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IEEFA Report Urges Robust Carbon Market Design as India Prepares to Operationalise Carbon Credit Trading Scheme

India must establish a credible, transparent and well-regulated carbon market to strengthen industrial competitiveness, attract low-carbon investments and prepare domestic industries for emerging global carbon regulations, according to a new report released by the Institute for Energy Economics and Financial Analysis (IEEFA) in collaboration with the Environmental Defense Fund (EDF). The report outlines key policy recommendations for the successful implementation of India's Carbon Credit Trading Scheme (CCTS), which is expected to become the country's primary market-based mechanism for reducing industrial greenhouse gas emissions.

The report comes at a time when Indian exporters are facing growing pressure from international climate policies. It notes that India's steel and aluminium exports to the European Union declined by 24.4 percent during FY 2025, with steel exports falling by 35.1 percent, even before any financial obligations under the European Union's Carbon Border Adjustment Mechanism (CBAM) came into force. According to the report, the decline suggests that European buyers are increasingly favouring lower-carbon suppliers in anticipation of stricter climate regulations.

Titled "The Road Ahead for India's Carbon Credit Trading Scheme," the report examines how policy decisions made over the next few years will determine whether the CCTS evolves into an effective carbon market capable of driving long-term investments in industrial decarbonisation. It identifies four critical areas requiring careful policy design: financial market participation, alignment with international carbon border measures such as CBAM, gradual expansion of sectoral coverage, and the development of a high-integrity carbon offset framework under Article 6 of the Paris Agreement.

India formally launched the Carbon Credit Trading Scheme through the Energy Conservation (Amendment) Act, 2022, replacing the earlier Perform, Achieve and Trade (PAT) mechanism with a broader market-based framework. The CCTS is intended to establish a domestic compliance carbon market where designated industrial sectors will be required to meet emission intensity targets or purchase carbon credits from entities that exceed their emission reduction obligations. The mechanism is expected to support India's commitments to reduce the emissions intensity of its economy while progressing toward its long-term net-zero target by 2070.

Drawing lessons from international experience, the report highlights that successful emissions trading systems depend on strong compliance obligations and sufficient market liquidity. It points to examples such as South Korea's Emissions Trading System, where limited early participation and an oversupply of emission allowances resulted in weak trading activity and subdued carbon prices. Similarly, India's PAT scheme witnessed relatively low certificate trading volumes, demonstrating that effective carbon markets require both meaningful compliance pressure and consistent regulatory enforcement.

According to Saurabh Trivedi, Lead Specialist – Sustainable Finance and Carbon Markets at IEEFA South Asia and co-author of the report, India's decision to initially limit participation in the CCTS to compliance entities is consistent with global best practices. He noted that financial institutions and market intermediaries can eventually play an important role in improving price discovery, market liquidity and risk management, but only after the compliance market has established credible demand and robust price signals capable of supporting long-term industrial decarbonisation investments.

The report also examines the implications of the European Union's Carbon Border Adjustment Mechanism, which will progressively impose carbon costs on imports of emissions-intensive products such as steel, aluminium, cement, fertilisers, electricity and hydrogen. Rather than focusing solely on CBAM itself, the report argues that India should prioritise developing a strong domestic carbon pricing mechanism capable of ensuring that carbon costs incurred within India receive recognition under international border adjustment systems. Such an approach could help Indian manufacturers remain competitive while retaining greater economic value within the domestic economy.

Another major recommendation concerns the future inclusion of the power sector within India's carbon market. Electricity generation accounts for nearly 40 percent of India's greenhouse gas emissions, yet it is not included in the initial compliance phase of the CCTS. The report recognises that this phased approach allows policymakers to first establish the market within industrial sectors before addressing the additional complexities associated with regulated electricity tariffs, dispatch mechanisms and power purchase agreements.

The report notes that several international carbon markets, including China's national Emissions Trading System, began by covering the power sector despite operating regulated electricity pricing frameworks. It suggests that India could gradually integrate electricity generation into the CCTS by developing suitable mechanisms for cost recovery, coordination between electricity regulators and carbon market authorities, and appropriate treatment of long-term power purchase contracts.

The study also recommends a cautious approach toward integrating carbon offsets into the compliance market. According to the authors, domestic offset mechanisms should be introduced only after the compliance market has matured sufficiently to establish credible carbon prices and maintain high environmental integrity. The report identifies Article 6 of the Paris Agreement as a significant opportunity for India to attract international climate finance by authorising high-quality emission reduction projects that generate internationally transferable carbon credits while ensuring that domestic mitigation priorities remain protected.

More broadly, the report argues that India now stands at a critical stage in shaping the future of its carbon market. Decisions relating to allowance allocation, emissions benchmarks, price formation, market oversight, sectoral expansion and international alignment will influence investment decisions across energy-intensive industries for decades. A transparent, well-functioning carbon market could encourage cleaner production technologies, accelerate industrial decarbonisation, improve export competitiveness and strengthen India's position in an increasingly carbon-conscious global economy.

As India prepares to operationalise the Carbon Credit Trading Scheme, the report concludes that establishing a strong regulatory foundation should remain the immediate priority. Once a robust compliance market is in place, more advanced features—including broader financial participation, power sector integration, international carbon market linkages and a comprehensive offset framework—can be introduced progressively to build a mature, efficient and globally competitive carbon market.