WHY DOES THIS MATTER NOW?
For decades, global climate conversation has treated economic expansion and aggressive decarbonisation as fundamentally opposing forces. India is actively attempting to dismantle that binary. As the world’s third-largest greenhouse gas (GHG) emitter, India sits at a critical intersection. The country faces the complex challenge of systematically reducing emissions at home while simultaneously ensuring robust domestic growth, driving economic modernization, and maintaining its export competitiveness in a rapidly changing global arena. The centerpiece of this high-stakes strategy is the newly launched Carbon Credit Trading Scheme (CCTS). This initiative is no longer just an isolated policy experiment; it represents a pivotal blueprint for how emerging economies across the Global South can navigate the green transition without sacrificing industrial development.
PILOT SCHEMES TO POLICY ARCHITECTURE
The operationalisation of the CCTS marks a significant evolution from the fragmented pilot schemes of the past two decades. By building directly on the operational lessons of the international Clean Development Mechanism (CDM), alongside domestic initiatives like the Perform, Achieve, and Trade (PAT) scheme and Renewable Energy Certificates (RECs), India has successfully formalized a sophisticated policy architecture. The true turning point occurred with the passage of the Energy Conservation (Amendment) Act 2022, which established the legal foundation for the government to issue, track, and trade carbon credits on a large scale.
This framework separates the market into a double-layered structure:
- The Compliance Market: A regulated section targeting obligated heavy industries, initially focusing on iron and steel, cement, petrochemicals, and paper and pulp, where entities are held accountable for reaching rate-based emissions reduction targets or purchasing credits to compensate for deficits.
- The Voluntary Market: A project-based mechanism designed to incentivize non-obligated businesses, renewable energy, agri-tech, and non-industrial mitigation projects to monetize their carbon savings.
With trading activities supported by established platforms like the Indian Energy Exchange (IEX) and Power Exchange India Limited (PXIL) having commenced in April 2025, carbon pricing is now officially integrated into real business decisions. Gradual expansion plans estimate that the market will account for 15% of India’s total emissions by 2030 as more industries are brought under stricter compliance regulations. This comprehensive mixture operates under transparent rules for monitoring, reporting, and verification (MRV) with strict oversight by the Bureau of Energy Efficiency (BEE), the National Steering Committee, and key state agencies.
THE IMMEDIATE MANDATE: WHAT MATTERS NOW?
To capture immediate opportunities and avoid market stagnation, India’s authorities are under pressure to prioritise three decisive, strategic areas:
- Escalating Sectoral Scope and Ambition: While the initial phase strategically targets the heaviest industrial polluters, regulators must quickly tighten existing benchmarks and bring newly industrialised, non-covered sectors into the framework to drive statistically significant greenhouse gas reductions across the economy.
- Democratising the Market for MSMEs: Because micro, small, and medium enterprises form the core backbone of Indian manufacturing, the immediate policy priority must shift toward deploying targeted capacity-building, technical assistance, and tailored financial instruments like credit guarantees or blended finance. This ensures the ecosystem truly represents Indian manufacturing in all its diversity rather than becoming a marketplace dominated entirely by large corporations.
- Institutionalising High-Integrity Digital Governance: To secure international trust, facilitate high-value bilateral and multilateral trade agreements, and unlock capital under Article 6 of the Paris Agreement, India must rapidly transition to digital-first MRV standards. Legally integrating blockchain and AI-based solutions inherently into both the national registry system and the verification and reporting processes is an urgent necessity to prevent greenwashing and establish investor trust.
NAVIGATING THE ROADBLOCKS
Even with strong current policy momentum, a number of critical issues stand in the way of a mature carbon ecosystem:
- The Compliance and Ambition Dilemma: The enforcement of regulations across the wider Indian industrial landscape remains at a low level. Furthermore, initial emission reduction targets for specific sectors, such as the cement sector’s target of a 4% reduction over two years, have faced criticism for being too weak to achieve solid, long-run climate mitigation. The program will have to systematically raise its level of ambition for each sector over time to achieve real, long-term decarbonisation.
- The MSME Equity and Cost Barrier: Small contributors currently face high compliance costs, a severe lack of financial support, and strictly limited technical capacities. Without targeted market reforms, capacity-building programs, and inclusive financial instruments designed to close these gaps, the broader economy risks missing out on a comprehensive green transformation.
- The MRV Complexity and Trust Deficit: There are ongoing concerns regarding the complexity and reliability of baseline MRV systems and the overall purity of carbon credits. Old-fashioned, manual verification controls risk causing inaccurate reporting and a subsequent loss of trust from both local stakeholders and foreign partners. While blockchain and AI tools offer a solution, they require wide adoption and clear legal frameworks before becoming standard practice.
DRIVING FACTORS AND THE GEOPOLITICAL MULTIPLIER
The driving factors behind the CCTS are powerfully balanced between domestic commitments and international realities. Domestically, the system serves as the centerpiece of India’s Nationally Determined Contribution (NDC) to reduce emissions intensity by 45% by 2030 and reach net-zero by 2070, pushing industries to adopt cleaner technologies through structured market incentives. Internationally, the upcoming full operationalisation of the European Union’s Carbon Border Adjustment Mechanism (CBAM) in 2026 gives Indian exporters a powerful commercial reason to verify their green credentials rather than face expensive tariffs on carbon-intensive exports like steel and cement.
Resolving domestic friction points carries immense geopolitical weight because India’s progress directly accelerates the move toward an interconnected Asian carbon ecosystem. The Indo-Pacific region is currently responsible for approximately 45.9% of global emissions and faces severe climate-induced economic risks, including a potential 17% GDP loss by 2070 under high-emission scenarios. By utilizing an intensity-based “baseline-and-credit” system, India provides a scalable model illustrating how emerging economies can successfully decouple industrial development from climate degradation.
Furthermore, India’s recent operationalisation of international trading under Article 6.2 of the Paris Agreement, highlighted by its formal bilateral carbon trade partnership with Japan, signals a clear shift toward proactive regional climate diplomacy. This collaboration serves as a direct pipeline for increased cash flow, broadened best practices, and the mobilization of foreign capital for clean technology transfers. By setting a precedent for high-integrity governance through a National Designated Authority (NDA), India offers a framework that other nations in the Global South can replicate to build investor trust. As regional hubs like Singapore and South Korea also advance their carbon policies, India’s market adds massive liquidity and a vast supply of high-quality credits from sectors ranging from renewable energy to sustainable agriculture, lowering the overall economic cost of the energy transition across the Indo-Pacific.
THE WAY FORWARD
The successful implementation of India’s CCTS ultimately hinges on a single imperative: seamlessly balancing aggressive domestic growth with strict, high-integrity climate governance. If policymakers can successfully broaden the market’s scope, fully integrate smaller enterprises, and enforce transparent, digital verification systems, India will establish a highly viable economic blueprint for the Global South. Doing so proves that an emerging economy can successfully protect its export competitiveness and drive technological modernization while systematically advancing toward its net-zero goals.
Shubhankar Agarwal
Assistant Manager, Economic Development
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The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Adam Smith International.
