The real test of India’s carbon market is getting the price right

India is putting a national price on industrial carbon for the first time. Under the Carbon Credit Trading Scheme (CCTS), baselines and final targets have been notified for seven energy-intensive sectors covering roughly 490 industrial emitters. The world’s sixth largest economy is joining a global shift: emissions trading systems now cover about 28% of the world's emissions and have raised more than $100 billion a year through auction revenues and other forms of carbon pricing. 

The debate so far was about whether India should have a carbon market. That is now settled. The harder one is whether the market India builds will actually work. 

A new report from the Institute for Energy Economics and Financial Analysis (IEEFA) and Environmental Defense Fund (EDF), examines precisely that, drawing on the experiences from carbon markets in the EU, South Korea, China and the state of California in the US. The report’s central conclusion is that getting the price signal right in the early years will be critical in building confidence and credibility in the market over time.

One should start with why the price matters at all. The whole purpose of a carbon market is to incentivise emission reductions. International assessments estimate that a single tonne of carbon dioxide inflicts around $140-380 (₹13,000-₹36,000) of damage on society — through worse health, lower farm yields and harsher weather. An unregulated emitter pays none of it. 

A carbon market exists to close that gap. If the price it produces is weak, the gap stays open, and the market becomes less effective.

India's carbon market design is deliberate. Rather than setting a single absolute ceiling on emissions, as Europe does, it has chosen an intensity-based system in which firms are judged on emissions per tonne of output, not against a national cap. That lets an economy growing at 6.6% to 6.8% a year keep expanding without the carbon limit constraining production levels. 

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It is the right instrument for a country that still has to industrialise. Underpinning all of this, credits are issued only after a firm's performance is verified. While this design has much to commend it, it also raises a challenge that merits a wider conversation.

A fine balance

In an intensity-based market, economic growth can create both buyers and sellers of credits. Firms that outperform their emissions-intensity targets generate credits that they can sell, while firms that fall short must buy them. The balance between supply and demand therefore depends on how ambitious the targets are and which firms are expanding production. 

Carbon scarcity does not emerge automatically; it is created through policy design. Set the benchmarks too generously, and the market fills with cheap credits that reward business-as-usual and send little signal to invest in cleaner technologies. Set them too tightly, and firms face costs they may not yet be able to absorb.

This is not a theoretical worry. Historical experience offers a useful lesson. Europe's carbon market, for example, struggled with low carbon prices in its initial phases, prompting a series of reforms to strengthen the market. It issued too many permits, prices fell close to zero, and for the better part of a decade, the market did little to cut emissions. 

Asia has similar stories: in their early phases, carbon prices sat below $10 in South Korea and between $6-$8 in China, drifting up to only around $14 by late 2024 — numbers set more by administrative design than by real scarcity. The lesson is blunt: a carbon market is only as strong as the scarcity built into it. 

There is a hard commercial reason to get this right, too. From 2026, the EU's carbon border tax will require importers of steel, aluminum and other goods to pay for the emissions embedded in them, in line with EU carbon prices. If India does not price its own industrial carbon credibly, that bill will simply be collected in Brussels. In today’s geopolitical and trade landscape, a credible domestic carbon price is not just climate policy, but an industrial strategy as well.

Learning curve

The good news is that India can choose not to repeat these mistakes. It also starts with a foundation: for more than a decade, the Perform, Achieve and Trade (PAT) scheme has familiarised energy-intensive industries with compliance obligations, third-party verification, and tradable certificates. While a carbon market is a different instrument, these experiences provide a valuable starting point. 

Three priorities stand out.

The first is a predictable tightening path. A blast furnace or a cement kiln locks in emissions for 15 to 30 years. No firm will price carbon into a thirty-year decision unless it believes the targets will tighten steadily and will not be quietly relaxed the moment industry pushes back. Europe, having learned the hard way, now follows a predictable annual reduction in the number of emission allowances available to the market. The rate of decline increased from 1.7% to 2.2% from 2021 onwards, steadily tightening supply and strengthening the carbon price signal. Publishing a clear, long-term trajectory of this kind is the single most powerful signal the government can send.

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The second is a stability mechanism built in from the outset. Rather than responding to challenges after they arise, India can strengthen market confidence by embedding appropriate safeguards from the outset. Europe recovered only after it created an automatic rule that reduces the supply of tradable emission allowances when surpluses build up. A transparent, rule-based version should be built into the CCTS too.

The third is a thoughtful roadmap for sectoral expansion. Currently, the CCTS roughly covers 20% of India’s emissions. The immediate priority is not to maximize coverage overnight, but to make the initial design work well. At the same time, policymakers should start signaling how the market would expand over time to cover a larger share of the economy. Wider sectoral coverage can deepen the market, increase opportunities for cost-effective abatement, and strengthen the carbon price signal.

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Need for expansion

Market depth matters too. Today, participation is largely limited to obligated entities. In more mature carbon markets, financial institutions also participate, providing liquidity by matching buyers and sellers, helping firms manage price risk, and supporting more continuous trading. While limiting participation in the early years is understandable, greater clarity on whether and how market participation could broaden over time would help firms and investors plan ahead.

Both are sensible evolutionary steps rather than immediate requirements. The objective is not to make the market bigger for its own sake, but to provide a clear sense of direction for how the CCTS can mature as India's carbon market develops.

There is a quieter risk as well. India is running many climate and industrial policies at once, including renewable consumption obligations, efficiency mandates, production-linked incentives, the Green Hydrogen Mission, the Green Credit Programme and others. Each is valuable. But where they cut emissions in the very sectors the carbon market covers, they can drain demand for credits and depress the price, with no one intending it. The carbon market must sit at the centre of this architecture, with the rest calibrated to reinforce its signal, not undercut it. That calls for coordination across ministries, states and regulators. 

None of these is a case for hesitation. It is the opposite. As IEEFA and EDF’s analysis makes clear, a well-built CCTS could become one of the most powerful tools India has to reach net zero by 2070 while keeping its industry competitive — steering capital toward the firms and technologies that pollute the least and turning a cost on carbon into an advantage for the cleanest.

But a market is only as good as the price it produces, and a price is only as good as the promise behind it. Europe learned that at great cost. Asia is still learning it. India, building with all of it in plain view, has the rare chance to get it right the first time.

Shuchi Malhotra is the Lead Advisor, Carbon Markets at the Environmental Defense Fund. Views expressed are personal.

[Edit: Bhasker Tripathi, Shaswata Kundu Chaudhuri; Production: Arkatapa Basu]