The ICRIER SETU Framework – How India's Carbon Market Will Impact Economic Growth, Trade, and Competitiveness

Introduction: Beyond Carbon – The Economic Implications

India's Carbon Credit Trading Scheme (CCTS) is often discussed in environmental terms: emission reductions, carbon pricing, and climate action. But there is another dimension that is equally important—the economic dimension.

The CCTS will have profound implications for economic growth, sectoral output, employment, trade, and competitiveness. As the Indian Council for Research on International Economic Relations (ICRIER) has noted, understanding these implications is essential for designing a market that delivers climate action without undermining economic development.

The ICRIER study, "Simulating Emissions Trading: a Unified Framework (SETU)," aims to assess the economy-wide impacts of the CCTS on economic growth, sectoral output, employment, trade, and competitiveness. India notified the Carbon Credit Trading Scheme (CCTS) 2023 to establish the legal framework for a national carbon market, supporting the country's transition to a low-carbon economy.

The stakes are high. 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 CCTS compliance covers nine 'hard-to-abate' sectors: iron and steel, cement, aluminium, fertilisers, petrochemicals, textiles, pulp and paper, chlor-alkali, and refineries, which together contribute roughly 15–20 per cent of India's total greenhouse gas emission.

This guide examines the economic implications of India's carbon market, drawing on the ICRIER SETU framework and other analyses, and what they mean for businesses and policymakers.

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What Is the ICRIER SETU Framework?

The Study

The ICRIER study, "Simulating Emissions Trading: a Unified Framework (SETU)," is a comprehensive analysis of the economy-wide impacts of the CCTS. The proposed study aims to:

• Assess the economy-wide impacts of the CCTS on economic growth
• Analyse sectoral output impacts
• Evaluate employment implications
• Assess trade and competitiveness impacts
• Inform policy design

The Timing

The study is being conducted during a critical period: August 2026 - February 2027. The findings will inform policy decisions as the CCTS moves into its operational phase.

The Context

India notified the Carbon Credit Trading Scheme (CCTS) 2023 to establish the legal framework for a national carbon market, supporting the country's transition to a low-carbon economy. The CCTS adopts a baseline-and-credit system with facility-level intensity targets, allowing emissions to scale with economic growth while rewarding firms that outperform their benchmarks.

The Research Questions

The SETU framework seeks to answer critical questions:

Question	Why It Matters
How will the CCTS affect economic growth?	Growth is a key policy priority
Which sectors will be most affected?	Sectoral impacts vary significantly
What are the employment implications?	Jobs are a critical concern
How will the CCTS affect trade competitiveness?	Exporters face carbon border taxes
What policy adjustments are needed?	Design choices matter

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The CCTS and Economic Growth: A Balancing Act

The Growth-Emissions Trade-off

India faces a fundamental challenge: how to continue economic growth while reducing emissions. The CCTS adopts an intensity-based approach—linking emissions targets to output rather than imposing absolute caps. This accommodates economic growth while creating incentives for efficiency.

The Intensity-Based Design

The intensity-based design means that allowable emissions rise alongside production output, meaning both credit supply and demand can increase simultaneously. This is a pragmatic approach for an emerging economy that needs to grow.

The CCTS Compliance Sectors

The CCTS compliance covers nine 'hard-to-abate' sectors: iron and steel, cement, aluminium, fertilisers, petrochemicals, textiles, pulp and paper, chlor-alkali, and refineries, which together contribute roughly 15–20 per cent of India's total greenhouse gas emission.

The Growth Impact

Factor	Impact on Growth
Compliance Costs	Reduce profitability and investment
Technology Investment	Can drive innovation and productivity
Carbon Revenue	Surplus credits create new revenue streams
Export Competitiveness	CBAM exposure affects exports

The ICRIER Assessment

The ICRIER study will assess the economy-wide impacts of the CCTS on economic growth. The findings will be critical for understanding whether the CCTS can deliver climate action without undermining economic development.

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Sectoral Output Impacts: Winners and Losers

The Hard-to-Abate Sectors

The CCTS covers nine 'hard-to-abate' sectors:

Sector	Share of India's GHG Emissions	Reduction Required
Iron and Steel	Significant	2.1-9.3%
Cement	Significant	4.7-7.6%
Aluminium	Moderate	2.8-7.06%
Fertilisers	Moderate	~25 MtCO₂/year
Petrochemicals	Moderate	Notified targets
Textiles	Moderate	3-7%
Pulp and Paper	Moderate	Up to 15%
Chlor-Alkali	Small	3.3-11%
Refineries	Significant	Notified targets

The Sectoral Impact

Sector	Impact	Reason
Cement	High	Process emissions, hard-to-abate
Steel	High	High emissions intensity, CBAM exposure
Aluminium	Medium-High	Energy-intensive, CBAM exposure
Fertiliser	Medium	Ammonia emissions, green hydrogen opportunity
Refineries	Medium	Complex emissions, hydrogen opportunity
Textiles	Medium	Moderate emissions, growing pressure

The Output Implications

Factor	Impact
Compliance Costs	Reduce profitability, potentially output
Technology Investment	Can improve productivity and competitiveness
Carbon Revenue	Surplus credits create new revenue streams
Export Competitiveness	CBAM exposure affects exports

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Employment Implications: Jobs in the Transition

The Employment Challenge

The transition to a low-carbon economy will have significant employment implications. Some sectors will lose jobs; others will gain jobs. The net impact depends on policy design and the pace of transition.

The Employment Impact by Sector

Sector	Employment Impact
High-Carbon Industries	Potential job losses as emissions are reduced
Renewable Energy	Significant job creation
Energy Efficiency	Job creation in retrofitting and consulting
Carbon Markets	New jobs in trading, verification, advisory
Green Hydrogen	New jobs in production and infrastructure

The ICRIER Assessment

The ICRIER study will assess the employment implications of the CCTS. This is critical for understanding how to manage the transition and ensure that no one is left behind.

The Just Transition Imperative

Just Transition is the principle that the transition to a low-carbon economy should be fair and inclusive, ensuring that no one is left behind. This is particularly important for coal-dependent regions and industrial workers.

The Union Budget 2026 Allocation

The Union Budget 2026 allocated ₹20,000 crore for Carbon Capture and Utilisation (CCU) in hard-to-abate sectors, indicating a focus on transitioning these sectors while protecting jobs.

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Trade and Competitiveness: The CBAM Connection

The CBAM Reality

India's steel and aluminium exports to the European Union (EU) fell 24.4% in financial year (FY) 2025, declining from USD 7.71 billion in FY24 to USD 5.82 billion in FY25. Indian steel and aluminium exports are likely to face a major competitiveness challenge starting January 1, 2026, as the EU's CBAM shifts from a reporting-only phase to a regime linked to actual payments.

The Price Pressure

Indian steel and aluminium exporters to the EU market have been forced to cut prices by 15-22 per cent to absorb the tax burden since January 1, 2026.

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.

The Export Response

Indian steel exports surged by 36 percent year-on-year in the first 10 months of FY2026, primarily driven by frontloading of shipments to the EU before CBAM took effect. This frontloading is a temporary response, not a sustainable strategy.

The ICRIER Assessment

The ICRIER study will assess trade and competitiveness impacts of the CCTS. This is critical for understanding how to protect India's export competitiveness in a carbon-constrained world.

The Strategic Imperative

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 retained at home.

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The Hard-to-Abate Sectors: Where the Impact Is Greatest

Cement

Cement manufacturing is one of the most carbon-intensive industrial processes. Approximately 60% of cement emissions come from the chemical process itself—the calcination of limestone into clinker releases CO₂ as a byproduct. Even if a cement plant switches entirely to renewable energy, it still cannot eliminate its core process emissions.

Steel

India has notified draft emission-intensity targets for 255 iron and steel units under the CCTS. As of 2023-24, the average emission intensity per tonne of crude steel produced in India was 2.54 tonnes of CO₂, while the global average stands at 1.9 tonnes of CO₂.

Fertiliser

The fertiliser sector emits approximately 25 million tonnes of CO₂ annually, with 95% of these emissions coming from ammonia production. Green hydrogen offers a transformative solution.

The Decarbonisation Pathways

Sector	Primary Pathways
Cement	Blended cement, alternative fuels, CCUS
Steel	Scrap-based EAF, green hydrogen DRI, CCUS
Fertiliser	Green hydrogen, energy efficiency
Refineries	Green hydrogen, energy efficiency, CCUS

The Role of Carbon Credits

For these hard-to-abate sectors, carbon credits will play a critical role in managing residual emissions while long-term technological solutions are developed and scaled.

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The Power Sector Exclusion: A Significant Gap

The Scale of the Gap

The power sector accounts for nearly 40% of India's greenhouse gas emissions but remains outside the initial CCTS 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 Integration Challenge

As the CCTS matures, future integration of the power sector will benefit from careful consideration of electricity market regulation, dispatch decisions, and cost recovery mechanisms.

The Impact on Economic Analysis

The power sector exclusion means that the ICRIER SETU framework must account for this significant gap in its economic modelling. The economic impacts of the CCTS are incomplete without considering the power sector.

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The Investment Requirements: Trillions, Not Billions

The Scale of Investment Needed

India's transition to net-zero will require trillions of dollars in investment across energy, industry, transport, and agriculture. The carbon market alone cannot finance this transition, but it can mobilise private capital and create price signals that guide investment decisions.

The Carbon Market Contribution

The India carbon credit market is estimated to be valued at USD 5.90 billion in 2026, surging to USD 66.79 billion by 2033—a CAGR of 41.4%.

The Investment Opportunity

Sector	Investment Need
Renewable Energy	Trillions for solar, wind, and storage
Industrial Decarbonisation	Billions for efficiency, fuel switching, CCUS
Green Hydrogen	Significant investment in production and infrastructure
Carbon Removal	Billions for nature-based and technological removals

The Union Budget 2026 Allocation

The Union Budget 2026 allocated ₹20,000 crore for Carbon Capture and Utilisation (CCU) in hard-to-abate sectors, indicating a focus on transitioning these sectors.

The Role of Financial Institutions

Financial intermediation is what eventually turns a compliance market into one with continuous price discovery and hedging. The legal framework for it already exists in India.

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The Role of Technology in Mitigating Economic Impacts

Digital MRV

Digital MRV (dMRV) using AI, IoT sensors, and blockchain will reduce the cost and improve the accuracy of emissions monitoring and verification. This will lower compliance costs and improve market efficiency.

AI for Carbon Estimation

Machine learning is being used to estimate emissions and carbon sequestration with greater accuracy than traditional methods. This reduces uncertainty and improves market confidence.

Blockchain for Transparency

Blockchain technology will play an increasing role in ensuring transparency, preventing double counting, and building trust in carbon credits.

Clean Technology Investment

Investment in clean technologies—green hydrogen, CCUS, renewable energy, and energy efficiency—will reduce compliance costs and improve competitiveness.

The ICRIER Assessment

The ICRIER SETU framework will assess how technology can mitigate the economic impacts of the CCTS.

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The International Experience: Learning from Others

The EU Experience

The EU ETS spent its first decade plagued by oversupply and weak price signals. The recovery came only after structural reforms, notably the Market Stability Reserve. India can learn from the EU's experience and embed a stability mechanism from the start.

The China Experience

China's national ETS initially focused on the power sector, recognising its importance for market development. Like India's CCTS, China's ETS initially adopted an intensity-based approach.

The California Experience

California's cap-and-trade program demonstrates the potential for linking carbon markets across jurisdictions and expanding sectoral coverage over time.

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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Policy Recommendations: What Needs to Change

Recommendation 1: Strengthen Enforcement

Action	Why It Matters
Independent Regulator	Real enforcement authority
Meaningful Penalties	Penalties must deter non-compliance
Consistent Enforcement	No exceptions, no delays

Recommendation 2: Implement a Price Stability Mechanism

Action	Why It Matters
Price Floor	Prevents price collapse
Supply Adjustment	Automatic supply adjustment
Market Stability Reserve	Limits oversupply

Recommendation 3: Include the Power Sector

Action	Why It Matters
Power Sector Integration	Complete the carbon price signal
Regulatory Coordination	Align carbon and electricity regulation

Recommendation 4: Support Affected Sectors

Action	Why It Matters
Just Transition	Protect workers and communities
Technology Investment	Support low-carbon technology deployment
Capacity Building	Build technical capacity

Recommendation 5: Strengthen the CBAM Response

Action	Why It Matters
CCTS-Calibration	Domestic carbon costs credited at the border
FTA Engagement	Leverage the India-EU FTA CBAM annexure

Conclusion: Managing the Transition

India's Carbon Credit Trading Scheme will have profound economic implications. The ICRIER SETU framework is essential for understanding these implications and designing policies that deliver climate action without undermining economic development.

Key Takeaways

Aspect	What You Need to Know
ICRIER SETU	Economy-wide impacts of CCTS
Sectors Covered	9 hard-to-abate sectors, 15-20% of emissions
CBAM Impact	24.4% export decline in FY 2025
Power Sector	40% of emissions excluded
Market Size	USD 5.90B in 2026, USD 66.79B by 2033

The Choice Is Yours

Option	Outcome
Understand the economic implications	Position your business for success, capitalise on opportunities
Ignore the economic implications	Face higher costs, missed opportunities, competitive disadvantage