As India moves forward with implementing its Carbon Credit Trading Scheme (CCTS), a new report from the Institute for Energy Economics and Financial Analysis explores the factors that will influence carbon price formation and determine how effectively the scheme supports industrial decarbonisation.
The report, titled Potential Drivers of Carbon Price Formation in the CCTS: Design and Market Dynamics in the Indian Carbon Market, examines the structure of India’s intensity-based emissions trading system, which will initially cover seven industrial sectors and 490 obligated entities. Drawing insights from established carbon markets in the European Union, South Korea, China, and California, the report highlights how India’s unique market design could shape trading behavior and carbon pricing during the scheme’s early years.
According to Saurabh Trivedi, Lead Specialist for Sustainable Finance and Carbon Markets – South Asia at IEEFA and one of the report’s authors, India’s carbon market has been designed to balance industrial growth with climate objectives while leveraging existing regulatory frameworks. However, he noted that the success of the scheme will depend on how its design features interact with India’s economic conditions and policy environment.
One of the report’s key findings relates to benchmark calibration, which will play a critical role in determining the availability of carbon credits. Since the CCTS is based on emissions intensity rather than absolute emissions, allowable emissions increase alongside production output. This means both the supply and demand for carbon credits could rise simultaneously, depending on which industries experience growth.
As a result, benchmark design becomes the primary mechanism for maintaining market scarcity and ensuring meaningful carbon price signals. The report emphasizes the importance of transparent benchmark-setting methodologies, robust industry data, and independent verification processes to support effective market functioning.
The report also discusses the implications of excluding India’s power sector from the scheme during its initial phase. In many established carbon markets, power producers are among the largest and most active participants, with shifts between coal and gas generation often driving carbon price movements.
Without the power sector’s participation, trading activity will be concentrated among industrial companies, potentially reducing market liquidity and limiting the influence of carbon pricing on energy investment decisions.Subham Shrivastava, Climate Finance Analyst at IEEFA and co-author of the report, explained that the phased inclusion of the power sector reflects the need to carefully align carbon pricing with India’s electricity regulatory framework.
He pointed to South Korea’s experience, where reforms gradually incorporated carbon costs into electricity dispatch decisions, as an example of how such integration can be implemented in stages. The report suggests that establishing a clear roadmap for power sector inclusion would strengthen the long-term effectiveness of India’s carbon market.
Another important finding concerns the interaction between the CCTS and existing government programmes, including the Perform, Achieve and Trade Scheme, Renewable Consumption Obligations, the Production-Linked Incentive Scheme, and the National Green Hydrogen Mission. These initiatives already influence emissions reductions across several sectors covered by the carbon market.
The report warns that if baseline emissions are not periodically revised to account for the cumulative impact of these policies, the market could experience an oversupply of credits, weakening carbon prices and reducing incentives for further emissions reductions. Similar challenges affected the early development of the European Union’s carbon market.The report also highlights potential challenges during the market’s formative years.
In sectors such as steel, cement, and aluminium, emissions reduction measures often require substantial capital investments and are tied to long-term industrial investment cycles that can span 15 to 30 years. As a result, companies may have limited ability to quickly adjust their emissions in response to carbon price signals, making both supply and demand relatively inflexible in the short term.
Market liquidity could also remain constrained initially because financial intermediaries, which account for a significant share of trading activity in mature carbon markets such as the EU Emissions Trading System, are not expected to participate in the early stages of India’s scheme. To address this challenge, the report recommends introducing supply adjustment mechanisms, providing advance guidance on future benchmark tightening, and establishing clear banking rules that allow companies to carry forward credits.
These measures could help improve market stability and build confidence among participants as trading activity develops.Saloni Sachdeva Michael, Lead Energy Specialist for India Clean Energy Transition at IEEFA and co-author of the report, noted that industrial companies are making investment decisions today that will influence their emissions profiles well into the next decade.
She emphasized that establishing credibility through predictable regulations, transparent policy implementation, and coordinated climate initiatives will be critical to ensuring the Carbon Credit Trading Scheme becomes an effective tool in supporting India’s long-term decarbonisation goals.
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