The PAT to CCTS Transition – Why India's Carbon Market Must Learn from the Past to Succeed in the Future
Introduction: The Baggage of Transition
The Carbon Credit Trading Scheme (CCTS) is India's new carbon market. It replaces the Perform, Achieve and Trade (PAT) scheme, which operated for over a decade.
That transition carries baggage.
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 ESCerts for PAT II, which should have been issued by December 2019, were only issued in August 2021, and trading did not conclude until October 2023. Nearly two years of slippage on a three-year compliance cycle.
Cumulatively, 34 lakh out of 52 lakh ESCerts mandated for purchase at the end of all three cycles were left unattended.
As the Observer Research Foundation (ORF) analysis notes, whether the CCTS inherits PAT's systemic gaps depends on three things that the design alone cannot guarantee: enforcement, verification, and price.
This guide examines the PAT to CCTS transition, the lessons India must learn from PAT's failures, and what must change for the CCTS to succeed.
What Was PAT? A Decade of Energy Efficiency
The Perform, Achieve and Trade (PAT) Scheme
PAT was India's mandatory energy efficiency program covering more than 1,000 entities from 13 energy-intensive sectors. It was notified under the Energy Conservation Act, 2001, and operated for over a decade.
The Mechanism
| Element | Description |
|---|---|
| Designated Consumers | Energy-intensive industries covered under the scheme |
| Energy Intensity Targets | Entities were assigned energy intensity reduction targets |
| ESCerts | Energy Saving Certificates issued to entities that outperformed their targets |
| Trading | ESCerts could be traded on power exchanges |
The Scope
PAT covered:
| Sector | Entities |
|---|---|
| Thermal Power Plants | ~150 |
| Cement | ~100 |
| Iron and Steel | ~90 |
| Fertiliser | ~50 |
| Aluminium | ~30 |
| Textiles | ~200 |
| Other Sectors | ~400 |
The Three Cycles
| Cycle | Period | Entities |
|---|---|---|
| PAT Cycle I | 2012-2015 | 478 |
| PAT Cycle II | 2016-2019 | 621 |
| PAT Cycle III | 2020-2023 | 1,000+ |
PAT's Record: The Good, The Bad, and The Ugly
The Good
| Achievement | Description |
|---|---|
| Energy Efficiency | Many entities improved their energy efficiency |
| Market Experience | Built experience in trading and compliance |
| Institutional Capacity | BEE developed expertise in market administration |
| Awareness | Raised awareness of energy efficiency |
The Bad
| Failure | Description |
|---|---|
| Limited Emissions Reductions | Energy efficiency did not deliver scale of emissions reductions needed |
| Persistent Non-Compliance | Many entities failed to meet their targets |
| Poor Price Discovery | Certificate trading fell short of mandated volumes |
| Weak Enforcement | Non-compliance without meaningful consequences |
The Ugly
| Failure | Description |
|---|---|
| Two-Year Slippage | PAT II ESCerts issued nearly two years late |
| Surplus | 34 lakh out of 52 lakh ESCerts mandated for purchase left unattended |
| Non-Compliance | Rose from 9% in Cycle I to 56% in Cycle II |
| Regulatory Capture | Non-complying entities from Cycles I and II allowed to trade in Cycle III |
The Lessons
| Lesson | Application to CCTS |
|---|---|
| Enforcement is Critical | Weak enforcement undermines market credibility |
| Price Signals Matter | Subdued prices provide no incentive for investment |
| Surplus Destroys Value | Oversupply depresses prices and weakens incentives |
| Timely Action is Essential | Delays undermine confidence in the market |
The Non-Compliance Problem: From 9% to 56%
The Numbers
| Metric | PAT Cycle I | PAT Cycle II |
|---|---|---|
| Non-compliance rate | 9% | ~56% |
| Designated Consumers (DCs) unregistered | — | 86% of mandated ESCert purchasers |
| ESCerts purchased | — | Sold at floor price due to oversupply |
Why Non-Compliance Rose
| Reason | Explanation |
|---|---|
| Delays | Procedural delays signaled that compliance was a future problem |
| Concessions | Non-complying entities were allowed to trade in subsequent cycles |
| Absence of Action | No meaningful consequences for non-compliance |
| Rational Response | Firms responded rationally to what they observed |
The Deterioration
The deterioration deepened when the non-complying DCs from the first two cycles were allowed to trade in the third cycle, effectively rendering even future consequences non-existent.
The Lesson
The PAT scheme's compliance record did not collapse suddenly. It deteriorated because firms responded rationally to what they observed: delays, concessions, and the absence of action.
The Surplus Problem: 10.3 Million Certificates vs. 5.2 Million Obligation
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.
| Metric | Value |
|---|---|
| Total ESCerts Issued | 10.3 million |
| Total Purchase Obligation | 5.2 million |
| Surplus | 5.1 million |
| Unattended Certificates | 34 lakh out of 52 lakh mandated for purchase |
Why the Surplus Existed
| Reason | Explanation |
|---|---|
| Over-Allocation | Too many certificates were issued |
| Weak Targets | Targets were not ambitious enough |
| Limited Demand | Few entities needed to purchase certificates |
| Oversupply | More supply than demand |
The Consequences
| Consequence | Impact |
|---|---|
| Depressed Prices | Oversupply pushed prices to the floor |
| Weak Incentives | Low prices provided little incentive for investment |
| Market Credibility | The market lacked credibility |
| No Price Discovery | Limited trading meant no effective price discovery |
The Lesson
Oversupply is a market killer. The CCTS must avoid the accumulation of surplus credits that characterised PAT.
The Price Discovery Problem: Subdued Prices, Limited Trading
The Problem
PAT saw certificate trading fall short of the mandated volumes, and prices remained subdued. The market failed to generate an effective price signal.
Why Price Discovery Failed
| Reason | Explanation |
|---|---|
| Oversupply | More certificates than demand |
| Limited Trading | Few transactions |
| Floor Price | Prices stuck at the floor |
| No Scarcity | No genuine compliance pressure |
The Consequences
| Consequence | Impact |
|---|---|
| No Investment Signal | Companies had no incentive to invest in deeper reductions |
| Market Stagnation | The market failed to develop |
| Limited Learning | Limited experience in trading and compliance |
The Lesson
Market depth and price signals depend on whether targets create genuine compliance pressure. Without scarcity, there is no price signal.
The Enforcement Problem: Delays, Concessions, and Inaction
The Delays
The ESCerts for PAT II, which should have been issued by December 2019, were only issued in August 2021, and trading did not conclude until October 2023. Nearly two years of slippage on a three-year compliance cycle.
The Concessions
Non-complying DCs from the first two cycles were allowed to trade in the third cycle, effectively rendering even future consequences non-existent.
The Inaction
| Action | Impact |
|---|---|
| No Penalties | No meaningful penalties for non-compliance |
| No Enforcement | No real enforcement of rules |
| No Accountability | Entities faced no accountability |
The Rational Response
Firms responded rationally to what they observed: delays, concessions, and the absence of action. If there is no cost to non-compliance, why comply?
The Lesson
Enforcement is the foundation of market credibility. Without enforcement, even the best-designed market architecture will fail.
The Baggage of Transition: Why the Same Entities Don't Trust the Rules
The Problem
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 Trust Deficit
| Reason | Explanation |
|---|---|
| PAT Experience | Entities experienced PAT's enforcement failures |
| No Consequences | Non-compliance had no consequences |
| Skepticism | Entities are skeptical that the CCTS will be different |
The Challenge
Building trust is one of the biggest challenges facing the CCTS. The entities that must comply with the CCTS have been conditioned by PAT to believe that non-compliance carries no real consequences.
The ORF's Assessment
Whether the CCTS inherits PAT's systemic gaps depends on three things that the design alone cannot guarantee: enforcement, verification, and price.
What Has Changed in the CCTS Design
The Institutional Framework
| Institution | Role |
|---|---|
| Bureau of Energy Efficiency (BEE) | Administrator—designs procedures, manages registration |
| Grid Controller of India | Registry—maintains electronic accounts, tracks CCCs |
| Central Electricity Regulatory Commission (CERC) | Regulator—sets price bands, oversees market operations |
The Intensity-Based Design
The CCTS adopts an intensity-based approach—linking emissions targets to output rather than imposing absolute caps. This reflects India's development priorities and industrial growth trajectory.
The Offset Mechanism
The CCTS includes an offset mechanism that allows non-obligated entities to participate voluntarily, generating credits from projects in renewable energy, forestry, waste management, and other sectors.
The Banking Provision
The CCTS allows unlimited banking of CCCs across compliance cycles. Borrowing is not allowed.
The Price Band
The CERC CCC Regulations, 2026, established the operational framework for the exchange of CCCs, including floor and forbearance prices.
What's Still Missing
| Element | Status |
|---|---|
| Independent Regulator | Not established |
| Price Stability Mechanism | Not implemented |
| Legacy Credit Plan | Not yet clear |
| Credible Enforcement | Yet to be demonstrated |
The Legacy Credit Problem: What Happens to PAT ESCerts?
The Scale of the 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 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 IEEFA's Warning
The IEEFA has cautioned that the inclusion of PAT ESCerts could flood the CCTS market and destroy the price signal. The government must manage this transition carefully.
The Conversion Choice: Generous vs. Strict
Generous Conversion
| Aspect | Description |
|---|---|
| What It Means | All or most ESCerts can be converted to CCCs |
| Outcome | Legacy credits flood the market |
| Price Impact | Prices collapse |
| Incentive Impact | No incentive for investment |
Strict Conversion
| Aspect | Description |
|---|---|
| What It Means | Only some ESCerts can be converted |
| Outcome | Legacy credits are limited |
| Price Impact | Prices are maintained |
| Incentive Impact | Genuine incentive for investment |
The Recommended Approach
The IEEFA has recommended that the CCTS should manage the transition of PAT legacy credits carefully to avoid flooding the market. Strict eligibility thresholds are essential.
The Price Collapse Threat: Why Legacy Credits Could Destroy the Price Signal
The Mechanism
| Step | Description |
|---|---|
| 1. Legacy Credits | 10.3 million ESCerts exist |
| 2. Conversion | ESCerts are converted to CCCs |
| 3. Supply Surge | Large number of CCCs enter the market |
| 4. Price Collapse | Oversupply drives prices down |
| 5. Market Failure | No price signal, no incentive for investment |
The Consequences
| Consequence | Impact |
|---|---|
| No Investment Signal | Companies have no incentive to invest in decarbonisation |
| Market Credibility | The market loses credibility |
| CBAM Exposure | Low domestic prices create CBAM exposure |
| Missed Opportunity | India misses the opportunity to decarbonise its industry |
The IEEFA's Warning
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 Enforcement Gap: Will the CCTS Repeat PAT's Mistakes?
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 Enforcement Challenge
| Challenge | Description |
|---|---|
| Trust Deficit | Entities don't trust that enforcement will happen |
| Institutional Weakness | No independent regulator with enforcement authority |
| Political Pressure | Risk of political interference in enforcement |
What's Missing
| Element | Description |
|---|---|
| Independent Regulator | No independent body with real enforcement authority |
| Meaningful Penalties | Penalties must be high enough to deter non-compliance |
| Consistent Enforcement | Enforcement must be consistent and predictable |
| Transparency | Market data must be publicly available |
The ORF's Assessment
Whether the CCTS inherits PAT's systemic gaps depends on three things that the design alone cannot guarantee: enforcement, verification, and price.
The Lesson from the EU and Australia: Stability Mechanisms Matter
The EU ETS 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 (MSR) , which replaced ad-hoc interventions with automatic supply correction.
The Lesson for India
India should embed a price or supply adjustment mechanism early in the CCTS lifecycle to avoid the costly corrections that have challenged compliance carbon markets worldwide.
The Australia Precedent
In 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 Lesson for India
India must manage offsets and legacy credits carefully to avoid flooding the market. The CCTS should embed limits on the use of legacy credits and international offsets.
The Path Forward: What Needs to Change
Recommendation 1: Manage the Legacy Credit Transition
| Action | Why It Matters |
|---|---|
| Strict Eligibility | Only some ESCerts should be convertible |
| Phased Conversion | Credits should be phased in over time |
| Price Floor | A price floor prevents collapse |
| Transparency | Clear rules for conversion |
Recommendation 2: Strengthen Enforcement
| Action | Why It Matters |
|---|---|
| Independent Regulator | Real enforcement authority |
| Meaningful Penalties | Penalties must deter non-compliance |
| Consistent Enforcement | No exceptions, no delays |
| Transparency | Publicly available enforcement data |
Recommendation 3: 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 4: Maintain Credible Enforcement
| Action | Why It Matters |
|---|---|
| No Delays | Issuance and trading must be timely |
| No Concessions | No exceptions for non-compliance |
| Consistent Application | Rules applied consistently |
Recommendation 5: Build Trust
| Action | Why It Matters |
|---|---|
| Demonstrate Enforcement | Show that enforcement will happen |
| Transparent Process | Clear, predictable rules |
| Engage Stakeholders | Build confidence through engagement |
Conclusion: Learn from the Past, Build for the Future
The transition from PAT to CCTS is a critical moment for India's carbon market. The lessons from PAT's failures are clear: enforcement matters, price signals matter, and trust matters.
Key Takeaways
| Aspect | What You Need to Know |
|---|---|
| PAT Legacy | 10.3 million ESCerts issued vs 5.2 million obligation |
| Non-Compliance | Rose from 9% to 56% in PAT cycles |
| Enforcement | Weak enforcement undermined PAT's credibility |
| Conversion Risk | Legacy credits could flood the CCTS |
| IEEFA Warning | Legacy credits could destroy the price signal |
| Way Forward | Manage legacy credits, strengthen enforcement, build trust |
The Choice Is Yours
| Option | Outcome |
|---|---|
| Learn from the past | Build a credible, effective carbon market |
| Ignore the lessons | Repeat PAT's failures |
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 was the PAT scheme?+
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.
Why did PAT fail?+
PAT suffered from limited emissions reductions, persistent non-compliance (rising from 9% to 56%), poor price discovery, and weak enforcement.
What is the PAT legacy problem?+
10.3 million ESCerts were issued against a purchase obligation of only 5.2 million, creating a surplus that could flood the CCTS.
What is the conversion problem?+
CCTS rules allow developers to convert old ESCerts into new CCCs, potentially flooding the market and destroying the price signal.
What is the enforcement challenge?+
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.
What is the IEEFA's warning?+
The IEEFA has warned that the inclusion of PAT ESCerts could flood the CCTS market and destroy the price signal.
What is the lesson from the EU?+
The EU ETS spent its first decade plagued by oversupply and weak price signals. Recovery came only after structural reforms like the Market Stability Reserve.
What is the lesson from Australia?+
In Australia, the inclusion of international offset units contributed to a collapse in domestic prices.
What needs to change?+
Manage legacy credits, strengthen enforcement, implement a price stability mechanism, maintain credible enforcement, and build trust.
How can Carboned.in help?+
We provide compliance assessment, legacy credit management, gap analysis, credit procurement, regulatory advisory, 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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