Global carbon markets have crossed the $100 billion mark for the second year in a row, signalling the growing acceptance of carbon pricing as a central climate policy tool. Nearly 28 per cent of global greenhouse gas emissions are now covered by a direct carbon price, a sharp rise from just 5 per cent in 2005, according to the World Bank State and Trends of Carbon Pricing 2025 report. While this expansion reflects progress at the global level, India’s experience with carbon markets suggests that scale alone does not guarantee meaningful emission reductions.
Across the world, carbon pricing instruments are expanding rapidly. The World Bank report notes that 80 direct carbon pricing mechanisms are currently operational, including 37 emissions trading systems and 43 carbon taxes. Much of this recent growth has come from middle-income economies, underscoring a shift in climate governance beyond high-income countries.
China played a particularly important role in 2024 by expanding its national emissions trading system beyond the power sector to include cement, steel and aluminium. This single move brought nearly three billion tonnes of carbon dioxide-equivalent emissions under carbon pricing and increased China’s overall coverage to more than half of its national emissions. In several countries, carbon pricing has also become a fiscal tool, with more than half of global carbon revenues in 2024 being channelled towards environmental programmes, infrastructure development and social protection.
Despite these gains, the report highlights critical design challenges. Many emerging economies, including India, have adopted rate-based emissions trading systems that regulate emissions per unit of output rather than placing an absolute cap on total emissions. While this approach offers flexibility for growing economies, it provides limited certainty on overall emission reductions and generates little public revenue. As a result, higher coverage does not necessarily translate into deeper climate impact.
India is currently in the process of operationalising its Carbon Credit Trading Scheme, which was notified in July 2024. The scheme initially covers nine energy-intensive industrial sectors and is intended to support India’s commitment to reduce the emissions intensity of its GDP by 45 per cent by 2030. However, analysis by the Centre for Science and Environment suggests that the scheme’s design carries forward several weaknesses from earlier market-based programmes.
The Indian carbon market is largely built on the framework of the Perform, Achieve and Trade scheme, which has been in place since 2012. While PAT improved data reporting and compliance systems, its actual impact on reducing carbon dioxide emissions has been limited. Targets under PAT were often modest, allowing industries to comply or even overachieve without making significant technological upgrades. This resulted in a surplus of energy-saving certificates, particularly during the second cycle, when prices collapsed and incentives for further efficiency improvements weakened.
The experience of the thermal power sector under PAT illustrates these shortcomings clearly. Despite being India’s largest source of emissions, cumulative carbon dioxide reductions achieved under the scheme over six years amounted to less than 2.5 per cent of emissions from a single year. Delays in enforcement and trading further eroded the programme’s effectiveness, turning compliance into a low-cost formality rather than a driver of transformation.
A major concern with the current Carbon Credit Trading Scheme is the exclusion of the thermal power sector from its initial phases. Globally, the power sector has the highest carbon pricing coverage because of its central role in national emissions profiles. In India, thermal power contributes nearly 40 per cent of total greenhouse gas emissions, yet the early stages of the carbon market will cover only about 10 per cent of national emissions. Without including the country’s largest emitter, the scheme’s ability to drive economy-wide decarbonisation remains severely limited.
The Centre for Science and Environment has argued that strengthening India’s carbon market will require clear and difficult policy choices. These include setting ambitious benchmarks supported by a credible carbon price, creating a robust market stability mechanism and gradually integrating the thermal power sector. Generating public revenue through the market could help support micro, small and medium enterprises that lack the capital needed for decarbonisation. Strong monitoring, reporting and verification systems, transparent public disclosure of emissions data and strict limits on the use of offset credits are also essential to ensure credibility.
In more mature markets such as the European Union, carbon prices have reached levels that influence long-term investment decisions and accelerate the adoption of clean technologies. India’s carbon market has the potential to play a similar role, but only if it moves beyond minimal compliance and adopts a more ambitious design.
Recent delays have already raised concerns. Although nine sectors are envisaged under the scheme, emission-intensity targets have so far been notified for only four. Key sectors such as petrochemicals and steel are still awaiting notification, raising the risk of credit oversupply and weakening market confidence.
For now, India’s carbon market remains in a warming-up phase. Without tighter targets, broader sectoral coverage and stronger enforcement, it risks repeating the limitations of earlier schemes high participation but low climate impact. Whether it becomes a meaningful instrument for decarbonisation or merely another compliance mechanism will depend on the choices India makes at this early stage.