Carbon Credits and Carbon Markets in India Explained

In simple terms, carbon credits are tradable certificates, each representing one tonne of carbon dioxide equivalent that has been kept out of the atmosphere or removed from it, which buyers can use to offset their own emissions or to meet a legal target. India, now one of the world’s largest emitters in absolute terms though low in emissions per person, is building a domestic carbon market while its companies also sell credits in the international voluntary market.

This explainer covers what a carbon credit is, how the voluntary and compliance markets differ, how credits are created and verified, how India’s Carbon Credit Trading Scheme is designed and where it departs from older schemes like PAT and renewable energy certificates, and what kinds of Indian projects earn credits. It also sets out the integrity concerns that critics raise, in neutral terms. Last updated: 3 November 2026.

Key Takeaways

• One carbon credit equals one tonne of carbon dioxide equivalent avoided or removed, and it can be traded so that the party who cuts emissions cheaply is paid for it.
• Compliance markets are created by law and force emitters to meet limits or targets, while voluntary markets let companies and individuals buy credits by choice to back climate claims.
• India’s Carbon Credit Trading Scheme sets up a national compliance market with emissions-intensity targets for energy-intensive industries and a voluntary offset mechanism for project-based credits.
• The new scheme builds on, and is expected to absorb, older instruments like PAT energy-saving certificates, and it differs from renewable energy certificates, which count units of clean electricity rather than tonnes of carbon.
• Indian projects earn credits through renewable power, clean cooking, biogas, waste handling, tree planting and mangrove restoration, among other activities.
• A credit is only as good as the climate benefit behind it, so quality tests such as additionality, permanence, accurate measurement and avoidance of double counting are central to the debate.

What are carbon credits and how do they work?

A carbon credit is a unit that represents one tonne of carbon dioxide, or an equivalent amount of another greenhouse gas, that a project has reduced, avoided or removed compared with what would have happened otherwise. The idea rests on a simple fact: a tonne of carbon dioxide has the same warming effect no matter where in the world it is emitted or saved, so cutting a tonne wherever it is cheapest can serve the same climate purpose.

The mechanism works through trading. A project, such as a solar farm replacing coal power or a village cookstove programme replacing open fires, measures the emissions it avoids, has them checked by an independent auditor, and receives credits from a registry. Those credits are then sold to a buyer, who may “retire” them, which means they are permanently taken off the market, to claim that amount of emissions has been offset. Revenue from the sale helps finance the project.

Other greenhouse gases are converted into carbon dioxide equivalent, shortened to CO2e, using their warming potential. Methane, for instance, is far more potent than carbon dioxide over a century, so capturing a tonne of methane from a landfill or biogas plant counts as many tonnes of CO2e. This is why waste and agriculture projects are common sources of credits, and why accurate measurement is so important.

What is the difference between voluntary and compliance carbon markets?

A compliance carbon market is created by law and obliges covered companies to hold allowances or credits equal to their emissions, while a voluntary carbon market lets organisations buy credits by choice, usually to support climate pledges or net-zero claims. The first is driven by regulation and the second by reputation, investor and customer expectations.

In a compliance system, a government sets a cap or a target for covered sectors. Firms that emit above their limit must buy allowances or credits from firms that do better, which creates a price on carbon. The European Union’s emissions trading system is the best-known example, and several countries and regions run similar schemes. Prices are generally higher and more stable than in voluntary markets because the demand is legally enforced.

In the voluntary market, standard-setting bodies and registries, such as Verra and Gold Standard, certify projects, and buyers include airlines, technology companies and manufacturers. Prices vary widely depending on the project type, the era of the credit and perceived quality. Some credits, such as those from verified carbon removal, sell at a premium, while older renewable-energy credits have fallen in price after doubts about their real impact. Voluntary credits are not a substitute for cutting a company’s own emissions, and standards bodies increasingly stress that they should complement, not replace, direct reductions.

How are carbon credits created and verified?

Carbon credits are created when a project follows an approved methodology to calculate its emissions savings against a baseline, has the numbers checked by an independent verifier, and is then issued credits by a registry. Each step is designed to ensure that the tonnes sold are real and are not counted twice.

First, the project developer defines the activity and picks a methodology, which is a rulebook for measuring what would have happened without the project, called the baseline. Second, the project is validated by an accredited third-party auditor, which checks the design and the claim that it is additional. Third, once the project is running, its actual results are monitored, reported and verified, often yearly. Finally, the registry issues serial-numbered credits, tracks any transfers, and records the retirement when a buyer uses them, which prevents the same credit from being sold again.

Three technical tests recur in the process. Additionality asks whether the project would have happened anyway without carbon revenue. Permanence asks whether the stored carbon, for example in a forest, will stay stored over decades, or be lost to fire, logging or disease. Leakage asks whether protecting one forest simply shifts logging to another. Projects with weak answers to these questions produce credits of doubtful value, which is why independent oversight and clear rules carry so much weight.

What is India’s Carbon Credit Trading Scheme?

India’s Carbon Credit Trading Scheme, or CCTS, is a national framework, set up under the Energy Conservation Act as amended in 2022 and notified in 2023, that creates a domestic carbon market with a compliance mechanism for large emitters and an offset mechanism for voluntary projects. It is India’s main step toward pricing carbon in a way that fits its development needs and its climate pledges.

The compliance side works by setting greenhouse gas emission intensity targets, which cap emissions per unit of output rather than total emissions, for designated industrial sectors. Companies that beat their targets earn tradable carbon credit certificates, and those that miss must buy certificates or face penalties. Government notifications have covered several energy-intensive industries, including sectors such as aluminium, cement, chlor-alkali and pulp and paper, with more sectors expected over time and trading planned to start in phases. Details and timelines are still being finalised and may change.

The offset side lets entities outside the compliance group register projects that reduce or remove emissions, such as renewable energy, afforestation or waste projects, and earn certificates under approved methodologies. The Bureau of Energy Efficiency acts as the administrator, supported by a steering committee, with a national registry and designated trading platforms. The design aims to give Indian industry a clear price signal and a domestic outlet for credits while aligning with the country’s targets to cut emissions intensity and to reach net zero by 2070.

How does the CCTS differ from PAT and renewable energy certificates?

The CCTS differs from PAT and renewable energy certificates because it counts and trades tonnes of greenhouse gas emissions, whereas PAT dealt with energy saved and RECs deal with units of renewable electricity. The older schemes were important stepping stones, and the new market is meant to absorb and extend them.

PAT, or Perform, Achieve and Trade, began in 2012 and asked big energy users to cut their specific energy use, rewarding those who overshoot with tradable certificates. It produced real efficiency gains in sectors like cement, steel and power. Under the carbon scheme, PAT is expected to be folded into the carbon market over time, shifting the metric from energy to emissions. RECs remain a separate tool that lets buyers meet renewable obligations without physically receiving green power.

The Green Credit Programme is sometimes confused with carbon credits but is different. It rewards voluntary environmental actions, such as planting trees on degraded land, and it is run by the environment ministry. It is not a trading system for tonnes of carbon, and its credits do not offset industrial emissions.

What kinds of projects earn carbon credits in India?

Indian projects earn carbon credits mainly through renewable energy, clean cooking, biogas and waste management, energy efficiency, tree planting and ecosystem restoration, all of which reduce or store greenhouse gases. India was among the leading host countries for projects under the Kyoto Protocol’s Clean Development Mechanism, and many developers carried that experience into voluntary markets.

• Renewable energy: wind, solar and small hydro projects displace coal-based power, though their additionality is debated now that they are often competitive without credits.
• Clean cooking: efficient or improved cookstoves and biogas units cut the wood burnt and the smoke produced in rural kitchens.
• Waste and methane: capturing landfill gas, treating manure and sewage, and turning organic waste into biogas avoid methane releases.
• Energy efficiency: efficient motors, boilers, lighting and industrial processes reduce fuel use.
• Forestry and land use: planting trees, restoring degraded forest, protecting mangroves and improving soil carbon on farms.
• Industrial gases and transport: capturing potent industrial gases and shifting to cleaner vehicles and fuels.

Cobenefits are often the real attraction. A cookstove project improves health, a mangrove project protects coasts and fishing, and a biogas plant supplies fertiliser. Good projects share benefits with local communities, and bad ones can leave local people with little say. For this reason standards increasingly require consultation, benefit-sharing and safeguards, and buyers pay a premium for projects with proven social and ecological gains.

Can afforestation and renewable projects really generate credible credits?

Afforestation and renewable projects can generate credible credits when they are truly additional, measured conservatively and managed for the long term, but they are also where the toughest integrity questions arise. Trees absorb carbon as they grow, which makes forestry a natural source of credits, but that carbon can be released again if the trees burn, die or are cut.

For forests, the main worries are permanence and leakage. A plantation of fast-growing species may lock up carbon for decades, but monocultures can harm biodiversity and water, and a mixed native forest or a restored mangrove usually brings wider benefits. Mangrove restoration in the Sundarbans and elsewhere along the coast has been promoted as a high-value option because mangroves store carbon densely in their soils and also shield shorelines from storms. Land rights are an extra issue in India, where forests are often used by communities, so projects need clear consent and fair sharing of returns.

For renewable projects, the question is whether credits changed the investment decision. Solar and wind have become cheap enough that many would be built anyway, which weakens the claim of additionality, and several standards have tightened or closed older methodologies for this reason. Projects that serve poorer communities, that need carbon revenue to be viable, or that provide new clean-cooking capacity are generally seen as stronger cases. The point is not that these projects are bad, but that the credit must represent a real extra climate benefit.

Why are carbon credits controversial?

Carbon credits are controversial because critics say some credits overstate or even fail to deliver emissions savings, and because buyers may use them to delay cutting their own pollution, while supporters argue that well-run markets move money to climate action that would not otherwise happen. Both views have evidence behind them.

The main criticisms are of quality. Investigations by researchers and journalists have suggested that some forest and cookstove credits overestimated their benefits, for example by inflating the baseline of how much wood would be burnt or how much forest would be lost. Double counting is another risk, when the same reduction is claimed by both the seller and the country in which the project sits. Concerns about greenwashing arise when a company markets itself as “carbon neutral” on the strength of cheap credits while its own emissions keep rising.

In response, the market has been tightening. Independent bodies have drawn up core carbon principles to mark out high-integrity credits, ratings firms assess project quality, and the Paris Agreement’s Article 6 sets rules for countries to trade reductions with proper accounting adjustments. Supporters stress that credits should supplement, not replace, deep cuts, and that buyers should favour verified, recent and transparent projects. India’s own scheme tries to build in accountability through a government registry and approved methodologies, though its performance will only be judged once trading matures.

How do carbon markets connect to India’s climate goals and trade?

Carbon markets connect to India’s climate goals by giving industry a financial reason to cut emissions intensity, in line with the country’s pledge to reduce the emissions intensity of its economy and to reach net zero by 2070. They also matter for trade, because other economies are beginning to tax the carbon content of imports.

India’s climate pledges under the Paris Agreement include reducing the emissions intensity of its gross domestic product, raising the share of non-fossil sources in its electricity capacity and creating an additional carbon sink through forests and trees. A domestic market puts a price on progress and channels funds toward efficiency and cleaner technology. It also lets India decide how its credits are counted, which matters because selling reductions abroad can make them unavailable for its own targets.

The European Union’s carbon border adjustment mechanism, which moves into its charging phase from 2026, will affect Indian exporters of steel, aluminium, cement and fertiliser, since they may have to pay for the carbon in their products. A credible domestic carbon price could, in principle, help exporters show they are already paying for emissions. Many details remain under negotiation, but the direction is clear: carbon pricing is spreading, and India is positioning its industries to meet it.

What should buyers and project developers look for?

Buyers and project developers should look for credits that are independently verified, additional, permanent, transparently documented and backed by safeguards for local people, because quality determines both climate impact and reputation. A simple checklist helps in an uncertain market.

• Registry and standard: prefer credits certified under a recognised programme with a public registry and clear retirement records.
• Additionality: ask why the project needs carbon revenue and what would happen without it.
• Permanence and buffers: for forests, check how reversals are covered, for example through buffer pools of unsold credits.
• Vintage and methodology: check when the reductions occurred and whether the methodology is current.
• Community benefits: look for evidence of consent, fair benefit-sharing and ecological safeguards.
• Honest claims: describe purchases as contributions or offsets, not as proof of being carbon neutral, and cut your own emissions first.

For small landowners and communities in India, the practical advice is to work with reputable aggregators, understand the contract terms, and ensure that long commitments, such as keeping trees standing for decades, are matched by fair and transparent payments. Carbon revenue should supplement local livelihoods, not trade them away.

Bottom Line

Carbon credits turn a tonne of avoided or removed greenhouse gas into a tradable asset, and India is now building both its own compliance market and a pipeline of offset projects. Done well, the system can reward efficient industry, fund clean cooking, biogas, forests and mangroves, and give India a say in how carbon is priced. Done badly, it can hand out paper reductions and cover for continued pollution. The difference lies in rigorous measurement, honest claims and a commitment to cut emissions at source first.

Frequently Asked Questions

What is a carbon credit?

A carbon credit is a tradable certificate representing one tonne of carbon dioxide equivalent that a project has avoided, reduced or removed. Buyers can use it to offset their own emissions or to meet a legal target.

What is India’s Carbon Credit Trading Scheme?

It is a national framework notified in 2023 under the Energy Conservation Act that sets emissions-intensity targets for energy-intensive industries and lets them trade carbon credit certificates. It also has an offset mechanism for voluntary projects such as renewable energy, afforestation and waste management.

How is a carbon credit different from a renewable energy certificate?

A carbon credit represents one tonne of greenhouse gas reduced or removed, while a renewable energy certificate represents one megawatt-hour of clean electricity generated. They measure different things and are used to meet different obligations.

Can individuals buy carbon credits?

Yes, individuals can buy voluntary carbon credits through registries, retailers and offset platforms. Quality varies, so it is wise to choose credits certified under a recognised standard and to cut personal emissions first.

Why do some people criticise carbon credits?

Critics say some credits overstate their climate benefit, risk double counting, or let polluters claim to be carbon neutral without cutting their own emissions. Newer integrity standards and tighter rules aim to address these concerns.

Is the Green Credit Programme the same as carbon credits?

No, the Green Credit Programme rewards voluntary environmental actions such as tree planting and water conservation, and it does not trade tonnes of carbon. Carbon credits measure greenhouse gas reductions and are traded in carbon markets.

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