The Price Puzzle – Why India's Carbon Market May Start Cheap but Won't Stay That Way
Introduction: The Price That Will Define a Generation
Every carbon market lives by its price signal. The price of a carbon credit tells companies whether it is cheaper to invest in clean technology or to buy their way out of compliance. It tells investors whether the market is worth their capital. It tells the world whether India is serious about decarbonisation.
India's Carbon Credit Trading Scheme (CCTS) is now operational. Compliance obligations are in force. Trading on power exchanges like the Indian Energy Exchange (IEX) and Power Exchange India Limited (PXIL) is expected to commence by mid-to-late 2026, with the first trades potentially in October 2026. The market is projected to grow from approximately $6 billion in 2026 to nearly $50 billion by 2030.
But here is the uncomfortable truth that no one is talking about: India's carbon price will start low. And that is exactly the plan.
Industry estimates indicate that when compliance trading starts, the initial phase of India's carbon market should start at about $10 per metric ton of CO₂e (approximately ₹800–₹1,000), with some variation based on project type and sector. Price estimates for the first Carbon Credit Certificates (CCCs), expected in Q4 2026, range from ₹250 to ₹1,500 per tonne depending on sectoral supply and demand.
But here is the critical insight: FY2026 is a transition year, not the destination.
By FY2027, the pressure will intensify significantly. According to ICRA ESG, cement companies will need to reduce emission intensity by 2.7% in FY2027 (compared to just 0.7% in FY2026), and aluminium firms may need to cut emission intensity by 5.2%. The cost of carbon will rise. Profits will be hit. And the market will face its first real test.
This guide provides a comprehensive analysis of carbon price formation in India's CCTS, examining where prices are headed, why FY2026 is a transition year, and what businesses must do to prepare for the price shock that is coming.
Where Will Carbon Prices Start? The ₹250–₹1,500 Question
The first CCCs are expected in Q4 2026. Price estimates for these early credits range from ₹250 to ₹1,500 per tonne depending on sectoral supply and demand. Industry estimates suggest the initial phase of India's carbon market should start at about $10 per metric ton of CO₂e (approximately ₹800–₹1,000), with some variation based on project type and sector.
What Determines the Starting Price?
| Factor | Impact on Price |
|---|---|
| FY2026 targets | Relatively modest reductions of 1-3% |
| Compliance demand | Only seven sectors covered initially |
| Credit supply | Surplus credits from early overachievers |
| Price corridor | Floor and forbearance price mechanism |
The Modest Targets
Initial reductions average 1–3% in FY 2025-26, ramping up to 2–8% or more in subsequent years, varying by sector (e.g., up to 15% in pulp & paper). These modest targets mean that most obligated entities can meet their obligations through incremental efficiency improvements rather than major capital investments.
The Price Corridor
A floor and forbearance price mechanism will guide early market behaviour, with the floor expected in the range of ₹800–₹1,000 per credit. This floor ensures that prices do not collapse completely, but it also means that early prices will be artificially supported rather than market-driven.
The FY2026 Transition Year: Why Prices Will Stay Low
FY2026 functions as a market-formation year. Benchmarks are transitional, targets are pro-rated, and trading activity will likely be thin. This is not a bug – it is a feature.
Why FY2026 Is Designed to Be a Transition Year
| Reason | Explanation |
|---|---|
| Retroactive targets | Targets apply retrospectively to 2025-26 |
| Modest reductions | Average 1-3% reduction requirements |
| Limited coverage | Only seven of nine sectors covered initially |
| Ex-post issuance | Credits issued only after verified performance |
| No financial intermediaries | Only compliance entities can trade initially |
The ICRA ESG View: Manageable Costs
According to ICRA ESG, FY2026 offers a transition period with manageable costs. Cement companies can mostly meet targets if they reduce emission intensity by about 1.5%. Aluminium companies start with better efficiency, and smaller firms benefit from efficiency improvements.
The Supply and Demand Dynamics
Ex-post credit issuance, the exclusion of financial intermediaries, and capital-intensive industrial abatement mean both supply and demand will remain relatively inelastic in the early years, with trading likely to cluster around settlement deadlines. This creates a situation where trading activity will be thin, and price discovery will be limited.
The Price Suppression Risk
The World Economic Forum and IEEFA have both flagged that unlimited credit banking, paired with modest early targets, could suppress prices before the market establishes any credibility. The EU Emissions Trading System struggled at three to seven euros per tonne for fourteen years before policy reforms brought stability.
The FY2027 Inflection Point: When the Real Pressure Begins
FY2027 is where the CCTS gets real.
The ICRA ESG Warning
India's CCTS is expected to become much stricter by FY2027, increasing compliance costs – especially for cement and aluminium companies. The study looked at 14 major companies (10 cement and 4 aluminium) and found that while FY2026 will be a relatively manageable transition year, FY2027 will bring tighter rules and higher financial risks if companies don't reduce emissions fast enough.
The Cement Sector: Up to 19% Profit Hit
| Metric | FY2026 | FY2027 |
|---|---|---|
| Required reduction | 0.7% | 2.7% |
| Compliance outlook | Manageable | 30% face deficits |
| Financial impact | Manageable | Up to 19% profit hit |
Around 30% of cement companies could face deficits even under favourable conditions. In worse scenarios, the financial impact could reach up to ₹700 crore, and carbon costs could cut profits by as much as 19% for some firms.
The Aluminium Sector: 5.2% Reduction Requirement
| Metric | FY2026 | FY2027 |
|---|---|---|
| Required reduction | 1.6% | 5.2% |
| Compliance outlook | Larger firms may need credits | Stricter targets widen gap |
| Financial impact | Manageable | Up to 3% of profits |
To meet targets, aluminium firms may need to cut emission intensity by 1.6% in FY2026 and 5.2% in FY2027. Carbon costs could reach up to 3% of profits for some players.
The Bottom Line
If companies continue at current emission levels while production grows, none are likely to meet targets. Steady emission reductions of 1-3% for cement and 2-5% for aluminium will be essential to control costs and stay competitive. Large companies may see profits hit by carbon costs, while smaller, more efficient players could gain an advantage by cutting emissions faster.
The ICRA ESG Warning: Cement and Aluminium Under the Gun
The ICRA ESG analysis of 14 major companies (10 cement and 4 aluminium) provides the most detailed look yet at how CCTS compliance costs will affect Indian industry.
Cement Sector Deficit Projections
In cement, emission deficits are estimated at about 0.5 million tonnes of CO₂ equivalent in FY2026, rising to around 1.3 million tonnes in FY2027 under higher growth scenarios. This means that even under favourable conditions, a significant portion of the cement sector will need to purchase credits to meet its obligations.
Aluminium Sector Deficit Projections
Aluminium companies start with better efficiency, but rising production will increase pressure. In FY2026, larger firms may already need carbon credits, while smaller firms benefit from efficiency improvements. By FY2027, stricter targets could widen the gap further.
The Compliance Cost as Percentage of Profits
A critical evaluation of emissions reduction targets by Climate Risk Horizons warns that 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.
| Sector | Compliance Cost as % of Profits |
|---|---|
| Steel | 7% |
| Cement | 2% |
| Aluminium | 0.6% |
Why Cement Faces a 19% Profit Hit
Cement is one of the hardest-hit sectors under the CCTS. Here is why.
The Emission Intensity Challenge
Cement manufacturing involves a chemical process (calcination) that inherently releases CO₂. Approximately 60% of cement emissions come from the chemical process itself, meaning that even with perfect energy efficiency, cement plants still have significant process emissions to address.
The Required Reduction
To stay on track, cement companies need to reduce emission intensity by roughly 0.7% in FY2026 and 2.7% in FY2027 compared to FY2024 levels.
The Financial Impact
| Scenario | Financial Impact |
|---|---|
| Favourable conditions | 30% of companies face deficits |
| Worse scenarios | Up to ₹700 crore in costs |
| Maximum profit impact | Up to 19% for some firms |
Why Some Companies Will Benefit
Some firms may still benefit by cutting emissions early and selling surplus credits. Companies that invest in blended cement, alternative fuels, and waste heat recovery will not only reduce their compliance costs but also earn revenue from surplus credits.
Why Aluminium Faces a 5.2% Reduction Requirement
Aluminium producers face a different but equally significant challenge.
The Efficiency Advantage
Aluminium companies start with better efficiency than cement producers. However, rising production will increase pressure, and the required reductions are steeper.
The Required Reduction
To meet targets, aluminium firms may need to cut emission intensity by 1.6% in FY2026 and 5.2% in FY2027.
The Power Sector Connection
The source of electricity matters significantly for aluminium producers. Coal-based power sharply increases the carbon burden, while renewable-based power reduces it. Major players like Vedanta and Hindalco are investing in renewable-linked smelters and captive solar and wind projects to cut coal dependence.
The Financial Impact
Carbon costs could reach up to 3% of profits for some aluminium players. While this is lower than the potential 19% hit for cement, it is still a significant financial impact that will affect competitiveness.
The 740-Entity Question: Expanding Coverage and Its Price Impact
The CCTS currently covers approximately 490 obligated entities across seven sectors. But this is only the beginning.
The Future Coverage
Once fully notified, the CCTS will cover some 740 entities and more than 700 million tonnes of CO₂e, making it one of the world's largest emissions trading systems. Nine sectors are covered: aluminium, cement, chlor-alkali, pulp and paper, iron and steel, fertiliser, petrochemicals, petroleum refining, and textiles.
The Price Impact of Expansion
| Phase | Coverage | Price Impact |
|---|---|---|
| FY2026 | 7 sectors, ~490 entities | Low prices, manageable costs |
| FY2027+ | 9 sectors, ~740 entities | Rising demand, higher prices |
The Iron and Steel Addition
The iron and steel sector, with 255 units and combined baseline emissions of 358.6 MtCO₂e, represents the largest sectoral expansion to date. The draft notification was issued on June 26, 2026, mandating iron and steel sector compliance starting in FY 2026-27. This will significantly increase demand for CCCs and put upward pressure on prices.
The Fertiliser Addition
Final targets for the fertiliser sector are still pending. Once notified, the CCTS will cover all nine hard-to-abate sectors, completing the compliance market's coverage.
The Price Corridor: ₹800 Floor and Why It Matters
The Floor and Forbearance Mechanism
A floor and forbearance price mechanism will guide early market behaviour, with the floor expected in the range of ₹800–₹1,000 per credit.
Why a Price Floor Matters
| Benefit | Explanation |
|---|---|
| Prevents collapse | Ensures prices don't fall to zero |
| Investor confidence | Provides price certainty |
| Project viability | Enables viable project economics |
| Market credibility | Signals that the market is serious |
The Debate
Some participants have advocated introducing price controls such as floors or stability reserves early on, while others warn that excessive intervention could distort price discovery. There is broad agreement that strong political commitment and sufficiently ambitious targets will be essential to ensure a meaningful carbon price signal.
The IEEFA Recommendation
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 $11.48 Benchmark: What the Models Are Saying
The IIT Roorkee Modelling
A high-level workshop in New Delhi, jointly organised by IEEFA, Indian Institute of Technology Roorkee, and Environmental Defense Fund, brought together policymakers, researchers, and industry representatives to shape the design of a credible national carbon market.
The Finding
Preliminary findings suggested a potential market-clearing carbon price of around $11.48 per credit under baseline assumptions. The analysis also indicated significant emissions reduction potential in sectors such as textiles and paper, while overall industrial output impacts were expected to remain minimal.
The Caveat
Experts stressed that such models should be used to understand trade-offs and directional trends rather than produce precise forecasts, particularly given current data limitations.
The Baseline Assumptions
| Assumption | Impact |
|---|---|
| Modest targets | Lower price |
| Ambitious targets | Higher price |
| CBAM recognition | Higher price |
| Power sector inclusion | Higher price |
The Price Collapse Risk: What Happens If the Market Floods
The Oversupply Threat
The World Economic Forum and IEEFA have both flagged that unlimited credit banking, paired with modest early targets, could suppress prices before the market establishes any credibility.
The PAT Legacy Problem
During the first three PAT cycles, regulators issued 10.3 million certificates against a total purchase obligation of only 5.2 million. This surplus heavily depressed market prices. CCTS rules allow developers to convert these old energy-saving certificates into new CCCs. If the government converts these legacy certificates without strict eligibility thresholds, a tidal wave of old credits will flood the system.
The Banking Problem
The CCTS allows entities to bank surplus CCCs across compliance cycles. While this offers flexibility to manage production volatility and cost uncertainties, unlimited banking can also lead to surplus accumulation that depresses prices.
The EU Precedent
The EU Emissions Trading System struggled at three to seven euros per tonne for fourteen years before policy reforms brought stability. That is a long time for a market to find its feet.
The Cost of Failure
If the CCTS repeats the EU's early mistakes, India could face fourteen years of weak price signals, limited emissions reductions, and missed investment opportunities. The window to avoid these mistakes is open now.
The PAT Legacy Problem: 10.3 Million Certificates and the Conversion Threat
The Scale of the Surplus
During the first three PAT cycles, regulators issued 10.3 million certificates against a total purchase obligation of only 5.2 million. This surplus heavily depressed market prices and created a structural problem that the CCTS now inherits.
The Conversion Mechanism
CCTS rules allow developers to convert old energy-saving certificates (ESCerts) into new Carbon Credit Certificates (CCCs). This creates a direct pipeline from the oversupplied PAT market into the new CCTS market.
The Conversion Choice
| Conversion Scenario | Outcome |
|---|---|
| Generous conversion | Legacy credits flood the market; price signal destroyed |
| Strict conversion | Market scarcity maintained; price signal preserved |
The Price Collapse Threat
If the government converts these legacy certificates without strict eligibility thresholds, a tidal wave of old credits will flood the system. This would destroy the carbon price signal before the market even matures.
The Structural Baggage
The surplus problem could be carried forward from PAT to CCTS, creating a weak point in the new market's foundation.
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 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.
The IEEFA Warning
The World Economic Forum and IEEFA have both flagged that unlimited credit banking, paired with modest early targets, could suppress prices before the market establishes any credibility.
The Financial Intermediation Gap: Why Price Discovery Needs More Players
The Problem
Ex-post credit issuance, the exclusion of financial intermediaries, and capital-intensive industrial abatement mean both supply and demand will remain relatively inelastic in the early years, with trading likely to cluster around settlement deadlines.
The Role of Financial Intermediaries
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).
The IEEFA Perspective
Every major emissions trading system 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. 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 Price Discovery Challenge
Without financial intermediaries, the market may struggle to generate continuous price discovery, which is essential for long-term investment decisions. Communicating clear long-term targets and a predictable path for benchmark tightening is particularly important given that industrial investment decisions span 15 to 30 years.
The Three Stages of CCTS Price Development
The IEEFA identifies three stages of CCTS development that will shape price formation.
Phase 1: Initial Stage (2026-2027)
- Low prices: Modest targets, limited coverage → low demand
- Thin trading: No financial intermediaries → limited liquidity
- Price floor: ₹800–₹1,000 per credit → artificial support
- Market formation: Establishing credible MRV standards
Phase 2: Market Maturation (2028-2030)
- Rising prices: Expanding sectoral scope → increasing demand
- Financial integration: Deepening liquidity, price discovery
- Offset design: Domestic and international mitigation interactions
- International positioning: Article 6 and CBAM
Phase 3: Foundational Design Changes (2030+)
- Higher prices: Transition to absolute emissions cap
- Auctioning: Competitive allocation of allowances
- Full integration: Power sector inclusion
- Price convergence: Alignment with international carbon prices
How Carboned.in Can Help
At Carboned.in, we help businesses navigate carbon price dynamics with clarity and confidence — whether prices are low or high.
Our Services
| Service | What We Do |
|---|---|
| Price Intelligence | Track price trends and forecasts |
| Procurement Strategy | Optimise timing and pricing |
| Risk Management | Hedge against price volatility |
| Compliance Planning | Budget for compliance costs |
| Investment Advisory | Identify opportunities |
| CBAM Readiness | Prepare for international carbon compliance |
Why Choose Carboned.in?
| Reason | Why It Matters |
|---|---|
| Legal Expertise | Led by Siddharth Gupta, Advocate, Calcutta High Court |
| Market Intelligence | Real-time price insights |
| Regulatory Knowledge | Deep understanding of CCTS and CERC |
| End-to-End Support | From strategy to execution |
Your first consultation is completely free. No obligation. Just honest advice.
Conclusion
India's carbon price will start low. That is the plan. FY2026 is a transition year with manageable costs, modest targets, and thin trading. But FY2027 is where the real pressure begins.
The price will rise. The question is whether it will rise gradually and predictably, or whether it will be undermined by oversupply from legacy PAT certificates, unlimited banking, and weak enforcement.
Key Takeaways
| Aspect | What You Need to Know |
|---|---|
| Starting Price | ₹250–₹1,500 per tonne (₹800–₹1,000 expected) |
| FY2026 Reductions | 1-3% (manageable) |
| FY2027 Reductions | 2.7% (cement), 5.2% (aluminium) |
| Cement Profit Impact | Up to 19% |
| Aluminium Profit Impact | Up to 3% |
| Price Collapse Risk | Legacy PAT certificates, unlimited banking |
| Three Stages | Initial (2026-27), Maturation (2028-30), Foundational (2030+) |
The Choice Is Yours
| Option | Outcome |
|---|---|
| Understand the price trajectory | Optimise procurement, manage risk, capitalise on opportunities |
| Ignore the price trajectory | Face higher costs, missed opportunities, competitive disadvantage |
How Carboned.in Can Help
At Carboned.in, we help businesses navigate carbon price dynamics with clarity and confidence.
- Price Intelligence: Track trends and forecasts
- Procurement Strategy: Optimise timing and pricing
- Risk Management: Hedge against volatility
- Compliance Planning: Budget for costs
- Investment Advisory: Identify opportunities
Your first consultation is completely free. No obligation. Just honest advice.
How Carboned.in can help
Our team covers every dimension of India's carbon market — pick the service that matches where you are.
Frequently Asked Questions
What is the projected carbon price in India?+
Industry estimates suggest the initial phase should start at about $10 per metric ton of CO₂e (₹800–₹1,000), with price estimates ranging from ₹250 to ₹1,500 per tonne depending on sectoral supply and demand.
Why will prices stay low in FY2026?+
FY2026 is a transition year with modest targets (1-3% reductions), limited coverage (only seven sectors), and no financial intermediaries. Trading activity will be thin.
When will prices start to rise?+
FY2027 will bring tighter rules and higher financial risks. Cement companies will need 2.7% reductions and could face up to 19% profit hits. Aluminium firms may need 5.2% reductions.
What is the price corridor?+
A floor and forbearance price mechanism will guide early market behaviour, with the floor expected in the range of ₹800–₹1,000 per credit.
What is the preliminary clearing price?+
Preliminary findings from IIT Roorkee modelling suggested a potential market-clearing carbon price of around $11.48 per credit under baseline assumptions.
What is the price collapse risk?+
Unlimited credit banking, paired with modest early targets, could suppress prices. The PAT legacy problem of 10.3 million certificates could flood the market if converted without strict eligibility.
What is the banking provision?+
The CCTS allows entities to bank surplus CCCs across compliance cycles, but unlimited banking can lead to surplus accumulation that depresses prices.
What are the three stages of CCTS development?+
Phase 1 (2026-27): Initial stage, low prices; Phase 2 (2028-30): Market maturation, rising prices; Phase 3 (2030+): Foundational design changes, higher prices.
How can Carboned.in help?+
We provide price intelligence, procurement strategy, risk management, compliance planning, and investment advisory.
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.
Related Articles
The Institutional Infrastructure of Carbon Markets – Why Registries, Not Just Credits, Will Define India's Carbon Future
The Hidden Engine of India's Carbon Market – How Carbon Prices Are Really Formed in the CCTS
