SubscriberWrites: India’s carbon market—A promising start with room to improve

With some thoughtful adjustments and continued evolution, India's carbon market could become a model for other emerging economies and a template for the global south to emulate.

Representational image | ANI

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In today’s world, where the push for cleaner, greener economies has never been more urgent, putting a price on carbon emissions has emerged as one of our most powerful tools. Countries across the globe have been experimenting with different approaches—some favor direct carbon taxes, while others pursue  market-driven solutions that let the conventional supply and demand dynamics determine the price.

We’ve seen these modalities implemented in places like Europe, South Korea, China, and California to name a few. Each has its own experience of carbon trading—whether it’s cap-and-trade systems or baseline-and-credit mechanisms—and India’s policymakers have clearly been paying attention. They’ve studied these models, learned from their successes and challenges, and that homework is evident.

More crucially, India isn’t starting from scratch here. Many of us remember the PAT scheme (Perform, Achieve, and Trade) that launched under the National Mission for Enhanced Energy Efficiency mission. It was India’s first real experiment with market-based environmental policy, focused on boosting industrial energy efficiency and reducing the country’s overall energy intensity. On a personal front, the experience gained by being at the forefront of various phases of the PAT scheme has been invaluable.

Coming back to the topic, with a rising call for internationalisation of regulation clubbed with need to propel industry decarbonisation, Indian Carbon Market (ICM) was birthed and institutionalised as an idea in 2022 through the passing of Energy Conservation (Amendment) Bill. It took multiple years to develop the final program structure, which included several stakeholder consultations, industry intelligence gathering, and I am sure tons of other activities and hurdles to cross. 

Let’s pause here and give credit where it’s due. The policymakers and relevant support teams who crafted this comprehensive carbon market framework deserve recognition and compliments. They’ve created something that builds a skeleton for both mandatory compliance (Carbon credit trading scheme or CCTS) and voluntary offset opportunities for Indian Inc.

But here’s the thing: having worked closely with industries during multiple phases of the PAT scheme and talking with businesses currently about their sustainability challenges, I can’t help but notice areas where ICM could do better. These aren’t meant as unfounded criticisms, rather think of them more as narratives and opinions that are intended to stress test the currently deployed framework to propel it towards further enhancement. 

Following are specific areas that caught my attention and should be introspected for further deliberation and potential improvement: 

1. Build ambition with pragmatism

The targets feel, for lack of better word, cautious. Perhaps too cautious. While pragmatism has its place in policymaking, the intensity-based targets currently on the books lack the ambition we need. What’s puzzling is that some of these notified companies already have science-based targets that are actually tougher than what the government has assigned them.

What’s more concerning is that as a policy statement – there seems to be a lack of clear roadmap showing how these targets will ramp up over time to align with science-based reduction pathways, signalling ambition. After all, we’re all chasing the same goal—keeping global warming in check. Without that forward momentum, companies find themselves juggling two different target frameworks, which muddles corporate focus and effort, especially when they’re trying to compete in global markets.

More crucially it is important to acknowledge that the lack of target stringency will only lead to abundance of credits and eventual erosion of effective market price. At this point, it is important to remember what happened with ECERTs. The eventual price discovered never quite lived up to expectations. We need carbon pricing that actually drives acceleration, not just compliance.

2. Burdening the policy objectives

Like many well-intentioned policies, this one seems to be trying to solve several problems at once. Yes, putting a price on emissions is the main goal, but there’s clearly other focus areas like greening the grid, enhancing alternate fuels. Perhaps influenced by the ministry at charge? 

Take this puzzle: Renewable Energy Certificates (RECs) don’t count toward compliance as per CCTS—which makes sense—but industries still have to abide by Renewable Purchase Obligations (RPO). That feels like a double whammy. And then there’s the Alternative Fuel and Raw Material (AFR) exemption for waste-derived fuels. Wait, doesn’t processing AFR release emissions? Why should the company producing AFR account for emissions while the company utilizing it through fossil substitution get a pass? The logic applied is confusing. 

Ideally the market should organically determine the most economical and least carbon-intensive fuel sources, not through artificial policy incentives. The nodal agency even acknowledges this complexity, noting that classification as AFR fuels need technical committee approval. In an era when we’re trying to cut red tape, are we really creating new bureaucratic bottlenecks?

3. Confusing Policy Signals

Here’s where things get really confusing. Large companies must meet Renewable Purchase Obligations (RPO) targets, essentially forcing them to buy renewable energy credits (RECs). But under the CCTS methodology document, RECs don’t count as valid decarbonization levers—which is fair and is aligned with international practice.

So essentially by keeping RPOs alive, the government has created a mechanism to keep private investment flowing toward greening the grid. That’s smart. But here’s the head-scratcher: as per CCTS methodology, companies can’t factor grid improvements into their compliance targets also, even though they’re helping fund that greening through REC purchases. Why? 

The reasoning? Decarbonization should focus on “pure corporate actions.” But if companies are financially contributing to grid decarbonization, shouldn’t that count for something? This feels like getting penalized twice for the same thing.

4. Who’s Really in Charge Here?

The Bureau of Energy Efficiency (BEE) deserves enormous credit for what it’s accomplished since its inception. But here’s an uncomfortable question: is it the appropriate agency to lead this charge when the Ministry of Environment, Forest and Climate Change (MoEFCC) is responsible for announcing targets?

It’s like asking someone else to pull the trigger on your behalf. If carbon pricing is truly the objective, why is the energy sector—one of our biggest emitters—sitting on the sidelines? The official reason is that this sector already faces other taxation policies. Fair enough, but by this logic, why can’t companies buying RECs count grid greening toward their targets? 

Maybe it’s time to consider setting up a dedicated carbon market program office within MoEFCC, or at least addressing these potential conflicts of interest head-on. While I do not have an insider perspective, I do hope the discussion on this point will gain steam going ahead. 

5. Minimising Ambiguity

The rules as per methodology document state that transferred emissions emanating from carbon capture and storage solution only count if the receiving entity can prove storage or usage. But what exactly constitutes acceptable proof? What standards will be applied? If this is going to be handled case-by-case by a small committee? If yes, the fact that handful bureaucrats are bestowed with power to decide doesn’t inspire much confidence. We need a process oriented approach. There’s plenty of international guidance available— the UK through its carbon storage regulation has recently published detailed permanence procedures to enhance transparency. Let’s use those lessons instead of reinventing the wheel.

6. ACVA’s Independence: Critical Linchpin 

The Accredited Carbon Verifying Agency (ACVA), as one of the actors, is crucial for maintaining credibility and transparency of the program. However, despite this criticality established, I couldn’t find clear safeguards preventing ACVAs from also providing consulting services to the companies they audit. As per my reading, the proof of demonstrating independence is left to the auditors themselves – lazy oversight or lack of capacity? Independence is everything in this business. Without strict conflict-of-interest rules, we risk undermining the entire system’s credibility. If there are already guidelines in place, they need to be more visible.

Beyond these main points, there are other questions worth exploring: Why not include refrigerant leakage? Will coverage expand to other greenhouse gases in the future? If yes, what does the graded plan look like? Should there be limits on credit banking to prevent market distortion? Most importantly, we need better alignment with global frameworks especially since we are aiming for more global value chain integration. Companies shouldn’t have to manage separate roadmaps for Science-Based Targets and ICM compliance. That’s just adding unnecessary complexity to an already challenging transition.

With so many successful carbon markets to learn from, it’s reasonable to expect ICM to evolve quickly. But here’s the catch—climate science doesn’t give us the luxury of time. We’re in a race against the clock, and unfortunately, we can’t afford to learn everything the hard way. While it is expected that ICM will get better with time. However,  the pace of improvement needs to match the urgency of the climate challenge. That means bolder ambition, clearer rules, and faster adaptation based on what we learn along the way.

India’s carbon market is a significant step forward—there’s no question about that. With some thoughtful adjustments and continued evolution, it could become a model for other emerging economies and a template for the global south to emulate. The foundation is solid; now let’s build something extraordinary on top of it. After all, we’re not just creating a carbon market. We’re laying the groundwork for India’s low-carbon future. That’s worth getting right.

These pieces are being published as they have been received – they have not been edited/fact-checked by ThePrint.