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.

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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+

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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 policy brief argues that while PAT has delivered incremental efficiency gains, it is insufficient to align industry with India's net-zero pathway.

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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 CCTS Risk

Since the ICM is modelled on the PAT scheme and it is generally expected that the PAT scheme would be phased out and migrated to the CCTS, clarity on this aspect is important. Many of the challenges experienced under PAT are likely to persist as it closely resembles the PAT framework.

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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.

Based on past experience with PAT, there is a serious concern that there will be an oversupply of CCCs in the ICM even with just a compliance market.

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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 CCTS Risk

Waiting for "clear price discovery" after the market tightens isn't a strategy—it's a risk. CCTS is not designed to shock the system in year one. It is designed to tighten over time.

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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.

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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

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. However, the CCTS's success depends on credible stringency, robust MRV, and genuine enforcement.

The ICRIER Perspective

A technology-aligned CTS can help India safeguard export competitiveness while accelerating its transition toward low-carbon industrialization. But only if enforcement is credible.

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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, notified on February 27, 2026, established the operational framework for the exchange of CCCs, including floor and forbearance prices.

The Penalty Mechanism

Non-compliance now has a public price tag. Obligated entities that fall short must buy Carbon Credit Certificates to cover the gap, or face a penalty pegged at twice the average market price of the shortfall, a cost any outside analyst can eventually estimate.

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

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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 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.

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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 Timing Question

Since the PAT scheme would be phased out and migrated to the CCTS, clarity on this aspect is important. The timing and terms of conversion will be critical to market credibility.

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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 Modest Targets Problem

Arriving at a low carbon price will defeat the purpose of the scheme. The maladies of the PAT scheme will definitely creep into the CCTS if the targets are again kept modest.

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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

The CCTS Design and PAT's Problems: The choice of a baseline-and-credit system is intentional. It avoids absolute caps, accommodates intensity-based targets, and allows economic growth to continue alongside emissions reduction. For an emerging economy. However, whether the CCTS inherits PAT's systemic gaps depends on three things that the design alone cannot guarantee: enforcement, verification, and price.

The ICRIER's Call

A technology-aligned CTS can help India safeguard export competitiveness while accelerating its transition toward low-carbon industrialization. But only if enforcement is credible and consistent.

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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 can learn from the EU's experience and embed a stability mechanism from the start. A price or supply adjustment mechanism—comprising consignment auctions—would ensure market stability and prevent 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 Case for a Stability Mechanism

India's forthcoming Carbon Credit Trading Scheme (CCTS), could face supply-demand imbalances and subdued price signals. Set to commence compliance in 2026, the CCTS adopts a baseline-and-credit system with facility-level intensity targets, allowing emissions to scale with economic growth. A stability mechanism is essential to prevent price collapse.

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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

Recommendation 6: Learn from Global Experience

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.

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