India's Carbon Market Moves From Pledge to Penalty

As binding intensity targets take effect across roughly 490 industrial plants and trading opens by October, the scheme's first price signal will test how Indian heavy industry absorbs EU carbon tariffs, currency pressure, and the underlying cost of decarbonisation.

Key Points

• India's Carbon Credit Trading Scheme (CCTS), notified in 2023, has moved from design to enforcement in 2026: roughly 490 plants now carry binding emission-intensity targets, and trading is expected to open by October.

• Eight of nine covered sectors have final targets; iron and steel — the largest and most trade-exposed sector — remains under a revised draft, with a public comment window closing in late August.

• Three prices will determine the scheme's economic bite: the domestic certificate price (not yet established), the EU's Carbon Border Adjustment Mechanism (CBAM) price (set at €75.36/tonne for Q1 2026), and the rupee's exchange rate (trading near 95/USD).

• Small and medium exporters face disproportionate compliance costs even though obligations formally attach to large plants; the government is reportedly preparing to cover most MSME CBAM compliance costs.

• The scheme's credibility now rests on its first market-clearing price: a low print would replicate the weak signal of the scheme's predecessor, while a durable price would mark a substantive shift in how India prices industrial carbon.
  

Enforcement Replaces Scaffolding

For three years after its 2023 notification, the Carbon Credit Trading Scheme (CCTS) functioned largely as regulatory architecture without operational teeth. That changed in 2026. About 490 plants now carry binding emission intensity targets, the Indian Carbon Market Portal opened in March, and a senior Bureau of Energy Efficiency (BEE) official indicated this month that trading should begin by October. Sometime this autumn, an executive at a cement or aluminium plant will, for the first time, be legally compelled to purchase a carbon credit.

Design: Intensity Targets, Not an Absolute Cap

The CCTS is structured around emission intensity rather than a fixed emissions ceiling. The environment ministry sets output-based targets against a 2023-24 baseline, covering compliance years 2025-26 and 2026-27. Plants that outperform their targets earn tradable certificates — each representing one tonne of carbon dioxide equivalent — while plants that fall short must purchase certificates or pay environmental compensation, set at twice the average certificate price.

Final targets were issued in two waves, in October 2025 and January 2026. The nine notified sectors will ultimately cover roughly 740 entities, representing about 16 percent of India's emissions. The World Bank's State and Trends of Carbon Pricing 2026 estimates coverage at approximately 477 million tonnes across some 490 installations — placing India's system third in scale, behind only China and the European Union, and ahead of South Korea.

The CCTS effectively supersedes the earlier Perform, Achieve and Trade (PAT) scheme, which priced energy savings rather than carbon and produced correspondingly weak certificate values. At the market portal's launch, Power Minister Manohar Lal framed the initiative as proof that "climate responsibility and economic development can go hand in hand."

The Missing Sector: Iron and Steel

Eight of the nine covered sectors now have finalised targets. Iron and steel — the largest and most trade-exposed sector in scope — does not. On 26 June, the environment ministry issued a revised draft covering 255 units, including JSW Steel, Tata Steel and Steel Authority of India, with targets set only for 2026-27 and a 60-day comment period.

Analysis from the Council on Energy, Environment and Water (CEEW) places the sector's 2023-24 baseline emissions at 349.5 million tonnes — the largest single block within the scheme — and finds the draft targets achievable largely through low-cost or cost-saving interventions. Delays in finalisation have already reduced the scheme's aggregate ambition, trimming an estimated 2.8 million tonnes from its potential impact by 2027. Without steel, the market's structural centre remains unresolved.

Three Prices, One Set of National Controls

Industrial competitiveness under the CCTS depends on three distinct prices, only one of which India can directly influence.

Domestic certificate price; No market price yet exists. The combination of output-scaled targets, unlimited banking of certificates, and modest first-phase ambition creates a meaningful risk of oversupply. The Institute for Energy Economics and Financial Analysis has called for a price stability mechanism, pointing to Australia's Safeguard Mechanism, which operated for seven years without generating a credible price signal.

Border carbon price; The EU's Carbon Border Adjustment Mechanism (CBAM) entered its definitive phase on 1 January, with the European Commission setting the first certificate price at €75.36 per tonne in April — an estimated annual exposure of US$2–4 billion for India's heavy-industry exporters. Iron and steel accounts for close to 90 percent of India's CBAM-exposed exports, and even the country's lowest-carbon steel — at 1.7–1.9 tonnes of CO₂ per tonne of metal — remains above the 1.34 benchmark below which no charge applies. The India-EU free trade agreement, concluded on 27 January, secured no CBAM exemption, though it commits the EU to extend any flexibility granted to other partners, open talks on recognising India's domestic carbon price, and provide €500 million toward steel and aluminium decarbonisation. In principle, a credible domestic carbon price would be deductible against CBAM liabilities in Brussels — a mechanism that effectively converts the CCTS from a climate instrument into a trade policy lever.

Currency; The rupee has traded near 95 to the dollar, down more than 6 percent this year following the March oil shock, with the Reserve Bank of India managing volatility rather than defending a specific level. Depreciation improves export margins on paper but raises the cost of imported solar modules, electrolysers, and any euro-denominated carbon liability.

Compliance Costs Beyond the Compliance List

Direct obligations under the CCTS apply only to large plants, but the associated costs will not remain contained there. Buyers typically pass measurement and disclosure requirements down their supply chains, and exporters have already encountered this dynamic through CBAM. An estimated 3,000–4,000 direct and 25,000–30,000 indirect micro, small and medium enterprise (MSME) exporters are exposed to CBAM. Default emissions values pushed effective levies to €240–300 per tonne in January, and several consignments were held at European ports over incomplete declarations.

The government's response is taking shape: reports indicate the Centre is preparing to cover roughly 90 percent of CBAM compliance costs for MSMEs, while BEE is engaging the EU and the United Kingdom on recognition of the CCTS and Indian verification bodies. The employment stakes are significant: foundry and rolling-mill clusters from Rajkot to Mandi Gobindgarh sit within these value chains, and fixed monitoring costs weigh disproportionately on smaller balance sheets.

Financing the Transition

India's external climate diplomacy and its domestic policy arithmetic are moving on separate tracks. Abroad, India has argued that the US$300 billion a year pledged at COP29 for 2035 is inadequate, describing the figure as "abysmally poor." At home, CEEW estimates the total investment required for net-zero by 2070 at US$10.1 trillion, against Rs 57,697 crore (approximately US$6 billion) raised through sovereign green bonds since 2022-23. India's climate finance taxonomy remains in draft form more than a year after its initial release. A July report from the Asia Society Policy Institute recommends that future CCTS compliance revenue be directed toward transition financing, with explicit protections for workers and coal-dependent states.

Outlook

India is now applying, domestically and with financial penalties attached, a carbon cost it has resisted accepting as a binding international obligation. For investors assessing sovereign and corporate risk, that domestic enforcement signal carries more weight than diplomatic statements on climate finance.

Three dates will shape the coming test of the scheme's credibility: the steel sector consultation closes in late August; certificate trading is expected to open by October; and the UK's own carbon border levy takes effect in January 2027. All three converge on a single question: what price will the market clear at. A negligible clearing price would leave the CCTS functionally indistinguishable from the PAT scheme it replaced. A durable, meaningful price would represent a genuine policy achievement — placing a tonne of carbon on the Indian industrial balance sheet, priced domestically before it is taxed at the border.

Debodipta Nandan is an independent public policy professional working at the intersection of digital governance and strategic communications. She writes on regulation, media, and emerging technology. Views expressed are personal.