role of Offsets

India must manage offsets and Article 6 opportunities while safeguarding the integrity of its carbon market and sovereign mitigation goals.

Positioning in International Architecture

India must position the CCTS to withstand scrutiny under the EU's CBAM while advancing its own strategic interests under Article 6 of the Paris Agreement.

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Phase 3: Foundational Design Changes (2030+)

Transition to Absolute Emissions Cap

The intensity-based design is a pragmatic approach for the initial phase, accommodating India's industrial growth trajectory. However, as the market matures, a transition to an absolute emissions cap may be necessary to deliver deeper emissions reductions.

Introduction of Auctioning

The introduction of auctioning and competitive allocation of allowances would create a more direct price signal and generate revenue for the government.

The Benchmark Calibration Challenge

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 Long-Term Investment Horizon

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.

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The Price Formation Challenge: Why Getting It Right Matters

The Intensity-Based Design

The CCTS regulates emissions intensity rather than imposing an absolute cap like in the EU-ETS, meaning aggregate allowable emissions will scale with output. This accommodates India's industrial growth trajectory but creates a structural tension at the heart of price formation.

The Output Growth Paradox

Output expansion simultaneously generates carbon credit supply from efficient firms outperforming their benchmarks, and credit demand from less-efficient firms falling short. 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.

The Output-Based Allocation Problem

Output-based allocation (OBA) 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.

The Ex-Post Issuance Problem

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 Benchmark Calibration Challenge

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.

What Credible Scarcity Requires

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

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The CBAM Connection: Why a Credible Domestic Carbon Market Matters

The Export Decline

India's steel and aluminium exports to the EU fell 24.4% in FY 2025, with steel alone down 35.1%, before any CBAM financial obligation had taken effect.

The CBAM Financial Liability

The EU's Carbon Border Adjustment Mechanism applies full financial liability from January 2026. The FTA does not change that.

The Sectoral Exposure

The sectors facing the sharpest exposure right now are steel and aluminium. Cement, fertilisers and hydrogen are also exposed as obligations expand post-2025.

The Strategic Imperative

A credible domestic carbon market can strengthen India's long-term industrial competitiveness, regardless of how discussions on the EU's CBAM evolve.

The Carbon Price Offset

Discussions are underway on India's emerging carbon pricing framework to ensure that domestic carbon costs can potentially be offset against CBAM liabilities in Europe.

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How Carboned.in Can Help

At Carboned.in, we help businesses navigate the CCTS with clarity and confidence — regardless of how the design choices evolve.

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 design choices and enforcement developments
Legal Documentation	Draft watertight agreements and handle regulatory filings
Policy Monitoring	Track regulatory changes and market developments

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 international experience
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.

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Conclusion

India's Carbon Credit Trading Scheme is entering a decisive period. The initial architecture has been laid down, but the next phase will be defined by more consequential design choices. The window to shape these choices is open before path dependencies harden.

Key Takeaways

Aspect	What You Need to Know
Current Status	490 entities covered, compliance in force from FY2025-26
First Deadline	July 31, 2026
Key Challenge	Balancing growth with credible stringency
Critical Design Choices	Financial market participation, CBAM response, sectoral expansion, offsets
The PAT Lesson	Genuine compliance pressure is essential
The CCTS Stages	Initial (2026-27), Maturation (2028-30), Foundational (2030+)

The Choice Is Yours

Option	Outcome
Understand the design choices	Navigate the market effectively, capitalise on opportunities
Ignore the design choices	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.

• Compliance Assessment: Understand your obligations
• Gap Analysis: Calculate your shortfall
• Credit Procurement: Buy CCCs at the best price
• Regulatory Advisory: Stay informed about design choices
• Legal Documentation: Ensure regulatory compliance

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