India’s New Carbon Market May Let Big Polluters Pay to Pollute, Report Warns

India’s national carbon market is scheduled to begin trading by around October, according to the Bureau of Energy Efficiency, with polluters across nine major sectors already measuring emissions against new intensity targets set last year. But a new report from Bengaluru-based think tank Climate Risk Horizons, released this week, argues the scheme in its current form is unlikely to meaningfully accelerate industrial decarbonisation — and could instead let some of India’s largest emitters treat compliance as a routine cost of doing business.

Targets that ask for very little

The report, titled “Unlocking Ambition for India’s Carbon Credit Trading Scheme,” focuses on the iron and steel, cement, and aluminium sectors, which face mandatory emissions-intensity targets under the scheme. The core finding: those targets are modest enough to be met through incremental efficiency gains rather than genuine technology shifts. Leading steel and cement producers, for instance, need to cut emissions intensity by only 2–5% by FY2026–27 — a bar low enough that most large players could clear it without structural change.

Paying to pollute is cheaper than fixing it

Even where companies fall short, the financial consequences look mild. The report estimates the cost of buying carbon credits to offset a shortfall at roughly 7% of annual profit for large steel companies, about 2% for cement, and under 1% for aluminium. Non-compliance carries a penalty of twice the market trading price of carbon credits — but with prices expected to start low and stay volatile, and no minimum floor price built into the framework, Climate Risk Horizons warns that penalty is unlikely to bite. “Paying to pollute,” the report notes, could become the economically rational choice for many companies, undermining the scheme’s decarbonisation intent altogether.

The elephant not in the room: power

Perhaps the report’s sharpest criticism is structural: the power sector, responsible for roughly 55% of India’s total CO2 emissions as of 2023, has been left out of mandatory targets entirely. Given that power sector decarbonisation is widely seen as central to India meeting its net-zero commitments, its absence from the compliance framework significantly limits how much emissions reduction the scheme can realistically deliver, however ambitious future iterations for industry become.

What would fix it

The report’s recommendations are straightforward, if politically harder to execute: successive iterations of the scheme need progressively tighter targets set transparently, rather than starting conservative and staying there; the power sector needs to be brought inside the compliance perimeter; and financial incentives — through price floors, stability reserves, and a credible non-compliance penalty — need to be strong enough that decarbonising is cheaper than not. International carbon markets that have driven real industrial change, the report notes, typically rely on exactly these features, none of which are yet adequately built into India’s framework.

The global backdrop

India’s approach mirrors a tension seen in carbon markets worldwide: schemes are politically easier to launch with modest starting targets and low initial prices, but that same caution is precisely what tends to blunt their impact in the early years. The EU’s own emissions trading system took over a decade of tightening — including the introduction of a market stability reserve — before prices rose high enough to meaningfully influence industrial investment decisions. Climate Risk Horizons’ central argument is that India doesn’t need to wait a decade to build those features in; it can design for ambition from the next iteration rather than retrofitting it later, as the EU eventually had to.

Why it matters

India launched its Carbon Credit Trading Scheme as a market-based complement to direct regulation — a way to let industry find the cheapest path to lower emissions rather than mandating specific technologies. That logic only works if the market actually prices carbon high enough, and penalises shortfalls hard enough, to change behaviour. As things stand, this report argues, India’s biggest industrial emitters can likely comply on paper while changing very little in practice — a gap worth watching closely as trading gets underway later this year.