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What is the buzz about the Carbon Credit Trading Scheme in India?

India's national carbon market has been operationalised. Here is why CCTS matters - for climate goals, exports, pricing, and the credibility of Indian credits on the global stage.

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India is among the worst affected countries when it comes to climate change. The vision of Viksit Bharat 2047 aims to improve the quality of life of its citizens. It is only natural to take steps towards mitigating the impact of climate change and reducing emissions. And India's commitment to international treaties is equally important as one of the most promising economies.

Each step towards meeting climate goals and sustainability has its own financial cost. But what if there is a way to transform sustainability into a revenue stream? Another way of looking at it is: unless there is a price attached, will any mechanism to address decarbonisation work effectively in a growing developing economy? The Indian Carbon Market is an answer to this bundle of questions.

Carbon markets found their way into the Indian ecosystem many years back. India offers opportunities for mitigation and adaptation projects on the one hand, and the technological acumen to develop carbon removal projects on the other. The intellectual capital and voluntary participation of citizens have been catalysts in attracting projects in India for generation of carbon credits. These credits have been traded in the voluntary carbon market for some time now. With the Carbon Credit Trading Scheme (CCTS), India's national carbon market has been operationalised.

Briefly, CCTS has two segments - the compliance market and the voluntary market. The compliance market is for entities, or more specifically units, that have been identified based on high emissions. Such units have been given targets based on their emissions in the baseline year 2023-24, to be met in the compliance years 2025-26 and 2026-27. If they meet the targets - no more, no less - then there is no action. If they exceed the target, Carbon Credit Certificates (CCCs) will be issued to them, which can be banked or sold, thereby creating the supply side of the compliance market. If they do not meet the target, then there is an obligation to purchase CCCs, creating the demand side. Based on demand and supply, the price for CCCs - and consequently, for carbon - is fixed. As for the voluntary market, carbon projects are allowed to be registered voluntarily and, based on prescribed methodologies, baseline emissions and emissions removed or reduced are calculated to generate CCCs. Since the supply is voluntary, demand also comes from organisations (mostly) and individuals voluntarily. There are of course technicalities attached to both.

If it were just a market with supply and demand of CCCs - which appear to be an intangible product - what is the buzz all about? The spotlight on CCTS is for all the right reasons. Let us have a closer look.

Why the spotlight

The CCTS matters for more than just credits.

Global stage

CCTS allows India to participate in the global carbon conversation, formally. The Paris Agreement has left room for mutual cooperation - each country has declared its climate goal and its mechanism to achieve it; reduction of absolute emissions is the priority, but if that is not possible, reliance on carbon credits may be sought, and those credits can originate in another country. CCTS establishes the path for Indian-origin credits to be bought by other countries to meet their goals. The voluntary market existed outside of CCTS, but CCTS being a regulated mechanism of the Government of India lends credibility - with the country's reputation at stake, the Government will ensure that the quality of credits is high and of global standards. CCTS is expected to be aligned with Article 6 of the Paris Agreement soon, paving the way for international purchases and the foreign exchange, investment and technology that come with them. This is a crucial reason why the world is watching the development of CCTS.

CBAM alignment

At a time when exports are crucial for India's stability and growth story, an additional carbon price is payable under the EU and UK CBAM. From their perspective, this checks leakage and provides a level playing field to domestic players - fair enough. For Indian exporters, CCTS can come to the rescue by fixing the price and mechanism in India itself. This will not only encourage emission reduction in India but also retain carbon price payments in the country, which is already struggling with climate finance, despite the common but differentiated responsibility principle. Even importers in the EU and the UK are keen on CCTS being recognised for CBAM purposes, for smoother importation and competitive prices.

Pricing mechanism

CCTS makes reduction of emissions by high-emitting sectors an economic problem rather than a mere penalty for wrongdoing. Entities must strategise on how to reduce emissions and the price they will pay if targets are not met. Prices also determine how much entities invest in reducing emissions - whether it is better to buy CCCs or pay the penalty; or, in case of exceeding targets, whether CCCs should be banked for later use, and if prices are expected to fall, whether CCCs should be sold to recover the reward for decarbonisation.

Commercial prudence vs tax cost

If you ask any entity to pay a carbon tax, not only does the end objective of reducing emissions feel like a burden, the question of where the tax money will go surfaces. On the contrary, incentivising entities to reduce emissions by introducing a revenue stream where they are rewarded for something that benefits them is far more acceptable and effective. It is not lost on organisations that at the end, the environment and planet earth are shared by everyone, and it is commercially wise to invest in sustainable practices. With entities striving to reduce emissions, attracting sustainability-linked investment from across the globe will also be easier.

Credibility and quality credits

In the carbon market, the quality of credits is the game changer. Everything else can be working, but if the credibility of credits is in question, the market will not serve its purpose and will practically fail. With such high stakes, and the Government of India putting in place robust and rigorous MRV protocols, alignment with international standards and quality becomes easier and enables optimal carbon prices. This is the most important difference between the existing voluntary market operations in India and CCTS.

Hard-to-abate industrial shifts

CCTS allows hard-to-abate sectors like steel, cement and aluminium to participate in the larger climate conversation and contribute to climate goals. It forces them to innovate or, failing that, to support other sectors. This moves the needle to commercialise low-carbon technologies - green hydrogen, carbon capture - reducing costs for the rest of the global market as well.

Enhancing supply chain resilience

The operationalisation of the Indian carbon market is a green signal indicating the seriousness of Indian manufacturers in being climate-oriented. The stringent mechanisms and focus on quality are crucial for enhancing brand reputation and making India the preferred hub for sourcing environmentally conscious goods, and for mitigating the risk of being phased out of green-focused supply chains.

The Indian carbon market will be an interesting space to watch in the coming months when trading begins, stakes increase and we see the outcome of the consistent measures of the industry and the country as a whole. The first movers and better prepared entities will reap the maximum benefit - and preparation begins with scanning current operations and setting reasonable, tailor-made climate goals. One size will not fit all.

Diligence

Risks to be aware of before investing in carbon credits.

Risk 01

Additionality

A credit is additional if the emissions reduction is beyond what would have happened in comparison with business as usual - it should be over and above. Additionality is the most contested concept in carbon markets and the primary source of integrity failures. If a solar plant would have been built anyway due to its economics, credits from it are not truly additional. Similarly, if a company was required to reduce emissions due to a regulatory requirement in the natural course of business, that reduction will not pass the additionality test. Additionality must be seen from multiple dimensions - regulatory, financial, technological.

Risk 02

Permanence

Permanence refers to how long the carbon removed stays out of the atmosphere. Carbon credits should be generated and traded only against CO₂ removal, reduction or avoidance that is permanent or close to permanent, with minimal chances of reversal. Switching to a renewable source of energy for only 12 months, for instance, is not a permanent measure. Credibility of carbon projects and credits weighs heavily on permanence; without it, desired GHG reductions will never take place and credits lose their purpose.

Risk 03

Retiring a carbon credit

When a credit is retired it is permanently removed from the registry and cannot be traded or used again. Retirement is the act of claiming the climate benefit. A company claiming carbon neutrality must retire credits equivalent to its unabated emissions. Credits held but not retired cannot support a climate claim. When purchasing a carbon credit, there must be enough checks to ensure it is not already held or retired.

Risk 04

Double counting

Double counting occurs when the same GHG emission reduction is claimed by more than one party. In a bilateral agreement between two countries, both the host country and the buyer country cannot claim the same credits for their respective climate goals - only one (usually the buyer, unless specified otherwise) does. The same credits cannot be traded in two markets, and the same reductions cannot be registered under two schemes. This principle applies wherever the same measure produces benefits more than once; otherwise the carbon market is defeated.

Risk 05

Greenwashing

Greenwashing using carbon credits occurs when a company uses credits to claim environmental credentials that are not genuinely supported - buying cheap, low-quality credits to claim 'carbon neutrality'; claiming net-zero without disclosing that 80% of emissions are unabated; or using credits from projects that are not additional, permanent, or accurately measured. The term is broader and covers other claims without credible and adequate climate contributions that mislead the user of the information.

To-do list

10-point to-do list for buyers in the voluntary carbon market.

  1. 01

    Define your climate strategy before you buy anything

    Credits should offset residual emissions after genuine reductions - not substitute for them. Map your Scope 1, 2 and material Scope 3 emissions first. Know exactly what unabated emissions you need to cover and why.

  2. 02

    Understand what claim you are actually making

    'Carbon neutral', 'net zero', 'climate positive' and 'carbon negative' are legally and substantively different claims. Before buying credits, confirm what standard your claim is being made under and what disclosure obligations come with it, especially in light of regulations like India's SEBI BRSR Core and the EU Green Claims Directive.

  3. 03

    Understand the premium

    A premium is attached for the nature of the project, the seller's past deliveries, the geographical market being operated in, and other factors. These must be understood to determine fair price, as it can fluctuate greatly depending on the quality of credits.

  4. 04

    Check which standard certified the credit

    There are various standards such as Verra VCS, Gold Standard, American Carbon Registry (ACR), and Climate Action Reserve (CAR). Check whether the credit carries credible labels like the ICVCM CCP label that signify highest-quality voluntary credits. Avoid uncertified or self-verified credits.

  5. 05

    Verify additionality independently

    Use third-party verification that independently rates individual projects on additionality, permanence and MRV quality, among other risk factors. Registration with a registry and claiming to meet the methodology obligation alone does not guarantee a high-quality credit.

  6. 06

    Check the project's registry record directly

    Every credit from the registry has a unique serial number listed on publicly accessible registries. Before purchasing, verify that the credits exist, have not already been retired by someone else, and that the project's verification reports are publicly available.

  7. 07

    Understand permanence risk for the project type

    Identify permanence risk checks relevant to the project type. For forestry and soil carbon projects, the buffer pool percentage held against reversals is a relevant test - and what happens if the forest burns or the project is abandoned? Match the permanence horizon to the claim period envisaged by the entity.

  8. 08

    Look for co-benefits but don't let them substitute for carbon integrity

    Credits with verified SDG co-benefits (biodiversity, water, community livelihoods) are valuable and often command price premiums. Credible certifications should be used. However, co-benefits should add to carbon integrity, not compensate for weak additionality or poor MRV.

  9. 09

    Get a legal review of your climate claim before publishing it

    With India's SEBI BRSR Core, the EU Green Claims Directive and similar frameworks tightening globally, an unsubstantiated climate claim backed by low-quality credits carries legal and reputational liability. Before publishing any carbon neutrality claim, conduct a legal review against applicable jurisdiction-specific standards and disclosure requirements.

  10. 10

    Plan for a world where the rules will change

    The VCM is in active regulatory flux. Article 6 rules are still being operationalised, and jurisdictions are adding greenwashing liability. Decide whether to buy credits in tranches or lock into long-term contracts, and build in contractual protections - quality warranties, replacement clauses - in case credit standards are later found to be insufficient.

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