In a significant move toward launching its domestic carbon market, the Indian government has announced the first set of emission reduction targets under the Carbon Credit Trading Scheme (CCTS). While the initial compliance year opts for relatively modest reductions, the government has signaled a steeper decarbonisation trajectory in the years ahead. The strategy appears calibrated to avoid cost shocks in the early phase while nudging industries toward energy efficiency and cleaner technologies.
Gradual Targets, Long-Term Vision
The Ministry of Environment, Forest and Climate Change (MoEF&CC) has adopted a cautious approach for the first year, easing industries into the compliance regime. However, starting in the second year, targets are expected to become more stringent, compelling industries to shift toward low-carbon energy sources and invest in technological upgrades.
Analysts see this as a phased effort to build industry confidence while setting the stage for deeper emissions cuts. But questions remain about whether the initial targets are ambitious enough to generate a meaningful carbon price.
Carbon Price: The Market’s Success Metric
A credible carbon market hinges on one key factor price. The higher the price of carbon credits, the greater the incentive for polluting industries to decarbonise. The Centre for Science and Environment (CSE), in its report “The Indian Carbon Market: Pathway Towards an Effective Mechanism,” has called for bolder targets than those seen under India’s earlier Perform, Achieve and Trade (PAT) scheme.
In theory, stricter targets shrink credit supply, boost demand, and elevate prices making emissions reduction financially attractive. But striking the right balance is tricky. If targets are too lenient, the market gets flooded with credits, driving prices down. If too aggressive, compliance costs could overwhelm businesses.
Design Challenges and Market Stability
Several design elements remain unresolved, each with potential to influence price signals:
- Floor Price: To prevent carbon credit prices from collapsing in weak market conditions, a well-calibrated minimum price is essential but India’s context makes this hard to determine.
- Offset Credits: While the eligibility framework allows for a high volume of offset credit inflows, whether demand will keep pace is uncertain. Poor balance could destabilise prices.
- Market Stability Mechanism: Tools to withdraw or inject credits into the market may help manage volatility, but estimating costs and ensuring adequate funding remains a hurdle.
- Monitoring and Enforcement: A robust Monitoring, Reporting and Verification (MRV) framework is vital. Ensuring data integrity, especially with the entry of new verifiers, and enforcing meaningful penalties through the Central Pollution Control Board will be key to credibility.
Scope and Readiness Concerns
The exclusion of the power sector India’s largest emitter from the initial phase limits market depth and liquidity. Meanwhile, readiness across industries varies sharply. Smaller high-emission entities may lack the technological or financial capacity to meet tougher targets.
Adding to the burden are overlapping disclosure regimes such as business responsibility reports, carbon border adjustment mechanisms, and sector-specific compliance tools. Aligning MRV frameworks across these mechanisms could reduce costs and improve efficiency.
The newly released targets mark a critical milestone in India’s carbon market journey. Compared to PAT, the CCTS targets show a modest uptick in ambition but whether they can generate a robust carbon price will become clear only after trading begins.
Ultimately, the market’s success will depend not only on emission caps, but also on the strength of its design from floor pricing and enforcement to offset controls and capacity-building support.
India’s path to a functional carbon market has begun, but how far and how fast it can drive decarbonisation will hinge on solving these foundational design challenges.