India’s Carbon Market Needs Predictable Rules To Build Credibility: IEEFA Report

India’s emerging carbon credit market will need strong benchmark design, predictable policy signals, and coordinated regulation to establish credibility and support industrial decarbonisation, according to a new report by the Institute for Energy Economics and Financial Analysis (IEEFA).

The report, Potential Drivers of Carbon Price Formation in the CCTS: Design and Market Dynamics in the Indian Carbon Market, examines how India’s Carbon Credit Trading Scheme (CCTS) could shape carbon pricing as the country begins implementing its compliance carbon market. The first compliance cycle will cover seven sectors and around 490 obligated entities.

Benchmark Design Will Determine Market Scarcity

According to the report, India’s intensity-based carbon market differs from traditional cap-and-trade systems because allowable emissions are linked to production output. As a result, both carbon credit supply and demand can increase simultaneously depending on industrial growth patterns.

IEEFA noted that benchmark calibration will play a central role in determining market scarcity and carbon prices. The report recommends transparent benchmark-setting methodologies, independent verification processes, and robust industry data to support effective price formation.

“India’s CCTS reflects a pragmatic approach to carbon market design. It accommodates industrial growth while building on existing institutional capabilities,” said Saurabh Trivedi, Lead Specialist, Sustainable Finance & Carbon Markets – South Asia at IEEFA.

“Understanding how these design features interact with India’s economic and regulatory context is essential for the scheme to fulfil its potential as an instrument for industrial decarbonisation.”

Power Sector Exclusion May Limit Early Liquidity

The report also highlights the implications of excluding the power sector from the initial phase of the CCTS. In several international carbon markets, power utilities are among the most active participants and play a significant role in driving carbon price movements.

IEEFA said the absence of the power sector could concentrate compliance activity among industrial firms, reduce market liquidity, and limit the influence of carbon pricing on energy investment decisions during the early years of the scheme.

“The phased approach to power sector inclusion reflects the importance of working through how carbon costs interact with India’s electricity regulatory framework,” said Subham Shrivastava, Climate Finance Analyst – South Asia at IEEFA. He added that a clear roadmap for integrating the power sector would help strengthen the market’s long-term foundations.

Policy Coordination Needed To Avoid Credit Surpluses

The report warns that interactions between the CCTS and existing government programmes, including the Perform, Achieve and Trade (PAT) scheme, Renewable Consumption Obligations (RCOs), Production-Linked Incentive (PLI) scheme, and National Green Hydrogen Mission, could affect market performance.

Without periodic revisions to emissions baselines that account for the combined impact of these initiatives, the market could face credit surpluses that weaken carbon price signals. The report notes that similar challenges affected the early years of the European Union’s emissions trading system.

IEEFA expects both carbon credit supply and demand to remain relatively inelastic during the initial years of the scheme. Industrial sectors such as steel, cement, and aluminium typically operate on investment cycles ranging from 15 to 30 years, limiting their ability to respond quickly to carbon price fluctuations.

The report recommends introducing supply adjustment mechanisms, clear banking rules, and forward guidance on benchmark tightening from the outset to improve market stability and support price discovery.

“Industrial firms are making capital allocation decisions today that will shape their emissions profiles through the 2030s and beyond,” said Saloni Sachdeva Michael, Lead Energy Specialist, India Clean Energy Transition – South Asia at IEEFA. “Building the CCTS’s credibility in its early years through predictable rules, transparent tightening trajectories, and well-coordinated policy design will be essential to ensuring the scheme fulfils its role in India’s decarbonisation journey.”