Building a Credible Carbon Market in India

This editorial is based on “India needs to build a credible carbon market, minus an offset mechanism” which was published in The Business Standard on 18/06/2025. The article brings into picture the challenges facing India's Carbon Credit Trading Scheme, set to begin in 2026, highlighting risks from voluntary offsets and emphasizing the need for mandatory participation and strong monitoring for credibility.

For Prelims: India's Carbon Credit Trading Scheme, Clean Development Mechanism,  Paris Agreement, European Union’s Carbon Border Adjustment Mechanism,  Energy Conservation (Amendment) Act of 2022, International Finance Corporation, Emissions Trading System.  

For Mains: Key Factors Influencing the Growth of the Carbon Market in India, Key Issues Associated with Development of Carbon Market in India.

India's Carbon Credit Trading Scheme (CCTS), set to begin trading in 2026, represents a pivotal step toward achieving the country's climate commitments, but its success hinges on overcoming fundamental design flaws. The inclusion of voluntary offset mechanisms risks compromising data integrity and scheme credibility, echoing past failures of programs like the Clean Development Mechanism. For India to develop a truly credible carbon market, it must expand mandatory participation across all high-emission sectors, and establish robust monitoring and enforcement mechanisms from the outset.

What are the Key Factors Influencing the Growth of the Carbon Market in India? 

• Commitment to Global Climate Goals: India’s development of a carbon market is primarily driven by its commitment to global climate goals under the Paris Agreement. 
  • The country aims to reduce its greenhouse gas (GHG) emission intensity by 45% by 2030 from 2005 levels, which necessitates robust mechanisms like carbon markets.  
    • This goal aligns with India’s target of achieving net-zero emissions by 2070, requiring significant emission reductions across sectors. 
  • The introduction of the Carbon Credit Trading Scheme (CCTS) in 2023 (expected to become operational by 2026) is a pivotal step towards meeting these ambitious targets, creating a market-based mechanism to cap emissions and promote green technologies. 
• Influence of International Trade and Carbon Border Adjustment Mechanism (CBAM): The looming implementation of the European Union’s Carbon Border Adjustment Mechanism (CBAM) has driven India to expedite the development of a national carbon market.  
  • This CBAM mechanism will impose tariffs on carbon-intensive imports, making Indian exports less competitive if they do not meet international carbon standards. 
  • Indian industries, particularly in high-emission sectors like steel and cement, are under the influence to adopt low-carbon technologies. 
    • The steel sector, responsible for 12% of India’s total CO2 emissions, faces these challenges directly, driving the need for carbon credit trading to comply with the international carbon framework. 
• Promoting Cleaner Technologies and Green Investments: A significant driver for India’s carbon market is the promotion of cleaner technologies and the incentivization of green investments.  
  • By setting emission intensity targets for key sectors, the government encourages industries to adopt energy-efficient and low-carbon technologies. 
  • The Energy Conservation (Amendment) Act of 2022 laid the legislative foundation for the CCTS, enabling carbon credits to be issued for overachieving emission reductions.  
    • Companies like Reliance Industries, investing in green hydrogen and renewable energy, exemplify this shift, positioning India to lead in sustainable industrial practices and attracting global green investments. 
• Economic Opportunities and Financial Incentives for Industry: The carbon market creates financial incentives for industries to reduce emissions by offering the potential to earn and sell carbon credits. 
  • This market-based approach ensures that businesses can offset the costs of decarbonisation by monetizing their emission reductions. 
  • Assuming that the global average price is $4 per credit, India's carbon market is valued at $1.2 billion, opening avenues for financial growth in renewable energy and sustainable projects.  
• Sector-Specific Emissions and Industrial Accountability: India’s carbon market development is driven by the need to address sector-specific emissions, especially from energy-intensive industries such as cement, steel, and chemicals.  
  • The government’s targeted approach to fix emission intensity norms for individual sectors ensures that emissions reductions are tailored to the challenges faced by each industry. 
  • For instance, cement, which accounts for 6% of industrial CO2 emissions, faces a modest 3.4% reduction target over two years under CCTS, reflecting the sector’s significant but manageable impact.  
    • Such sectoral focus ensures that the carbon market will address the most pressing emissions while also encouraging incremental improvements across industries. 
• Increased Domestic and International Stakeholder Engagement: The push for a carbon market is also driven by increasing stakeholder engagement from domestic industries and international bodies.  
  • Stakeholders like the International Finance Corporation (IFC) and major Indian corporations are pushing for the establishment of a transparent, efficient carbon market that enhances India's competitiveness in global trade. 
  • As of 2023, more than 1,400 carbon credit projects were registered under global certification programs like Verra, with a significant portion in India, signaling strong domestic and international interest in India's emerging carbon market. 

What are the Key Issues Associated with Development of Carbon Market in India? 

• Limited Scope and Exclusion of Major Emitters: While the CCTS has targeted energy-intensive sectors like cement, aluminium, and textiles, the steel and thermal power sectors remain outside its scope. 
  • Steel, which contributes around 12% of India’s total CO2 emissions, has been excluded from CCTS despite being a top emitter.  
    • Similarly, as per TERI, the power sector in India contributes ~50% of the fuel-related emissions, and is also missing from the carbon market framework, undermining the scale of emissions reduction needed. 
• Weak Emission Reduction Targets: Critics argue that the emission reduction targets set for some sectors under the CCTS appear weak and lack sufficient ambition to meet long-term climate goals.  
  • For example, the cement sector has relatively modest targets of 3.4% reduction over two years, which seem insufficient given the urgency of decarbonising India’s industrial base.  
    • While these targets may be politically feasible, they risk delaying the substantial emission cuts necessary for India’s net-zero commitment. 
• Inadequate Financial Support and Compliance Burden on MSMEs: Small and medium enterprises (MSMEs) face significant barriers in participating in the carbon market due to high compliance costs, inadequate financial support, and lack of technical capacity.  
  • These sectors, which are crucial for India’s economy, often struggle to meet the stringent regulatory demands of carbon credit trading.  
  • Research by the Indian Carbon Market (ICM) suggests that MSMEs could face compliance costs as high as 5-20%, making it prohibitively expensive to engage with carbon markets.  
    • Without targeted support, MSMEs may be excluded from the market, undermining its inclusivity and hindering the country’s overall decarbonisation efforts. 
• Complexity of Measuring, Reporting, and Verification (MRV) Systems: The credibility of carbon credits depends on robust monitoring, reporting, and verification (MRV) systems, which remain a significant challenge in India’s carbon market.  
  • The country’s existing MRV infrastructure, largely based on older regulatory frameworks, lacks the sophistication needed for accurate and transparent emission tracking.  
    • This could undermine investor confidence and create loopholes for non-compliance. 
  • The absence of consistent and verifiable reporting standards, as seen in past energy efficiency schemes, could lead to discrepancies in carbon credit allocation and hinder the market’s credibility. 
• Fragmentation with Existing Schemes Like PAT: India’s carbon market development faces the issue of fragmentation due to the overlap with existing schemes like the Perform, Achieve, and Trade (PAT) program.  
  • The PAT scheme, which already mandates energy efficiency improvements in high-emission sectors, risks duplicating efforts and confusing industries about compliance requirements.  
  • A lack of integration between these frameworks could lead to inefficiencies and missed opportunities for a unified approach to decarbonisation. 
• Voluntary Participation and Offset Mechanism Risks: The inclusion of voluntary participation in the offset mechanism of the CCTS poses significant risks to market integrity.  
  • Allowing non-obligated entities to trade carbon credits may lead to inflated credit supply and data manipulation, compromising the scheme’s overall credibility.  
  • Past experiences with voluntary carbon markets, such as the Clean Development Mechanism (CDM), highlight issues like double-counting and poor verification. 
• Inconsistent Price Signals and Market Volatility: The lack of clear price signals and market volatility remains a major issue for India’s carbon market. 
  • An effective carbon market requires a stable price for carbon credits to encourage long-term investments in emission reduction technologies.  
    • However, the price of carbon credits in India remains uncertain, with fluctuations likely due to inconsistent emission targets and the introduction of financial players in the market. 
  • International experiences, such as the volatility seen in the European Union Emissions Trading System (EU ETS), serve as a cautionary tale.  
• Lack of Sector-Specific Incentives for Green Technology Adoption: While the carbon market aims to drive emission reductions, the lack of sector-specific incentives for adopting green technologies is a major challenge.  
  • Industrial sectors, such as cement and steel, face high initial costs for transitioning to cleaner technologies, but the carbon market does not offer direct subsidies or incentives for these investments.  
    • Without such incentives, industries may hesitate to invest in costly decarbonisation technologies. 
  • Additionally, the CCTS framework does not sufficiently address the financing gaps for clean technology adoption, which could undermine the long-term sustainability of the market. 

What Measures can India Adopt to Enhance and Strengthen its Carbon Market?   

• Promote Green Financing and Investment in Low-Carbon Technologies: A dedicated green financing mechanism should be created to funnel investment into low-carbon technologies and infrastructure.  
  • This could include the issuance of green bonds, tax incentives for green startups, and partnerships with international climate funds to reduce the capital burden for clean energy projects.  
    • By lowering the financial barriers, India can encourage the private sector to adopt innovations in renewable energy, energy efficiency, and sustainable practices. 
• Establish Clear Long-Term Carbon Targets with Sectoral Roadmaps: India needs to establish clear, binding long-term carbon emission reduction targets, supported by specific sectoral roadmaps.  
  • These roadmaps would outline the technologies, investments, and steps required for industries to meet their emissions goals over the next two to three decades. 
  • This will give businesses the certainty to plan ahead and invest in decarbonization, as well as create a measurable and structured pathway to achieving India’s climate commitments. 
• Strengthen Monitoring, Reporting, and Verification (MRV) Systems: To enhance the credibility of carbon credits, India should implement a robust, digital MRV system that tracks emissions with high precision.  
  • A transparent, standardized reporting process coupled with a network of independent verifiers would ensure the integrity of carbon credits.  
  • This system should be supported by cutting-edge technologies, such as AI and blockchain, to guarantee transparency, traceability, and efficiency in verifying carbon offsets and ensuring compliance. 
• Create Carbon Market Education and Capacity-Building Programs: The successful implementation of a carbon market requires widespread awareness and expertise among stakeholders, including businesses, regulators, and the public.  
  • India should establish dedicated programs to educate and train businesses, especially MSMEs, on how to engage with carbon markets effectively.  
  • This would include workshops, certification programs, and the development of technical advisory services to ensure smooth market participation and maximize the potential of carbon credit trading. 
• Introduce Market Stability Mechanisms: To ensure the long-term sustainability of the carbon market, India should introduce market stability mechanisms such as price floors, flexibility in carbon credit banking, and stabilization reserves. 
  • These measures would mitigate the risks of volatile carbon prices, which could discourage investment and participation.  
  • Such mechanisms would balance market fluctuations, ensuring that carbon prices remain predictable and industry players can confidently make long-term investments in low-carbon technologies. 
• Expanding the Scope of Carbon Credit Trading: India can expand the scope of its carbon credit trading by including all major emitting sectors, particularly those currently excluded, like steel and thermal power.  
  • By incorporating these sectors, the carbon market will have a much larger base of participants, enhancing its liquidity and effectiveness in reducing national emissions.  
    • This would ensure that the carbon market has the capacity to influence the most significant contributors to greenhouse gas emissions. 
• Facilitate Cross-Border Carbon Trading Mechanisms: India can engage in cross-border carbon trading with countries in the region and beyond, creating a more interconnected and liquid global carbon market.  
  • By linking with international carbon markets, such as the EU ETS, India can attract foreign investments and ensure that domestic businesses can offset emissions by purchasing cheaper credits from countries with more cost-effective decarbonization pathways.  
    • This will also help Indian industries stay competitive in global markets with stricter climate regulations. 
• Encourage Carbon Capture and Utilization (CCU) Innovations: India should actively promote innovations in carbon capture and utilization (CCU) as part of its carbon market strategy.  
  • CCU technologies can convert captured CO2 into useful products, such as chemicals or building materials, creating new economic opportunities while reducing emissions.  
    • Incentives for research and development, along with pilot projects, can pave the way for scaling up these technologies, which can play a crucial role in achieving net-zero emissions. 
• Develop a Comprehensive Carbon Offset Framework: India should develop a comprehensive framework for carbon offsets that guarantees high-quality carbon credit generation from voluntary actions, such as reforestation, sustainable agriculture, and renewable energy projects.  
  • By setting clear standards and ensuring strict certification processes, the country can create a thriving voluntary carbon market.  
  • This would attract investment into green projects, generating additional carbon credits that can be traded within both domestic and international markets.

Conclusion:

India’s Carbon Credit Trading Scheme (CCTS) plays a pivotal role in advancing the country’s climate goals, aligning closely with the United Nations Sustainable Development Goals (SDGs), particularly SDG 13 (Climate Action) and SDG 9 (Industry, Innovation, and Infrastructure). To strengthen the market, India must ensure broader participation from all high-emission sectors, establish robust monitoring and verification systems, and create market stability mechanisms.  

Drishti Mains Question:

Examine the potential of India's Carbon Credit Trading Scheme (CCTS) in achieving the country's climate goals. Discuss the key challenges in its design and implementation, and suggest measures to enhance its effectiveness.  

UPSC Civil Services Examination, Previous Year Question (PYQ)  

Prelims 

Q. Consider the following statements (2023)

Statement-I: Carbon markets are likely to be one of the most widespread tools in the fight against climate change.  

Statement—II: Carbon markets transfer resources from the private sector to the State.  

Which one of the following is correct in respect of the above statements?  

(a) Both Statement—I and Statement—II are correct and Statement—II is the correct explanation for Statement—I  

(b) Both Statement—I and Statement—II are correct and Statement—II is not the correct explanation for Statement—  

(c) Statement—I is correct but Statement—II is incorrect  

(d) Statement—I is incorrect but Statement—II is correct  

Ans: B  

Q. The concept of carbon credit originated from which one of the following? (2009)

(a) Earth Summit, Rio de Janeiro  

(b) Kyoto Protocol  

(c) Montreal Protocol  

(d) G-8 Summit, Heiligendamm  

Ans: B