The carbon market plays a crucial role in accelerating climate action by creating a financial incentive for reducing greenhouse gas emissions, fostering innovation in clean technologies and facilitating international cooperation. India plans to develop its carbon market by establishing a national framework aimed at decarbonising the economy, incorporating carbon credit certificate trading to price greenhouse gas emissions effectively. The Bureau of Energy Efficiency (BEE), under the Ministry of Power (MoP), along with the Ministry of Environment, Forest and Climate Change (MoEFCC), has been collaborating with industry stakeholders on initiatives to support this transition. In the Union Budget 2024-25, the finance minister announced the formulation of a road map to shift hard-to-abate industries from energy efficiency targets to emission targets, a key step as India readies to launch its new
carbon market.
Carbon pricing instruments
Carbon pricing instruments are categorised into compliance instruments and voluntary carbon markets. Compliance instruments, such as emission trading schemes (ETSs) and carbon taxes, are mandatory mechanisms that require polluters to pay for their emissions. ETS allows companies to trade emissions allowances, incentivising reductions, while carbon taxes impose direct costs on fossil fuel use, encouraging a shift to cleaner energy. With taxes, companies can reduce their emissions by meeting specific standards, allowing them to sell surplus certificates in the market for revenue. This system operates on a reward and penalty basis.
In contrast, voluntary carbon markets enable companies and individuals to buy carbon credits to offset their emissions. This includes initiatives such as the clean development mechanism, which allows developed nations to invest in emissions reduction projects in developing countries, and domestic offset programmes, which support local emissions projects, fostering local climate action. Voluntary markets focus solely on rewards, as there are no penalties involved. However, participants must still adhere to established principles and conditions. Additionally, there are renewable energy certificates, which serve as another mechanism to promote sustainability and support renewable energy initiatives.
Indian carbon market framework
In June 2023, the first notification for the carbon credit trading scheme (CCTS) was issued, introducing a compliance mechanism with target-based requirements. By December 2023, a voluntary offset mechanism was also announced. In March 2024, nine sectors were selected for compliance, followed by 10 offset sectors, including energy. By September 2024, detailed documents outlining the compliance mechanism and protocols for selecting verification agencies had been published, although the portal for agency selection has not yet opened. The minimum criteria for these agencies were released, and the goal is to publish the procedures for the offset mechanism by December 2024.
Institutional framework
The National Steering Committee serves as the supervisory body for the CCTS, overseeing the entire process. It is convened by a member secretary, with BEE acting as the programme’s administrator, managing development and implementation. Technical committees focus on specific sectors, such as steel and offset mechanisms, discussing details before presenting recommendations to the National Steering Committee. Once approved, these recommendations go to the MoP and then the MoEFCC for finalisation and notification.
Accredited third-party carbon verification agencies verify emissions reductions, with criteria for selection already published. Entities wishing to participate in the Indian carbon market must register, categorised as either obligated entities (subject to compliance targets) or non-obligated entities (participating voluntarily). Certificates will be traded on power exchanges, enhancing transaction security, and all certificates will be stored in a registry managed by Grid Controller of India Limited, akin to stock exchange registries.
Registered entities can undertake multiple projects, such as renewable energy or carbon capture, but must demonstrate that their projects would not be viable without the revenue from carbon credits. The system aims for transparency and integrity, ensuring no double issuance of credits and maintaining strict standards for project eligibility. The focus is on quality over quantity, with a commitment to aligning with sustainability goals and ensuring that all registered projects meet rigorous criteria.
Methodology
The offset mechanism involves calculating baseline emissions to determine current levels, followed by measuring reductions achieved through specific interventions over project lifespans (typically 5 to 15 years). For these reductions, certificates will be awarded. Various sectors will have distinct methodologies; for instance, renewable energy projects will be categorised separately for wind, biomass and energy
efficiency initiatives.
The methodologies must be approved by the National Steering Committee after review by the offset mechanism committee. Presently, 12 methodologies have been selected for implementation, with plans to expand to a broader range over the next few years, potentially reaching around 300 methodologies in the future. The approval process will follow a top-down approach, where the National Steering Committee or BEE identifies and proposes new methodologies for consideration. In addition to a top-down approach, a bottom-up approach will also be implemented for methodology development. This allows developers or agencies to propose new methodologies that may not have been considered initially, such as a modal shift methodology. They can approach the committee with their suggestions, which will then undergo analysis before being submitted to the National Steering Committee for approval. Both approaches will be utilised to ensure a comprehensive and adaptable methodology framework.
Project registration
The project registration process begins with developers creating an online account, paying a nominal fee of Rs 5,000 and receiving a user ID to submit their project design document (PDD) based on an approved methodology. The PDD undergoes a 30-day public consultation period for comments, after which the developer revises it and submits it to a third-party validator. The validator assesses the project’s feasibility and capacity to implement the
proposed activities.
Once validated, the accredited carbon verification agency (ACBA) submits the project for registration via the Bureau of Registration. All steps, including public consultation and validation, are conducted online through the Integrated Carbon Management (ICM) portal, ensuring transparency. The ICM administrator verifies the validation report for integrity before registering the project, making all data publicly accessible.
After registration, the monitoring phase begins. For example, if a project is registered in January 2025 and implemented by April 2025, the developer can report emissions reductions until March 2026, verified by a different ACBA. Certificates for these reductions will be issued in April 2026. Developers can choose to verify their projects annually or every five years, determining a project life cycle of either 10 or 15 years. The sectors eligible for offsets will be defined in
this mechanism.
Corresponding adjustment
While foreign entities can register in India if they are part of a domestically registered company, completely foreign players cannot directly purchase carbon credits from Indian entities. This is due to the concept of corresponding adjustments, which requires that any credits sold internationally must be added to India’s emissions inventory.
For a foreign company to buy credits, those credits would need approval from the National Designated Authority for Implementation of the Paris Agreement, which certifies projects eligible for international sales. Currently, there are 14 approved technologies for corresponding adjustments.
For a foreign company wishing to purchase carbon credits for voluntary purposes–without impacting their emissions inventory–this situation is still under consideration. The Indian government is deliberating whether to allow such sales without corresponding adjustments, as this could lead to complications in emissions reporting.
The way forward
In Phase I, BEE has identified two methodologies from each sector, including energy, industry, transport and forestry. Once these methodologies are approved and the documentation is published, the methodologies for Phase II will be developed. The aim is to establish at least two methodologies per sector, with the exception of solvent use, as there are currently no methodologies for solvent use globally.
BEE has developed accreditation procedures for agencies involved in the offset mechanism and will soon initiate their registration through the ICM portal, pending the portal’s readiness. A robust IT infrastructure is essential for ensuring transparency, with the registry system for certificates based on blockchain technology. Additionally, it will conduct capacity-building exercises to support these initiatives. BEE aims to ensure that the transaction cost is minimal so that small projects can also be registered.
As far as the potential for international sales of carbon credits and the related compliance mechanisms are concerned, there is currently no approval for full internationalisation of credits. However, there is consideration for allowing up to 5 per cent of compliance credits to be sold internationally, though this is still under discussion. In addition, India is developing a net zero mechanism to help organisations such as railways commit to net zero targets. A market stability reserve (MSR) is also being established, which will not buy certificates but will intervene during significant market fluctuations. If prices drop sharply, the MSR will purchase credits to stabilise prices, and conversely, it may sell credits when prices rise significantly to prevent excessive inflation. The MSR will apply to both voluntary and compliance markets to ensure overall market stability, functioning similarly to interventions by the RBI in currency markets, but only during significant market disruptions.
Based on inputs from the recent roundtable hosted by India Infrastructure Forum on Carbon Markets: Challenges and Opportunities, chaired by Saurabh Diddi, Director, BEE