The Climate Risk Horizons Report – Why India's Carbon Market Targets Are "Modest and Unambitious" and What It Means for Business

Introduction: A Market Under Scrutiny

India's Carbon Credit Trading Scheme (CCTS) is less than a year away from its first compliance deadline. Trading is scheduled to begin in the fourth quarter of 2026. The regulatory architecture is in place. The Indian Carbon Market Portal is operational.

But a growing chorus of critics is asking a fundamental question: Is the CCTS designed to fail?

In July 2026, Climate Risk Horizons (CRH), a research organisation, released a critical evaluation of the emission reduction targets set under India's carbon market framework. The verdict was damning: the targets are "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. For many high-margin polluters, "paying to pollute" could become a preferred business strategy.

This guide examines the debate surrounding India's carbon market targets, the criticisms levelled against them, what they mean for businesses, and the path forward.

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The Climate Risk Horizons Report: Key Findings

The Report

On 29 July 2026, Climate Risk Horizons released a report titled "Unlocking Ambition for India's Carbon Credit Trading Scheme." The report evaluated the emission reduction targets set under the CCTS and found them to be "modest and unambitious"—unlikely to drive changes in operations that would reduce emissions substantially.

The Authors

The report was authored by Anirudh T.R., who warned that "for many high-margin polluters, 'paying to pollute' could become a preferred business strategy."

The Sectors Analysed

The analysis covers targets for three industries with global significance: the iron and steel, cement, and aluminium sectors. These are among India's largest industrial emitters and the backbone of the country's manufacturing economy.

The Key Findings

Finding	Description
Weak Targets	The targets are "readily achievable" through incremental efficiency gains
Low Compliance Costs	The cost of purchasing credits is between 0.6% and 7% of profits
Oversupply Risk	Weak penalties could make it cheaper to buy credits than invest in cleaner technologies
No Deep Decarbonisation	2-5% emission cuts by 2026-27 let heavy industries rely on minor efficiency tweaks
No Systemic Shift	The current structure allows major polluters to meet their obligations through incremental efficiency gains rather than the systemic operational shifts needed to meet India's international climate pledges

The Significance

The report is significant because it comes from a credible research organisation and raises fundamental questions about the CCTS's ability to deliver meaningful emissions reductions. It has been covered by multiple media outlets and has sparked widespread debate among policymakers, industry, and civil society.

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The Numbers That Have Everyone Talking

The Steel Sector

Metric	Value
Number of steel/iron companies	255
Required reduction by 2026-27	6%
How it can be achieved	"Incremental improvements in process efficiency"

The Cement Sector

Metric	Value
Average required reduction	2-5%
How it can be achieved	Incremental efficiency gains

The Compliance Cost

Sector	Compliance Cost as % of Profits
Steel	7%
Cement	2%
Aluminium	0.6%

Source: Climate Risk Horizons analysis, assuming credit prices at $10 per tonne

The Carbon Price

Metric	Value
Projected carbon price	~$10 per tonne of CO₂ equivalent
International benchmark	EU ETS: €75+ per tonne

The Emissions Coverage

Metric	Value
Current coverage	~490 entities, ~477 million tCO₂e
Power sector emissions	~40-55% of India's GHG emissions (excluded)

What These Numbers Mean

Implication	Description
Modest Targets	The required reductions are achievable with minimal investment
Low Compliance Costs	The financial incentive to reduce emissions is weak
No Deep Decarbonisation	Companies can meet targets without significant technological change
Oversupply Risk	Surplus credits could depress prices

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The "Pay to Pollute" Problem

The Core Argument

The CRH report warns that low carbon credit prices and weak penalties could make it cheaper for companies to buy credits than invest in cleaner technologies. This creates a situation where "paying to pollute" becomes a preferred business strategy.

How It Works

Step	Description
1. Modest Targets	Companies can meet targets through incremental improvements
2. Low Penalties	The cost of non-compliance is low
3. Cheap Credits	Carbon credits are cheap (~$10/tonne)
4. Rational Choice	It is cheaper to buy credits than invest in deep decarbonisation
5. No Real Change	Emissions continue, credits are bought, and nothing fundamentally changes

Why This Is a Problem

Reason	Explanation
Greenwashing	Companies claim climate action while continuing to pollute
No Technological Shift	No investment in low-carbon technologies
Oversupply	Too many credits, prices collapse
Market Failure	The market fails its primary purpose

The High-Margin Polluter Problem

For high-margin polluters, the cost of compliance is a small fraction of profits. In steel, the compliance cost is 7% of profits. In cement, it is 2%. In aluminium, it is just 0.6%. For these companies, it is rational to continue polluting and simply buy credits.

The International Comparison

India's projected carbon price of ~$10 per tonne is far below international benchmarks. The EU ETS price is significantly higher, creating a gap that could affect Indian exporters under CBAM.

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The International Comparison: How India's Carbon Price Stacks Up

The Global Landscape

Market	Carbon Price (Approx.)
EU ETS	€75+ per tonne
India CCTS (Projected)	~$10 per tonne

The CBAM Connection

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

The Competitive Disadvantage

Implication	Description
Low Domestic Carbon Price	Indian companies face lower carbon costs domestically
High CBAM Costs	Indian exporters face high carbon costs in the EU
Competitive Gap	The gap between domestic and international carbon prices creates competitive pressure

The IEEFA Perspective

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

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 Power Sector Omission: 55% of Emissions Left Out

The Scale of the Gap

The power sector, responsible for approximately 40-55% of India's GHG emissions, is excluded from mandatory compliance and kept under voluntary participation.

Why This Matters

Reason	Explanation
Largest Emitter	The single largest source of emissions is excluded
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 International Experience

In other carbon markets, power utilities are among the most active participants. Their inclusion is essential for market liquidity and continuous price discovery. India's decision to exclude the power sector initially is a notable departure from international practice.

The IEEFA Warning

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

The Integration Challenge

As the scheme evolves, 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.

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The Governance Gap: Who Watches the Watchmen?

The Problem

The CRH report recommends an independent regulator to ensure transparent governance and accelerate investment in low-carbon technologies.

What's Missing

Element	Description
Independent Regulator	No independent body with real enforcement authority
Transparency	Limited public access to market data
Conflict of Interest	Government acts as regulator and operator

What the Critics Are Saying

Researchers recommend "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."

What Best Practice Looks Like

International best practices call for:

• Reserve price floors to prevent prices from collapsing
• Stability reserves to manage supply
• Independent regulators to ensure enforcement

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.

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The Government's Defence: Pragmatism vs. Ambition

The Official Position

The government has not formally responded to the CRH report, but its position is clear: the CCTS is a pragmatic approach that accommodates industrial growth while building on existing institutional capabilities.

The Pragmatic Argument

Argument	Description
Industrial Growth	India needs to grow its economy
Phase-in	Modest targets allow companies to adapt
Learning	The market needs time to develop
Institutional Capacity	Building MRV and enforcement capacity takes time

The Counter-Argument

Argument	Description
Climate Urgency	Emissions must be reduced urgently
Lost Opportunity	Weak targets mean lost abatement opportunities
Competitive Disadvantage	Low domestic carbon prices create CBAM exposure

The Industry Perspective

Industry representatives argue that the targets are "readily achievable" and that the transition should be gradual to avoid economic disruption.

The Real Test

The real test will be whether future compliance cycles begin to influence long-term investment decisions and accelerate the adoption of low-carbon technologies that bring about a deeper, structural shift in the sector's emissions trajectory.

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The Industry Perspective: A Measured Start or a Missed Opportunity?

What Industry Is Saying

Argument	Description
Measured Start	The CCTS is a new market, and a gradual start is appropriate
Cost Management	Modest targets keep compliance costs manageable
Investment Planning	Companies need time to plan and invest

What Critics Are Saying

Argument	Description
Missed Opportunity	Weak targets mean missed abatement opportunities
No Real Change	Companies can meet targets without significant investment
Oversupply Risk	Surplus credits could depress prices

The Middle Ground

Position	Description
Gradual Tightening	Targets should become more ambitious over time
Phased-In Inclusion	The power sector should be included in future phases
Stronger Enforcement	Penalties must be meaningful

The ICRA ESG Warning

An ICRA ESG analysis found that while FY2026 offers a transition period with manageable costs, FY2027 will significantly increase pressure. Large companies may see profits hit by carbon costs, while smaller, more efficient players could gain an advantage by cutting emissions faster.

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The Environmental Perspective: Not Nearly Enough

What Environmentalists Are Saying

Argument	Description
Not Enough	The targets are too weak to drive meaningful action
Pay to Pollute	Companies can continue polluting and buy credits
Missed Opportunity	The CCTS could have been a powerful tool

The Carbon Market Paradox

Paradox	Description
Market Mechanism	The CCTS is a market mechanism
Weak Targets	Weak targets mean weak market signals
No Incentive	Companies have no incentive to invest in deep decarbonisation

What Would Make a Difference

Change	Description
Ambitious Targets	Targets that require significant investment
Meaningful Penalties	Penalties that make non-compliance unattractive
Power Sector Inclusion	Including the largest emitter
Independent Regulator	Transparent governance and enforcement

The 2-5% Reality

The required reduction in emission intensity ranges from 2.1% to 9.3% across various types of steel entities, with a median target of around 5.5%. For cement, the average required reduction is 2-5%. These are not transformative reductions.

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What This Debate Means for Businesses

For Obligated Entities

Implication	Action Required
Low Compliance Costs	Compliance is likely to be inexpensive
No Pressure to Invest	Little incentive for deep decarbonisation
Oversupply Risk	Credits may be cheap and abundant
Future Tightening	Expect more ambitious targets in future cycles

For Project Developers

Implication	Action Required
Low Credit Prices	Low demand = low prices
Oversupply Risk	Too many credits = price collapse
Market Credibility	Weak targets undermine market credibility

For Exporters

Implication	Action Required
CBAM Exposure	Low domestic carbon prices create CBAM exposure
Competitive Disadvantage	Gap between domestic and international carbon prices
Reputational Risk	Weak carbon performance may affect reputation

The Strategic Response

Strategy	Description
Monitor Developments	Stay informed about regulatory changes
Prepare for Tightening	Expect targets to become more ambitious
Build Internal Capacity	Develop expertise in carbon management
Engage with Policymakers	Provide input on future target design

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The Path Forward: Recommendations from the Critics

Recommendation 1: More Ambitious Future Targets

Recommendation	Description
Ambitious Targets	Future compliance cycles need emission targets that strongly signal towards preventing long-term carbon lock-in
Tightening Trajectory	A predictable path for benchmark tightening

Recommendation 2: Stronger Carbon Pricing Safeguards

Recommendation	Description
Price Floor	Reserve price floors to prevent prices from collapsing
Stability Reserve	Supply adjustment mechanisms to manage oversupply
Penalties	Meaningful penalties for non-compliance

Recommendation 3: Include Major Emitters

Recommendation	Description
Power Sector Inclusion	The power sector, responsible for 40-55% of emissions, must be included
Phased Integration	A credible integration roadmap

Recommendation 4: Independent Regulator

Recommendation	Description
Independent Regulator	An independent body to ensure transparent governance
Enforcement	Real enforcement authority

Recommendation 5: Transparent Governance

Recommendation	Description
Transparency	Public access to market data
Accountability	Clear accountability mechanisms

The IEEFA Perspective

As the IEEFA report notes, "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."

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The IEEFA Perspective: Sequencing and the Window of Opportunity

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 Sequencing Principle

"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 Window of Opportunity

Over the next two to five years, choices made by regulators, policymakers, and market participants will shape how far the CCTS develops into a market capable of guiding capital-intensive industrial investment over 15- to 30-year horizons.

The Opportunity 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.

The IEEFA's 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 (CBAM)
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

Conclusion: A Market at a Crossroads

India's Carbon Credit Trading Scheme is at a crossroads. The criticisms levelled by Climate Risk Horizons and others raise fundamental questions about whether the CCTS is designed to drive real decarbonisation or merely create a paper market.

Key Takeaways

Aspect	What You Need to Know
CRH Report	Targets are "modest and unambitious"
Compliance Costs	0.6-7% of profits
Carbon Price	~$10/tonne (far below international benchmarks)
Power Sector	40-55% of emissions excluded
Pay to Pollute	Could become a preferred strategy
Way Forward	Ambitious targets, stronger safeguards, independent regulator

The Choice Is Yours

Option	Outcome
Understand the debate	Position your business for the evolving regulatory landscape
Ignore the debate	Face higher costs, missed opportunities, competitive disadvantage