The Carbon Market in India Explained

Putting a price on pollution is one of the most widely used ideas in climate policy, and the carbon market in India is the country’s attempt to apply that idea to its own fast-growing economy. In a carbon market, emissions of greenhouse gases are measured in tonnes of carbon dioxide equivalent, and a tradable unit, called a carbon credit, represents one tonne that has been avoided, reduced or removed. Firms that cut emissions below a required level can sell credits; firms that fall short can buy them.

India has long used market-based tools to encourage efficiency, notably the Perform, Achieve and Trade (PAT) scheme for energy efficiency and Renewable Energy Certificates (RECs) for clean power. The Energy Conservation (Amendment) Act, 2022 created the legal basis for a wider, national carbon market, and the Carbon Credit Trading Scheme (CCTS) was notified in 2023 to build the Indian Carbon Market. This explainer describes how such markets work, how India’s system is designed, who runs it and where it fits into the goal of reaching net-zero emissions by 2070.

Quick Facts

How a Carbon Market Works

Economists have long argued that when pollution is free, polluters have little reason to cut it. A carbon market tries to fix this by giving emissions a price. There are two basic designs.

• Cap-and-trade: the government sets an overall limit on emissions and issues or auctions a matching number of allowances. Firms that emit less than their allowance can sell the surplus; others must buy extra allowances. The best-known example is the European Union’s Emissions Trading System, which began in 2005.
• Baseline-and-credit (intensity-based): each firm is given a target, often expressed as emissions per unit of output. Those who beat the target earn credits, and those who miss must buy credits or pay a penalty.

The logic is the same in both: a company can meet its target either by cutting emissions in its own plant or by buying credits from another entity that has found a cheaper way to cut emissions. This allows overall reductions to be achieved at lower cost than if every firm were forced to follow the same rule.

Key Terms

• Carbon credit: a certificate representing the avoidance, reduction or removal of one tonne of CO2 equivalent.
• Obligated entity: a company that is legally required to meet an emission target.
• Offset: a credit generated by a project that reduces or removes emissions, such as a renewable energy plant or afforestation scheme.
• Monitoring, reporting and verification (MRV): the process by which emissions are measured and checked so that credits are credible.

Compliance vs Voluntary Carbon Markets

Carbon markets around the world operate in two broad segments, and India’s design follows this split.

Compliance markets tend to be larger and more predictable, because demand is created by law. Voluntary markets are more flexible but have faced criticism over the integrity of some credits, such as whether a project would have happened anyway or whether the reduction is permanent. This is one reason governments are trying to bring greater regulatory oversight to the voluntary segment.

India’s Journey Towards a Carbon Market

India’s experience with market mechanisms for climate and energy goals goes back well over a decade. The National Action Plan on Climate Change, released in 2008, included a National Mission for Enhanced Energy Efficiency, which later gave rise to the PAT scheme. India was also an active host of projects under the Clean Development Mechanism, created by the Kyoto Protocol, through which Indian projects such as wind farms and efficient industrial plants earned tradable credits sold to buyers in developed countries.

Timeline of Key Steps

• 2008: National Action Plan on Climate Change announced, with a mission on enhanced energy efficiency.
• 2010: Renewable Energy Certificate mechanism introduced for renewable power.
• 2012: PAT scheme launched for energy-intensive industries.
• 2015: India’s first Nationally Determined Contribution submitted under the Paris Agreement.
• 2021: Net-zero target for 2070 announced at the Glasgow climate conference.
• 2022: Energy Conservation (Amendment) Act passed; updated climate pledges submitted.
• 2023: Carbon Credit Trading Scheme notified.

The Perform, Achieve and Trade (PAT) Scheme

PAT was launched in 2012 as a market-based mechanism to improve energy efficiency in large energy-consuming industries. It was run by the Bureau of Energy Efficiency under the National Mission for Enhanced Energy Efficiency.

How PAT Works

Industries designated as large consumers of energy, such as thermal power, iron and steel, cement, fertiliser, aluminium, textiles and pulp and paper, were assigned targets to reduce their specific energy consumption, which is energy used per unit of output, over a fixed cycle of years. Plants that exceeded their targets earned Energy Saving Certificates (ESCerts), each representing a metric tonne of oil equivalent of energy saved, which could be traded on power exchanges. Plants that fell short had to buy certificates or face penalties.

PAT ran in successive cycles, adding sectors and plants. It focussed on energy efficiency, which is closely linked to emissions, but its unit was energy saved rather than carbon avoided. The CCTS shifts the focus to greenhouse gas emissions directly and has a wider scope, and PAT sectors are expected to be brought into the new compliance system in stages.

Renewable Energy Certificates

The REC scheme was introduced in 2010 to help states and power distributors meet their Renewable Purchase Obligations under the Electricity Act, 2003. Not every state has equal renewable resources, so a market in certificates was created to allow states with fewer resources to fulfil their obligations.

• One REC is issued for each megawatt-hour of renewable electricity generated and fed to the grid.
• The renewable generator can sell the electricity at the regular tariff and sell the certificate separately.
• Obligated entities buy certificates to meet their obligations; they are traded on power exchanges under regulation by the Central Electricity Regulatory Commission.
• Voluntary buyers, such as companies with green pledges, can also purchase them.

RECs helped to separate the “green” attribute of electricity from the physical power, but they certify renewable generation, not a tonne of avoided emissions. The new carbon market is meant to complement them by covering emissions across a wider range of sectors.

The Energy Conservation (Amendment) Act, 2022

The Energy Conservation Act, 2001 created the Bureau of Energy Efficiency and provided a framework for promoting efficient use of energy. The 2022 amendment, passed by Parliament in December of that year, expanded this framework to support India’s climate commitments.

Key Provisions

• Carbon credit trading scheme: empowered the Central Government to specify a scheme for trading in carbon credit certificates.
• Non-fossil energy: enabled the government to specify a minimum share of non-fossil energy as feedstock or energy source for designated consumers.
• Buildings: extended the energy conservation building code to a wider range of commercial buildings.
• Vehicles and equipment: widened the coverage of energy consumption standards to vessels and other equipment.
• Governance: changed the composition of the Bureau’s governing council and strengthened enforcement powers, including penalties.

The amendment thus gave the carbon market a statutory foundation, which is important because credits that are tradeable and enforceable require legal backing.

The Carbon Credit Trading Scheme (CCTS), 2023

The Ministry of Power notified the Carbon Credit Trading Scheme in June 2023 to set up the Indian Carbon Market. The scheme defines how credits will be generated, verified, registered and traded, and creates the institutional structure needed.

Two Mechanisms

• Compliance mechanism: the government sets greenhouse gas emission intensity targets for obligated entities in specified sectors. Entities that perform better than the target receive Carbon Credit Certificates, and those that fall short must buy certificates or otherwise meet their obligations.
• Offset mechanism: non-obligated entities, such as developers of renewable energy, afforestation, waste management or other emission-reducing projects, can register projects, have emission reductions verified and earn certificates that can be sold.

An important design feature is that India’s compliance approach is based on emission intensity, meaning emissions per unit of production, rather than an absolute cap on total emissions. This reflects the country’s development needs, as output and energy demand are expected to grow.

Institutions

A National Steering Committee for the Indian Carbon Market, with representatives of the Power and Environment ministries and other stakeholders, provides overall guidance. The Bureau of Energy Efficiency acts as administrator and regulator for the scheme, while accredited agencies verify emissions data. A registry records issued and traded certificates, and trading takes place through power exchanges under the oversight of the electricity regulator.

The Role of the Bureau of Energy Efficiency

The Bureau of Energy Efficiency, set up in 2002 under the Energy Conservation Act, is the central agency for energy efficiency policy in India. It was the implementing body for PAT and for efficiency labelling programmes such as the star rating of appliances. For the Indian Carbon Market it plays several roles.

• It is the administrator of the compliance mechanism, setting out procedures for target setting, monitoring and verification.
• It works with sector ministries and technical experts to design intensity targets for different industries.
• It accredits verification agencies and oversees the integrity of data.
• It operates the framework for issuing credit certificates and coordinating with the registry and exchanges.
• It builds capacity among industries and institutions to measure and report emissions.

Since the Bureau already has experience with large industries through PAT, it was a natural choice, and it provides continuity between the older efficiency scheme and the carbon market.

Link to India’s Climate Goals and Net-Zero 2070

At the 2021 Glasgow climate conference, India announced a five-part plan sometimes described as “Panchamrit” and set a target of reaching net-zero emissions by 2070. Its updated Nationally Determined Contribution of 2022 commits to reducing the emissions intensity of its GDP by 45 per cent from 2005 levels by 2030 and to meeting around half of its installed electric power capacity from non-fossil sources by that year.

A carbon market supports these goals in several ways. It rewards firms that cut emissions faster than required; it directs investment to cost-effective abatement; it creates a revenue stream for projects such as renewables, energy efficiency and forestry; and it gives industry a price signal that helps in long-term planning. It also prepares Indian exporters for international carbon pricing, such as the European Union’s Carbon Border Adjustment Mechanism, which charges for the carbon content of certain imports.

Related Initiatives

• Green Credit Programme (2023): a separate scheme of the Environment Ministry that incentivises voluntary environmental actions such as tree planting and water conservation. It is distinct from carbon credits.
• International cooperation: Article 6 of the Paris Agreement allows countries to cooperate through carbon markets, and India’s domestic system can be aligned with it.

Challenges and Criticisms

Building a carbon market is a complex task, and India faces several practical challenges.

Data and Verification

Credible markets require reliable emissions data. Many small and medium-sized firms do not yet have systems to measure emissions accurately, and building a verification industry will take time.

Price Discovery and Liquidity

A market works only if there are enough buyers and sellers. Early markets can be thin, and prices can be volatile if targets are set too loosely or too tightly. Stable, predictable rules are crucial.

Integrity of Credits

• avoiding double counting when the same reduction is claimed twice;
• ensuring additionality, meaning that a project would not have taken place without carbon revenue;
• ensuring permanence of removals, particularly for forestry projects.

Equity and Competitiveness

Industries worry about higher compliance costs, especially smaller firms. Policymakers must balance climate action with employment, competitiveness and affordability, and design targets that are phased and achievable.

What the Market Means for Businesses and Citizens

For large industries in covered sectors, the carbon market means preparing greenhouse gas inventories, setting internal targets, investing in efficiency and cleaner technology and deciding whether to buy credits or reduce emissions directly. For developers of clean projects, it opens a potential source of additional revenue. For banks and investors, it provides a way of linking finance to climate performance.

For ordinary citizens, the effects are indirect but real. A successful market can lower the cost of the energy transition, encourage innovation in clean technology and help improve air quality. Over time, the same machinery may extend to more sectors, creating a unified national system for pricing carbon.

Conclusion

The Indian Carbon Market represents the next stage in a long evolution of market-based climate and energy policy, from CDM projects and RECs to PAT and now the Carbon Credit Trading Scheme. Anchored in the Energy Conservation (Amendment) Act, 2022 and administered by the Bureau of Energy Efficiency, it combines a compliance mechanism for large emitters with an offset mechanism for projects. Its success will depend on sound data, stable rules and credible verification, but if these are in place it could become a powerful tool for helping India reach its 2030 pledges and the long-term goal of net-zero emissions by 2070.

Frequently Asked Questions

What is the Carbon Credit Trading Scheme?

The Carbon Credit Trading Scheme (CCTS) is the framework notified by the Ministry of Power in 2023 to create the Indian Carbon Market. It allows the generation, verification and trading of carbon credit certificates, each representing one tonne of carbon dioxide equivalent. It has a compliance mechanism for obligated industries and an offset mechanism for voluntary projects.

Which law provides the legal basis for the Indian Carbon Market?

The legal basis is the Energy Conservation (Amendment) Act, 2022, which amended the Energy Conservation Act, 2001. The amendment empowered the Central Government to specify a carbon credit trading scheme and expanded other energy conservation provisions. The scheme itself was notified under this Act in 2023.

How is the carbon market different from the PAT scheme and RECs?

PAT rewarded industries for saving energy and issued Energy Saving Certificates measured in energy units, while RECs certify one megawatt-hour of renewable electricity. The carbon market measures and trades greenhouse gas emissions directly, in tonnes of CO2 equivalent, and covers a wider range of sectors and projects. PAT sectors are expected to transition into the new compliance system.

What is the difference between compliance and voluntary carbon credits?

Compliance credits are used by entities that are legally required to meet emission targets, and demand arises from regulation. Voluntary credits are bought by organisations that choose to offset their emissions, often for corporate climate commitments. India’s system has a compliance mechanism and an offset mechanism that corresponds broadly to these two types.

What is the role of the Bureau of Energy Efficiency?

The Bureau of Energy Efficiency acts as the administrator of the Indian Carbon Market. It helps set sectoral targets, develops monitoring and verification procedures, accredits verification agencies and manages the issuance of certificates. It brings experience from running the PAT scheme and appliance labelling programmes.

How does the carbon market help India reach net-zero by 2070?

It puts a price on emissions, which encourages industry to adopt cleaner technology and rewards those who cut emissions faster than required. It also channels finance to projects such as renewable energy and afforestation. Together with other policies, it supports India’s 2030 targets and the long-term goal of net-zero emissions by 2070.

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