From Energy Saving to Carbon Credits – Why the PAT-to-CCTS Transition Carries Dangerous Baggage

Introduction: The Inheritance No One Is Talking About

India's Carbon Credit Trading Scheme (CCTS) is being positioned as a transformative leap forward in the country's climate policy architecture. The ICM Portal went live in March 2026, initiating the formal transition from the Perform, Achieve and Trade (PAT) scheme to the CCTS. The scheme will eventually cover some 740 entities and more than 700 million tonnes of CO₂e, making it one of the world's largest emissions trading systems.

But the transition carries baggage. Serious 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.

As one analysis notes, global carbon emissions trading systems rarely fail due to bad economic theory. Instead, they collapse due to a lack of administrative enforcement and monitoring. The PAT scheme suffered from soft penalties. Companies that failed to meet their energy targets in early cycles were still permitted to trade in later cycles. This eroded the financial incentive to comply.

This guide examines the dangerous baggage that the CCTS inherits from PAT, the structural weaknesses that could undermine the new scheme, and what needs to change for India's carbon market to succeed.

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What Was PAT? A Decade of Mixed Results

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. It operated for over a decade and was an important step in building market experience.

PAT's Compliance Record

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.

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

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 Deterioration

These procedural pushbacks signalled that compliance was a future problem rather than a current concern. This 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.

Cumulatively

34 lakh out of 52 lakh ESCerts mandated for purchase at the end of all three cycles were left unattended. These numbers indicate that the DCs openly defied the PAT scheme's rules and regulations.

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The Numbers That Should Alarm Every Market Participant

PAT's Shortfall

The IEEFA report notes that only about 3.4 million of the 5.2 million Energy Saving Certificates mandated for purchase were actually transacted, all at the floor price, reflecting weak targets, uneven MRV and insufficient enforcement.

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.

The PAT-to-CCTS Conversion Risk

CCTS rules allow developers to convert these old energy-saving certificates into new Carbon Credit Certificates (CCCs). If the government converts these legacy certificates without strict eligibility thresholds, a tidal wave of old credits will flood the system.

Why This Matters

This would destroy the carbon price signal before the market even matures. The surplus problem could be carried forward from PAT to CCTS, creating a third weak point.

The choice of conversion rates will therefore serve as early indicators of whether the new regime intends to enforce stricter market discipline.

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The Legacy Credit Glut: 10.3 Million Certificates vs. 5.2 Million Obligation

The Oversupply 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 Scale of the Surplus

Metric	Value
ESCerts issued	10.3 million
Purchase obligation	5.2 million
Surplus	5.1 million (98% of obligation)
Actual transacted	3.4 million
Unattended	3.4 million (34 lakh out of 52 lakh)

The PAT Target Problem

With extremely lenient targets, Designated Consumers were able to overachieve their energy savings and flood the market with excessive ESCerts despite minimal demand.

Approximately 103 lakh ESCerts were issued in the first three PAT cycles, out of which only 52 lakh were mandated for purchase.

The CCTS Risk

If the government converts these legacy certificates without strict eligibility thresholds, a tidal wave of old credits will flood the system. The conversion of banked ESCerts into CCCs, if undertaken without strict eligibility criteria, could flood the market with legacy credits before a meaningful price signal has emerged.

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The Conversion Hazard: How Old ESCerts Become New CCCs

The 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

The choice of conversion rates will serve as early indicators of whether the new regime intends to enforce stricter market discipline.

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.

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The Enforcement Deficit: Why Penalties Must Be Real to Work

The PAT Enforcement Failure

The PAT scheme suffered from soft penalties. Companies that failed to meet their energy targets in early cycles were still permitted to trade in later cycles. This eroded the financial incentive to comply.

The Second Weakness

The second weakness arises when the existence of a penalty is confused with enforcement. Under PAT, penalties were defined in the Energy Conservation Act and were never applied consistently.

What Credible Enforcement Requires

For the CCTS to succeed, Indian regulators must enforce absolute market discipline and apply real, unavoidable penalties to non-compliant entities.

The Core Insight

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.

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The Compliance Culture Problem: What Companies Learned Under PAT

The Dangerous Expectation

Because the CCTS will regulate many of the exact same industrial entities that operated under the decade-long PAT scheme, a dangerous cultural expectation has already set in. Under the PAT scheme, companies learned that target-misses and non-compliance carried very few meaningful penalties or commercial consequences.

The Rational Response

Firms responded rationally to what they observed: delays, concessions and the absence of action. The deterioration in PAT's compliance record was not accidental—it was the logical outcome of a system where non-compliance had no real consequences.

The PAT Record

• Cycle I: 9% non-compliance
• Cycle II: ~56% non-compliance
• 86% of mandated ESCert purchasers were unregistered

The CCTS Risk

Simply building a newer, more sophisticated carbon market framework will fail to drive real, long-term decarbonisation investment if businesses believe the rules will remain soft in practice.

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Why the Same Entities, Same Regulator May Mean Same Outcomes

The Institutional Continuity

The entities entering the CCTS are the same ones that operated under PAT. The transition from PAT to CCTS is a regulatory evolution, not a clean break.

The Culture Problem

Without a change in enforcement culture, the same companies that learned to ignore PAT's rules will learn to ignore CCTS's rules. The question is not whether the design is better—it is whether the enforcement will be different.

The ORF Assessment

Whether the CCTS inherits PAT's systemic gaps depends on three things that the design alone cannot guarantee: enforcement, verification, and price.

The Dangerous Assumption

The assumption that a better-designed market will automatically produce better outcomes is dangerous. Without credible enforcement, even the best-designed market will fail.

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The Power Sector Omission: 40% of Emissions Left Outside the Gate

The Scale of the Gap

The power sector accounts for roughly 40% of national emissions and sits outside the initial compliance boundary. Its exclusion simplifies implementation while recognising the complexities of electricity market regulation.

Why This Matters

In other carbon markets, power utilities are among the most active participants, and fuel-switching dynamics between coal and gas are among the strongest drivers of carbon price movements.

The Result

Their initial absence will concentrate compliance demand among industrial firms whose trading may cluster around settlement deadlines, weakening the informational content of periodic market-clearing prices.

The Integration Challenge

Future integration will require careful attention to electricity market regulation, dispatch decisions, cost recovery, and regulatory coordination. Without a credible integration roadmap, the CCTS will lack the primary channel through which carbon pricing shapes energy investment.

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The Offsets Trap: Why Timing Matters

The Risk of Rushing Offsets

The IEEFA report cautions against rushing offsets. "Offsets are best sequenced to follow market conditions, rather than lead them," said Subham Shrivastava, climate finance analyst and consultant at IEEFA.

The International 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. India can learn from this experience.

The CCTS 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.

The Sequencing Principle

More advanced features such as financial intermediaries, offsets and auctioning should be designed early but introduced only as the market matures. Priority should go to foundational elements: credible stringency, robust MRV, and genuine enforcement.

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The Three Stages of CCTS Development

The IEEFA report identifies three stages of CCTS development:

Phase 1: Initial Stage (2026-2027)

• Introduction of CCTS
• Deciding the policy framework
• Shaping design options such as price and supply adjustment mechanisms
• Establishing credible MRV standards

Phase 2: Future Directions and Market Maturation (2028-2030)

• Expanding sectoral scope (inclusion of new industries)
• Integrating financial markets (deepening liquidity, price discovery, risk management tools)
• Designing role of offsets and external credits
• Positioning in international architecture (Article 6, CBAM)

Phase 3: Foundational Design Changes (2030+)

• Transition to absolute emissions cap
• Introduction of auctioning and competitive allocation of allowances

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What CCTS Must Do Differently to Succeed

Recommendation 1: Enforce Real Penalties

For the CCTS to succeed, regulators must enforce absolute market discipline and apply real, unavoidable penalties to non-compliant entities. The existence of a penalty must not be confused with enforcement.

Recommendation 2: Manage the Legacy Credit Conversion Carefully

The conversion of banked ESCerts into CCCs, if undertaken without strict eligibility criteria, could flood the market with legacy credits before a meaningful price signal has emerged.

Recommendation 3: Establish Credible MRV Standards

Priority should go to foundational elements: credible stringency, robust MRV, and genuine enforcement.

Recommendation 4: Include the Power Sector

The power sector accounts for nearly 40% of national emissions. Its eventual inclusion is essential for the CCTS to function as a credible carbon market.

Recommendation 5: Sequence Offsets Carefully

Offsets are best sequenced to follow market conditions, rather than lead them.

Recommendation 6: Communicate Clear Long-Term Targets

Industrial investment decisions often span 15–30 years and require confidence in the durability of the price signal.

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How Carboned.in Can Help

At Carboned.in, we help businesses navigate the CCTS with clarity and confidence — regardless of how the transition from PAT unfolds.

Our Services

Service	What We Do
Compliance Assessment	Understand your obligations and assess your position
Gap Analysis	Calculate your shortfall and develop a mitigation strategy
Credit Procurement	Help you buy CCCs at the best price
Regulatory Advisory	Stay informed about enforcement developments and conversion rules
Legal Documentation	Draft watertight agreements and handle regulatory filings
Policy Monitoring	Track regulatory changes and market developments

Why Choose Carboned.in?

Reason	Why It Matters
Legal Expertise	Led by Siddharth Gupta, Advocate, Calcutta High Court
Regulatory Knowledge	Deep understanding of PAT, CCTS, and the transition risks
Market Intelligence	Real-time insights on pricing and compliance trends
End-to-End Support	From assessment to compliance

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

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Conclusion

India's Carbon Credit Trading Scheme is one of the world's largest new carbon markets. But the transition from PAT carries dangerous baggage that could undermine the new scheme before it even matures.

Key Takeaways

Aspect	What You Need to Know
PAT Legacy	10.3M ESCerts issued vs 5.2M obligation
Non-Compliance	Rose from 9% to 56% in PAT cycles
Conversion Risk	Legacy credits could flood the CCTS
Enforcement	Penalties were defined but never applied
Cultural Expectation	Companies expect soft rules
Power Sector	40% of emissions excluded initially
First Deadline	July 31, 2026

The Choice Is Yours

Option	Outcome
Understand the risks	Navigate the transition effectively, avoid pitfalls, capitalise on opportunities
Ignore the risks	Face higher costs, missed opportunities, competitive disadvantage

How Carboned.in Can Help

At Carboned.in, we help businesses navigate the PAT-to-CCTS transition with clarity and confidence.

• Compliance Assessment: Understand your obligations
• Gap Analysis: Calculate your shortfall
• Credit Procurement: Buy CCCs at the best price
• Regulatory Advisory: Stay informed about conversion rules and enforcement
• Legal Documentation: Ensure regulatory compliance

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