The IEEFA Framework for India's Carbon Market – Why Price Stability and Design Choices Will Define the CCTS's Success
Introduction: A Defining Moment for India's Carbon Market
India's Carbon Credit Trading Scheme (CCTS) has transitioned from policy design to implementation. Compliance obligations are in force. The Indian Carbon Market Portal is operational. Trading is about to begin.
But the easy part is over.
As the Institute for Energy Economics and Financial Analysis (IEEFA) notes, determining the CCTS's trajectory now is about 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.
A new IEEFA report, "The road ahead for India's Carbon Credit Trading Scheme," 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:
- Financial market participation
- The design choices India faces in responding to border carbon costs, of which CBAM is the most prominent
- Sectoral expansion, including the implications of incorporating the power sector
- Managing offsets and Article 6 opportunities
The IEEFA has also emphasised that "getting the price signal right early is key to the credibility of India's carbon market". India's CCTS reflects a pragmatic approach to carbon market design. It accommodates industrial growth while building on existing institutional capabilities.
This guide provides a comprehensive analysis of the IEEFA framework, the critical design choices facing India's carbon market, and what they mean for businesses and policymakers.
The IEEFA's Core Argument: Learning from Global Experience
The Opportunity
With its CCTS set to begin compliance in 2026, India has an opportunity to learn from international experience and embed market stability mechanisms, avoiding the costly corrections that have challenged compliance carbon markets worldwide.
The IEEFA argues that India has a unique opportunity to design a durable and credible carbon market from the outset—one that avoids the pitfalls experienced by other global emissions trading systems.
The Risk of Inaction
India's CCTS lacks a dedicated pilot phase – a feature of many ETSs that allows early learning before full-scale operations – making stability mechanisms even more critical. Without these mechanisms, the CCTS risks repeating the costly mistakes of other carbon markets.
The Core Recommendations
The first IEEFA paper, 'Strengthening India's carbon market' (October 2025), argued that CCTS should embed a price or supply adjustment mechanism — comprising consignment auctions, vintage-based credit classification, and a price corridor — from the outset.
The subsequent report, 'Potential drivers of carbon price formation in the CCTS: Design and market dynamics in the Indian carbon market,' analyses how carbon prices will take shape in India's intensity-based emissions trading system, covering seven sectors and more.
The Four Themes
The analysis is structured around four interconnected themes that will shape the CCTS's trajectory:
| Theme | Description |
|---|---|
| 1. Financial Market Participation | When and how financial intermediaries can be brought into the market |
| 2. Responding to Border Carbon Costs | The design choices India faces in responding to CBAM |
| 3. Sectoral Expansion | Including the implications of incorporating the power sector |
| 4. Managing Offsets and Article 6 | Managing offsets and Article 6 opportunities while safeguarding integrity |
The Three Stages of CCTS Development
The IEEFA report identifies three stages of CCTS development:
Phase 1: Initial Stage (2026-2027)
| Element | Description |
|---|---|
| Introduction of CCTS | Compliance obligations in force for 490+ entities |
| Policy Framework | Deciding design options and examining market design options such as price and supply adjustment mechanisms |
| MRV Standards | Establishing credible monitoring, reporting, and verification standards |
Phase 2: Future Directions and Market Maturation (2028-2030)
| Element | Description |
|---|---|
| Expanding Sectoral Scope | Inclusion of new industries |
| Integrating Financial Markets | Deepening liquidity, price discovery, risk management tools |
| Offsets and External Credits | Domestic and international mitigation interactions |
| International Architecture | Article 6 and CBAM positioning |
Phase 3: Foundational Design Changes (2030+)
| Element | Description |
|---|---|
| Transition to Absolute Emissions Cap | Moving from intensity-based to absolute cap |
| Introduction of Auctioning | Competitive allocation of allowances |
The report notes that every major emissions trading system (ETS) has begun with compliance entities only, and the CCTS is well placed to do the same. Financial intermediation is what eventually turns a compliance market into one with continuous price discovery and hedging.
Phase 1: The Initial Stage (2026-2027)
Current Status
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. The compliance mechanism presently covers Aluminium, Cement, Chlor-Alkali, Fertilizer, Iron & Steel, Petrochemical, Petroleum Refinery, Pulp & Paper and Textile sector. The targets were notified in two phases:
| Phase | Sectors | Entities | Date |
|---|---|---|---|
| Phase 1 | Aluminium, Cement, Chlor-Alkali, Pulp and Paper | ~282 | October 2025 |
| Phase 2 | Petroleum Refining, Petrochemicals, Textiles | ~208 | January 2026 |
Key Milestones
| Milestone | Date |
|---|---|
| Compliance Obligations in Force | April 1, 2025 |
| First Compliance Deadline | July 31, 2026 |
| Indian Carbon Market Portal Launch | March 21, 2026 |
| First CCC Trading | Q4 2026 |
Critical Design Decisions
| Decision | Why It Matters |
|---|---|
| Price and Supply Adjustment Mechanism | Prevents costly corrections |
| Credible MRV Standards | Ensures market integrity |
| Benchmark Calibration | Determines scarcity |
The IEEFA Warning
"Getting the price signal right early is key to the credibility of India's carbon market". The report emphasises that priority should go to foundational elements: credible stringency, robust MRV, and genuine enforcement.
Phase 2: Future Directions and 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 fertiliser sector is pending.
Integrating Financial Markets
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. The legal framework for it already exists in India.
Offsets and External Credits
The role of offsets and external credits must be carefully designed to maintain market integrity. The IEEFA report cautions against rushing offsets.
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.
The Power Sector Integration
The power sector accounts for nearly 40% of India's greenhouse gas emissions but remains outside the initial CCTS compliance boundary. Its eventual integration will require careful attention to electricity market regulation, dispatch decisions, cost recovery, and regulatory coordination.
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.
International Experience
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.
Theme 1: Financial Market Participation
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.
The Precondition for Inclusion
Every major emissions trading system (ETS) has begun with compliance entities only, and the CCTS is well placed to do the same. The precondition for financial intermediaries' inclusion is genuine scarcity and credible enforcement.
The IEEFA Recommendation
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.
The Three Types of Financial Participants
| Type | Role | Timing |
|---|---|---|
| Brokers | Connect buyers and sellers | Phase 2 |
| Banks | Lend against carbon assets | Phase 2 |
| Investment Funds | Invest in carbon credits | Phase 2-3 |
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% in financial year (FY) 2025, declining from USD 7.71 billion in FY24 to USD 5.82 billion in FY25. India's 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. CBAM allows deductions if exporters can prove they have already paid a domestic carbon price equivalent to the EU ETS. In practical terms, that means Indian exporters cannot meaningfully offset CBAM liabilities with domestic carbon payments.
The Strategic Imperative
Irrespective of the ongoing international discussions around CBAM, 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.
The EU Export Fall
The development comes as India's compliance carbon market under the CCTS moves into its operational phase. The IEEFA report highlights decline in steel and aluminium exports to the EU ahead of CBAM implementation and outlines key policy priorities for strengthening India's Carbon Credit Trading Scheme.
The India-EU FTA CBAM Annexure
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 and the Power Sector Question
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. Its exclusion simplifies implementation while recognising the complexities of electricity market regulation.
The Integration Challenge
Its eventual integration will require careful attention to electricity market regulation, dispatch decisions, cost recovery, and regulatory coordination. 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 IEEFA Warning
Without a credible integration roadmap, the CCTS will lack the primary channel through which carbon pricing shapes energy investment.
The Expansion Path
| Phase | Sectors | Entities | Emissions | Timeline |
|---|---|---|---|---|
| Phase 1 | Aluminium, Cement, Chlor-Alkali, Pulp & Paper | 282 | ~200 MtCO₂e | October 2025 |
| Phase 1b | Petroleum Refining, Petrochemicals, Textiles | 208 | ~277 MtCO₂e | January 2026 |
| Phase 2a | Iron and Steel | 255 | ~358 MtCO₂e | Draft June 2026 |
| Phase 2b | Fertiliser | ~35+ | ~25 MtCO₂e | Pending |
| Phase 3 | Power Sector | TBD | ~40% of emissions | 2028-2030+ |
The CCTS Compliance Coverage
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.
Theme 4: Managing Offsets and Article 6 Opportunities
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.
Article 6 Opportunities
India is exploring Article 6 opportunities while safeguarding the integrity of its carbon market and sovereign mitigation goals. The Article 6 pathway theoretically appears to be conceived, but it presents significant design and implementation challenges for India's CCTS. Firstly, it inherently entails dilution risks of integrating offsets early in the design mechanism of domestic ETS.
The IEEFA Caution
The IEEFA report cautions against rushing offsets. More advanced features should be designed early but introduced only as the market matures.
The Lesson from 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 Sequencing Principle
Offsets and Article 6 opportunities should be designed early but introduced only as the market matures, ensuring that the domestic market establishes credibility before engaging with international markets.
The Price Formation Challenge: Why India's Carbon Price Could Collapse
The Risk of Low Prices
A key concern is the risk of low carbon prices in early phases due to oversupply of credits—an issue that has affected several global markets. India's CCTS could face supply-demand imbalances and subdued price signals.
The Supply and Demand Dynamics
| Factor | Impact on Price |
|---|---|
| Modest Targets | Low demand for credits |
| Surplus Credits | Oversupply depresses prices |
| Legacy PAT Credits | 10.3 million ESCerts could flood the market |
| Unlimited Banking | Credits banked, not traded |
| Power Sector Exclusion | Reduced demand |
The "Pay to Pollute" Risk
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. If it is cheaper to buy credits than to reduce emissions, the market fails its primary purpose.
The Potential for Oversupply
The IEEFA analysis notes that indefinite banking, though designed to offer flexibility and cost management, can create large credit surpluses under modest early targets, weakening carbon prices. Global experience shows that markets without early stability mechanisms face prolonged periods of ineffective price discovery.
The IEEFA's Assessment
The IEEFA has argued that the CCTS should embed a price or supply adjustment mechanism to ensure market stability and prevent costly corrections. The report titled 'Potential drivers of carbon price formation in the CCTS: Design and market dynamics in the Indian carbon market', analyses how carbon prices will take shape in India's intensity-based emissions trading system.
The IEEFA's Recommendation: A Price and Supply Adjustment Mechanism (PSAM)
The Core Argument
The IEEFA has argued that the CCTS should embed a price or supply adjustment mechanism—comprising consignment auctions, vintage-based credit classification, and a price corridor—from the outset.
Why India Needs a PSAM
| Reason | Explanation |
|---|---|
| Prevent Price Collapse | Automatic supply adjustment prevents oversupply |
| Maintain Credibility | Stable prices signal market credibility |
| Attract Investment | Investors need price certainty |
| Enable Long-Term Planning | Companies need confidence in the price signal |
The IEEFA's Warning
India has an opportunity to learn from international experience and embed market stability mechanisms, avoiding the costly corrections that have challenged compliance carbon markets worldwide. India's CCTS already includes a price collar, an indicative floor and ceiling to dampen extreme price swings. However, it alone is not sufficient.
The Opportunity
India has the advantage of learning from the costly missteps of earlier movers. The CCTS can design a stability mechanism that avoids the problems faced by the EU and other markets.
The Stability Mechanism Design
The IEEFA report recommends a stability mechanism tailored to India's CCTS that comprises three elements: a consignment auction system for transparent price discovery, vintage-based credit classification, and a price corridor.
The EU Experience: 14 Years of Weak Price Signals
The Problem
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.
Why It Happened
| Factor | Description |
|---|---|
| Oversupply | Too many allowances were issued |
| Weak Targets | Early targets were not ambitious enough |
| No Stability Mechanism | No automatic supply correction |
| Banking | Surplus allowances were banked, depressing future prices |
The Solution: Market Stability Reserve
The EU eventually introduced the Market Stability Reserve (MSR) , which automatically adjusts the supply of allowances based on market conditions.
The Lesson for India
India can learn from the EU's experience and embed a stability mechanism from the start. India has a unique opportunity to design a durable and credible carbon market from the outset—one that avoids the pitfalls experienced by other global emissions trading systems.
The PAT Legacy: India's Own Lesson in Weak Enforcement
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.
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 CCTS must avoid the accumulation of surplus credits and weak price signals that characterised PAT. The key lesson: market depth and price signals depend on genuine compliance pressure and consistent enforcement.
The Choice of Design
The choice of a baseline-and-credit system is intentional. It avoids absolute caps, accommodates intensity-based targets (per unit of output), and allows economic growth to continue alongside emissions reduction. For an emerging economy, this is a pragmatic approach.
The Power Sector Omission: 40-55% of Emissions and the Price Signal Gap
The Scale of the Gap
The power sector accounts for roughly 40-55% of India's GHG emissions and sits outside the initial CCTS compliance boundary. Its exclusion simplifies implementation while recognising the complexities of electricity market regulation.
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's Warning
Without a credible integration roadmap, the CCTS will lack the primary channel through which carbon pricing shapes energy investment.
The Integration Timeline
| Phase | Timeline | Status |
|---|---|---|
| Phase 1 | 2026-2027 | Power sector excluded |
| Phase 2 | 2028-2030 | Power sector integration planned |
| Phase 3 | 2030+ | Full integration |
The Banking Problem: Unlimited Banking and the Price Suppression Risk
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 IEEFA's Warning
Indefinite banking, though designed to offer flexibility and cost management, can create large credit surpluses under modest early targets, weakening carbon prices. Global experience shows that markets without early stability mechanisms face prolonged periods of ineffective price discovery.
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.
Getting the Price Signal Right: Why Early Action Matters
The IEEFA's Call
"Getting the price signal right early is key to the credibility of India's carbon market". The price of carbon credits determines the cost of compliance, the value of carbon credits, and the competitiveness of different industrial sectors.
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 Recommendations
| Recommendation | Why It Matters |
|---|---|
| Embed a PSAM | Prevent price collapse and maintain credibility |
| Manage Legacy Credits | Avoid flooding the market with PAT ESCerts |
| Include the Power Sector | Create a complete carbon price signal |
| Strengthen Enforcement | Ensure genuine compliance pressure |
| Maintain Transparent Price Discovery | Build market confidence |
The CERC's Role
The Central Electricity Regulatory Commission has notified the 2026 regulations governing the trading of Carbon Credit Certificates, establishing a formal market framework under India's Carbon Credit Trading Scheme 2023.
The IEEFA's Perspective
The IEEFA report recommends that supply adjustment mechanisms, forward guidance on benchmark tightening, and clear banking rules be built into the scheme's architecture from the outset, so that stabilising features are in place as the market develops.
Conclusion: The Window of Opportunity Is Open
India's Carbon Credit Trading Scheme is at a pivotal moment. 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 |
|---|---|
| Three Stages | Initial (2026-27), Maturation (2028-30), Foundational (2030+) |
| Four Themes | Financial market participation, CBAM, sectoral expansion, offsets |
| PSAM Need | Price and Supply Adjustment Mechanism is essential |
| Power Sector | 40% of emissions excluded initially |
| CBAM Impact | 24.4% export decline in FY 2025 |
| PAT Lesson | Genuine compliance pressure is essential |
| IEEFA Warning | Getting the price signal right early is key to credibility |
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
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Frequently Asked Questions
What is the IEEFA report?+
A report by the Institute for Energy Economics and Financial Analysis (IEEFA) that maps the trajectory of the CCTS and makes recommendations on critical design choices.
What are the three stages of CCTS development?+
Phase 1 (2026-27): Initial stage; Phase 2 (2028-30): Market maturation; Phase 3 (2030+): Foundational design changes.
What are the four themes of the IEEFA framework?+
Financial market participation, responding to border carbon costs (CBAM), sectoral expansion, and managing offsets and Article 6 opportunities.
Why is sequencing important?+
The window to shape the CCTS's trajectory is open before path dependencies harden. Priority should go to foundational elements.
What is the power sector issue?+
The power sector accounts for nearly 40% of national emissions and sits outside the initial compliance boundary.
What is the CBAM connection?+
India's steel and aluminium exports to the EU fell 24.4% in FY 2025, before any CBAM financial obligation had taken effect.
What is the lesson from PAT?+
Market depth and price signals depend on genuine compliance pressure and consistent enforcement.
What is the PSAM?+
A Price and Supply Adjustment Mechanism recommended by IEEFA to ensure market stability.
When will financial intermediaries be introduced?+
Financial intermediaries will be introduced in Phase 2 (2028-2030) as the market matures.
How can Carboned.in help?+
We provide regulatory advisory, compliance assessment, gap analysis, credit procurement, policy monitoring, 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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