India's Carbon Market Under Fire – Why Critics Say Targets Are Too Weak to Drive Real Change

Introduction: A Market at a Crossroads

India's Carbon Credit Trading Scheme (CCTS) is one of the most ambitious climate policy initiatives in the world. When fully notified, it will cover some 740 entities and more than 700 million tonnes of CO₂e, making it one of the world's largest emissions trading systems.

Yet, even as the market prepares for its first trading cycle—expected to begin by October 2026—a growing chorus of critics is raising fundamental questions about its effectiveness.

A critical evaluation of emissions reduction targets set under the country's carbon market framework has deemed the targets "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.

This is not an isolated critique. The IEEFA-EDF report warns that choices made over the next two to five years will shape how far the CCTS develops into a market capable of guiding capital-intensive industrial investment over 15- to 30-year horizons. The Observer Research Foundation (ORF) has published an analysis titled "Design Without Discipline," examining whether the CCTS's design is sufficient to address the deficiencies that have historically weakened carbon markets: inadequate economic incentives and weak external enforcement.

This guide provides a comprehensive analysis of the criticisms facing India's carbon market, the evidence behind them, and what they mean for businesses navigating this new regulatory landscape.

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The CRH Report: "Modest and Unambitious" Targets

The Analysis

Climate Risk Horizons (CRH), a research organisation, conducted a critical evaluation of the emissions reduction targets set under India's carbon market framework.

The Key Findings

Finding	Implication
Targets are "readily achievable"	Little pressure for transformation
Cost of non-compliance is too low	No incentive for systematic operational changes
"Paying to pollute" may become a preferred strategy	Undermines decarbonisation efforts

The Scope

The analysis covers targets for three industries with global significance: the iron and steel, cement, and aluminium sectors.

The Steel Sector

India's iron and steel sector is the world's second largest, growing at 6.8% annually. Crude steel capacity reached 200 million tonnes in 2024-25, and is targeted to reach 300 million tonnes by 2030.

According to the CRH analysis, the 255 steel and iron companies obligated to meet targets are required to reduce their emissions intensity by 6% by 2026-2027, achievable through "incremental improvements in process efficiency".

The Verdict

The report's authors conclude that the targets are "modest and unambitious" and unlikely to drive the kind of systematic operational changes needed to drastically reduce greenhouse gas emissions.

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The Numbers: What the Targets Actually Require

The Required Reductions

Sector	Required Reduction (2026-27)	Source
Iron and Steel	~6%	CRH Analysis
Cement	~2.7%	ICRA ESG
Aluminium	~5.2%	ICRA ESG

The Context

For top steel and cement companies, the reduction targets by 2026-27 are just 2-5%, "creating little pressure" for transformation.

The Intensity-Based Design

Unlike cap-based systems that limit total emissions, the CCTS for nine types of industries focuses on emissions per unit of production, a design aligned with India's status as an emerging economy. While this approach has merit, critics argue that it allows for continued emissions growth as long as intensity improves marginally.

The Compliance Pressure

Factor	Assessment
Target tightness	Weak—targets are readily achievable
Compliance cost	Low—less than 7% of profits
Penalty	Ineffective—2× market price at low prices

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The "Pay to Pollute" Problem

The Core Concern

"For many high-margin polluters, 'paying to pollute' could become a preferred business strategy," said Anirudh T.R., an author of the CRH report.

Why This Matters

Factor	Explanation
Low credit prices	At $10 per tonne, credits are cheap relative to abatement costs
Weak targets	Minimal reductions required
Low penalties	2× market price is still low at current prices
Business logic	It may be cheaper to buy credits than invest in cleaner technologies

The Economic Calculation

For a company facing a choice between:

Option	Cost
Invest in abatement	High capital expenditure, long payback period
Buy carbon credits	~$10 per tonne, immediate compliance

If the cost of abatement exceeds the cost of credits, the rational business decision is to buy credits. This is exactly what critics fear will happen.

The Undermining Effect

If "paying to pollute" becomes the preferred strategy, the CCTS will fail in its primary objective: driving real emission reductions.

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The Cost of Compliance: 0.6% to 7% of Profits

The Numbers

According to the CRH analysis, the financial impact of buying carbon credits to offset shortfalls is currently small, typically less than 7% of the annual profit for large companies.

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

The Assumption

These figures assume a carbon credit price of $10 per tonne of CO₂ equivalent, as indicated by S&P Global.

What This Means

Implication	Explanation
Low burden	Compliance costs are minimal for most companies
No investment signal	No incentive to invest in expensive abatement
Status quo	Companies can continue operating as before

The Contrast with EU ETS

In the EU Emissions Trading System, carbon prices have exceeded €75 per tonne—more than seven times India's starting price. This creates a very different investment signal.

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The Penalty Problem: Why 2× Market Price Isn't Enough

The Penalty Structure

Under the CCTS, the penalty for non-compliance is Environmental Compensation equal to twice the average market price of carbon credit certificates.

The Problem

Issue	Explanation
Low absolute penalty	At $10 per tonne, 2× is only $20 per tonne
Still cheaper than abatement	For many companies, paying the penalty may still be cheaper than investing in clean technology
No deterrent effect	Weak penalties do not deter non-compliance

The CRH Warning

The study cautioned that the penalty of twice the price of carbon credits would be ineffective because of the low initial prices and market volatility.

The PAT Experience

India's Perform, Achieve and Trade (PAT) scheme—the predecessor to the CCTS—was marked by persistent non-compliance. The entities entering the CCTS are the same ones that operated under PAT, yet they have little reason to believe that the rules have fundamentally changed.

The Lesson

Without meaningful penalties, compliance becomes optional.

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The IEEFA-EDF Report: Lessons from Korea and PAT

The Report

The IEEFA-EDF report, titled "The road ahead for India's Carbon Credit Trading Scheme," maps the trajectory of the CCTS's next phase and makes recommendations on the decisions that will shape the scheme's trajectory.

The Four Themes

The analysis is structured around four interconnected themes:

Theme	Description
Financial Market Participation	How financial intermediaries can support market depth
Responding to Border Carbon Costs	How India should respond to CBAM
Sectoral Expansion	Implications of incorporating the power sector
Managing Offsets and Article 6	Safeguarding market integrity

The Korea Lesson

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 PAT Lesson

India's own Perform, Achieve and Trade (PAT) scheme saw certificate trading fall short of the volumes mandated.

The Shared Lesson

"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 Precondition

"Every major Emissions Trading System (ETS) began with compliance entities only. The CCTS is right to do the same. Financial intermediaries matter eventually 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 financial intermediaries' inclusion is genuine scarcity and credible enforcement, and that is what the CCTS needs to establish first".

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The ORF Analysis: Design Without Discipline

The Paper

The Observer Research Foundation (ORF) published an analysis titled "Design Without Discipline: The Role of Incentives and Enforcement in India's Carbon Market".

The Core Argument

Carbon markets are only as effective as the institutions that enforce them. Across the world, emissions trading systems (ETSs) have often faltered not because their economic logic was flawed, but because the conditions required for that logic to function—credible enforcement, meaningful price signals, and robust monitoring—were absent.

The Historical Context

Oversupply, weak penalties, unambitious targets, and institutional fragility have undermined schemes, from Brussels to Beijing.

The PAT Baggage

India is launching its CCTS against this backdrop. PAT's decade-long record was marked by limited emissions reductions, persistent non-compliance, and a price discovery mechanism that functioned poorly. The entities entering the CCTS are the same ones that operated under PAT, yet they have little reason to believe that the rules have fundamentally changed.

The Research Questions

The paper examines:

1. In what ways have inadequate economic incentives and weak enforcement emerged as recurring challenges in emissions trading systems globally?
2. What design choices has India incorporated into the CCTS to address these challenges?
3. Are these design choices adequate to overcome them?

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The PAT Legacy: A Decade of Limited Emissions Reductions

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.

The Record

PAT's decade-long record was marked by:

• Limited emissions reductions
• Persistent non-compliance
• A price discovery mechanism that functioned poorly

The Transition

The CCTS represents a transition from PAT, with designated consumers being transitioned into Obligated Entities under the new system.

The Concern

The entities entering the CCTS are the same ones that operated under PAT, yet they have little reason to believe that the rules have fundamentally changed.

The Opportunity

The CCTS represents an opportunity to learn from PAT's shortcomings. But whether it will is an open question.

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The Oversupply Risk: Korea's Cautionary Tale

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 Parallels with India

Factor	Korea	India (CCTS)
Early participation	Compliance entities only	Compliance entities only
Allowance supply	Surplus	Potential surplus
Target tightness	Weak	Weak (per CRH analysis)
Result	Thin trading, subdued prices	Potential for same outcome

The Risk

If India follows the same path, the CCTS could suffer from:

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

The 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 Power Sector Question: Why India's Largest Emitter Is Still Outside

The Current Coverage

The CCTS currently covers nine sectors: aluminium, cement, chlor-alkali, fertiliser, iron and steel, petrochemicals, petroleum refineries, pulp and paper, and textiles.

The Missing Sector

The power sector—India's largest source of emissions—is not yet covered.

The IEEFA Report's Focus

The IEEFA-EDF report examines the implications of incorporating the power sector.

Why the Power Sector Matters

Factor	Significance
Emissions share	The power sector is India's largest source of emissions
Scale	Power sector incorporation would dramatically expand the CCTS
Price signal	Would strengthen the carbon price signal

The Recommendation

Anirudh, author of the CRH report, recommended that "Big emitters such as the power sector must be included" for the policy to be truly effective.

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The CBAM Connection: Weak Domestic Targets Undermine Export Competitiveness

The CBAM Reality

India's steel and aluminium exports to the European Union fell 24.4% in FY2025, with steel alone down 35.1%, before any CBAM financial obligation had taken effect. The decline suggests European buyers are already reorienting toward lower-emission producers.

The Weak Target Problem

Issue	Impact
Weak domestic targets	Limited domestic decarbonisation
High emissions intensity	Higher CBAM liability
Loss of competitiveness	EU buyers prefer lower-emission producers

The IEEFA View

"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".

The Strategic Imperative

If the CCTS fails to drive real emission reductions, Indian exporters will face:

• Higher CBAM costs
• Loss of market share
• Reduced competitiveness

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The Bloomberg View: Weak Market May Encourage Firms to Keep Polluting

The Headline

Bloomberg reported: "Weak Carbon Market May Encourage Indian Firms to Keep Polluting".

The Analysis

Weak penalties and expected low allowance prices mean India's planned national carbon market will deliver little incentive to steelmakers, cement producers and other heavy industries to quickly curb emissions.

The Trading Start

Trading in the nation's carbon credit system, which initially covers nine major sectors, is scheduled to begin by about October, according to the Bureau of Energy Efficiency.

The Measurement Start

Polluters included in the market began measuring emissions against new intensity targets from last year.

The Concern

If the market delivers little incentive to reduce emissions, it will fail in its primary objective.

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The Independence Question: Who Will Enforce the Rules?

The Current Structure

The CCTS is administered by the Bureau of Energy Efficiency (BEE), with oversight from the Ministry of Power.

The Concern

Critics argue that an independent regulator is needed to ensure transparent governance.

The ORF Argument

"Carbon markets are only as effective as the institutions that enforce them".

The Independence Gap

Aspect	Current	Recommended
Regulator	BEE (under Ministry of Power)	Independent regulator
Enforcement	Administrative	Independent
Transparency	Limited	Enhanced

The Recommendation

Researchers recommend an independent regulatory framework and referring to international best practices that call for reserve price floors and stability reserves, which are currently not adequately featured in India's framework.

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Recommendations from Critics

The CRH Recommendations

Recommendation	Rationale
More ambitious future targets	Create genuine compliance pressure
Stronger carbon pricing safeguards	Prevent prices from falling too low
Inclusion of the power sector	Cover India's largest emitter
Independent regulator	Ensure transparent governance

The IEEFA Recommendations

Recommendation	Rationale
Genuine scarcity	Targets must create real compliance pressure
Credible enforcement	Penalties must be meaningful
Financial intermediaries	Enable price discovery and hedging

The Anirudh View

"Big emitters such as the power sector must be included, and financial incentives to adopt low-carbon industrial processes must be strengthened for the policy to be truly effective".

The ORF Perspective

The ORF analysis examines whether the CCTS's design is sufficient to address the two deficiencies that have historically weakened carbon markets: inadequate economic incentives and weak external enforcement.

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The Government's Defence

The Official Position

The government has emphasised India's leadership in advancing climate commitments under the visionary guidance of the Prime Minister.

The Achievements

As of March 2026, the share of non-fossil fuel-based installed electricity generation capacity had reached 53.21 per cent against the target of 50 per cent by 2030, achieving the target nearly five years in advance.

The Market Progress

The Indian Carbon Market Portal was launched in March 2026, marking the regulatory beginning of the ICM.

The First Trading

Trading in the carbon credit system is scheduled to begin by about October 2026.

The Perspective

The government argues that the CCTS is a significant step forward and that targets will tighten over time as the market matures.

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What This Means for Your Business

For Obligated Entities

Implication	Action
Low compliance cost	But don't assume it will stay low
Weak targets	But prepare for tighter targets in future
Cheap credits	But quality credits may command a premium

For Investors

Implication	Action
Market uncertainty	Monitor regulatory developments
Potential oversupply	Be cautious about credit price assumptions
Long-term opportunity	Position for eventual market tightening

For Exporters

Implication	Action
CBAM exposure	Weak domestic targets increase CBAM liability
Competitiveness risk	EU buyers prefer lower-emission producers
Strategic imperative	Invest in decarbonisation despite weak targets

For Project Developers

Implication	Action
Credit demand	May be lower than expected
Price risk	Prices may be subdued
Quality premium	Focus on high-quality credits

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How Carboned.in Can Help

At Carboned.in, we help businesses navigate the CCTS landscape with clarity and confidence—even as the market faces criticism and uncertainty.

Our Services

Service	What We Do
Regulatory Intelligence	Keep you informed of market developments and criticisms
Compliance Strategy	Help you meet obligations efficiently
Credit Procurement	Buy CCCs at the best price
Risk Management	Navigate market uncertainty
CBAM Advisory	Protect export competitiveness
Policy Engagement	Help you engage with policymakers

Why Choose Carboned.in?

Reason	Why It Matters
Legal Expertise	Led by Siddharth Gupta, Advocate, Calcutta High Court
Regulatory Knowledge	Deep understanding of CCTS and its critics
Strategic Perspective	Help you navigate uncertainty
End-to-End Support	From strategy to compliance

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

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Conclusion

India's carbon market is at a crossroads. The critics have raised valid concerns: weak targets, low penalties, the risk of "paying to pollute," and the legacy of PAT's limited success.

But the CCTS is not a finished product. It is a market in its early stages, and the choices made over the next two to five years will shape its trajectory for decades to come.

Key Takeaways

Aspect	What You Need to Know
CRH Verdict	Targets are "modest and unambitious"
Compliance Cost	0.6-7% of profits
Penalty	2× market price—ineffective at low prices
IEEFA Lesson	Genuine scarcity and credible enforcement are essential
ORF Concern	"Design Without Discipline"
PAT Legacy	Limited emissions reductions, persistent non-compliance
Power Sector	Still outside the CCTS
CBAM Connection	Weak targets undermine export competitiveness

The Choice Is Yours

Option	Outcome
Prepare for tightening	Position for when targets become more ambitious
Assume status quo	Risk being caught off guard by regulatory changes

How Carboned.in Can Help

At Carboned.in, we help businesses navigate the CCTS landscape with clarity and confidence.

• Regulatory Intelligence: Stay informed of market developments
• Compliance Strategy: Meet obligations efficiently
• Credit Procurement: Buy CCCs at the best price
• CBAM Advisory: Protect export competitiveness

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