Sairam Thandra, Senior Analyst; and Harikrishna K. V., Research Scientist, CSTEP
The Indian government notified the draft Greenhouse Gas Emission Intensity Targets Rules for energy-intensive industries on April 16, 2025. This is a foundational step towards operationalising the Carbon Credit Trading Scheme (CCTS), whaich is set to be launched in mid-2026.
India is the third largest emitter of greenhouse gases (GHG) in the world. An International Monetary Fund working paper estimates that India’s current economic growth trajectory will lead to a 41 per cent increase in GHG emissions by 2030. As such, decoupling emissions from economic growth will be a major goal – and challenge – for India in the coming years.
Globally, emissions trading systems (ETSs) are seen as a key mechanism for achieving emissions reduction without compromising economic growth. India began developing its ETS by establishing the regulatory framework for the Indian carbon market under the Energy Conservation Amendment Act, 2022. Based on this, in 2023, the Indian government notified the CCTS – a market-based mechanism to decarbonise the economy and spur investments in clean technologies by pricing GHG emissions and facilitating carbon trading.
Of the two mechanisms defined under the CCTS – compliance mechanism and offset mechanism – detailed regulations for the former were adopted by the government in July 2024. These cover emissions from nine energy-intensive industrial sectors, which together account for around 16 per cent of the country’s total emissions. However, thermal power plants (TPPs), which constitute almost 39.2 per cent of India’s total carbon emissions, have not been included in this initial phase of CCTS. Given that more than half of India’s fuel-related carbon dioxide (CO2) emissions come from TPPs, their exclusion is a major miss. But it also cannot be denied that including them involves sub-stantial challenges.
Why are TPPs not included?
TPPs are an integral component of India’s energy mix, meeting almost 73 per cent of the country’s total electricity demand, which is growing annually by 6-7 per cent. The Ministry of Power (MoP) has proposed an addition of 80 GW of coal-based capacity by 2031-32 for meeting the growing demand, indicating that the current reliance on coal-based generation is likely to persist. While renewable energy penetration has been increasing and will continue to do so, owing to the push towards clean energy transition, coal plants would still be necessary to ensure reliable power supply in view of the intermittency of renewables-based power generation.
The majority of TPPs in India are sub-critical, which means that they use older technology, are less efficient and cause more emissions per unit of electricity produced, as compared to supercritical and ultra-supercritical TPPs. In this scenario, including them in the compliance carbon market might hike the per-unit cost of electricity generation, as retrofitting TPPs with advanced technologies like supercritical boilers or carbon capture and storage systems requires significant capital investment. Further, given that more than 50 per cent of TPPs in India are relatively young (less than 11 years old) and almost 41 per cent of these are sub-critical and operate under long-term power purchase agreements (according to Global Energy Monitor data), a strict emissions cap would put them under severe financial stress.
Strategies for including TPPs
Navigating the complex challenges associated with bringing TPPs under the compliance-based mechanism requires a comprehensive modelling approach, where multiple scenarios at the regional or national level are executed and an appropriate strategy for ploughing back the revenue to foster cleaner technologies in TPPs is identified.
India has adopted emissions intensity-based target setting across all the sectors covered under the CCTS. This can be extended to TPPs as well. Given the technical and operational diversity of TPPs across the nation, assigning a unit-level target that takes into account plant-specific challenges would be an effective strategy for reducing emissions from TPPs.
China’s ETS, which was launched in 2017, offers a relevant example in the context of power sector decarbonisation. Employing emissions intensity-based targets, China operationalised its ETS in the power sector in the initial phases, which enabled it to cover more than 40 per cent of the country’s total CO2 emissions. It adopted a modelling approach, under which all relevant technical and operational parameters were factored in for assigning targets to individual units, giving them enough time to transition. For India too, transitioning from the current specific energy-consumption-based targets under the Perform, Achieve and Trade (PAT) scheme to emissions intensity-based targets under the CCTS can prove to be more effective for decarbonising TPPs. As CCTS offers a range of measures for emissions reduction (as compared to the PAT scheme), such as off-site renewable installations and other technological upgrades, it can prompt TPPs to lower their emissions. A comprehensive modelling approach can help in understanding the impact of including TPPs in the CCTS, and region-specific projects can be piloted to identify challenges at a granular level.
To begin with, India can permit TPPs to continue emitting at their current levels to establish a base-line emission (for each plant), which can be considered as initial free allowances. For instance, if a plant generates 1,000 MUs of electricity annually, with an average grid emission factor of 0.727 tonnes of CO2 per MWh, its total annual CO2 emissions would be 0.727 million tonnes, which can be granted to the plant as free allowance initially. Once the baseline emission is fixed, customised targets can be assigned to each plant after evaluating its potential to cut down emissions. Depending on whether a TPP exceeds or falls short of its target, it can sell or buy carbon credit certificates under the CCTS. Eventually, the free allowances can be auctioned through the CCTS, and a portion of the revenue generated can be gradually allocated for modernising grid infrastructure and promoting clean energy. A similar approach has been taken by California’s Cap-and-Trade Programme, where revenue from auctioning is directed to the state’s Greenhouse Gas Reduction Fund, and most of it is allocated for supporting projects that deliver significant environmental and public health benefits. Japan’s Green Transformation policy also considers auctioning allowances and utilises the resultant revenue for recovering the initial investment costs of decarbonisation projects, especially in the hard-to-abate sectors.
In addition to exploring the applicability of successful global ETS mechanisms, India must endeavour to substantially reduce its power sector emissions. India’s future generation planning should entail building ultra-supercritical and advanced ultra-supercritical TPPs, while increasing the share of ultra-supercritical TPPs (which is currently only 1 per cent). The MoP has already mandated using 5-7 per cent biomass pellets made from agricultural residue along with coal through co-firing in TPPs. As this measure reduces CO2 emissions and generates carbon credits, it can be incentivised through carbon markets for effective implementation.
The bottom line
Though excluding TPPs in the initial phase of CCTS is understandable, they cannot be sidelined for long, as that would negate the possibility of curbing over 1.1 billion tonnes of annual CO2 emissions. The challenges associated with including TPPs call for a well thoughtout strategy that integrates contextualised global best practices with modelling approaches, aiming for their phased and successful inclusion in the CCTS.
The authors work in the Transmission and Grid Planning group at the Centre for Study of Science, Technology and Policy (CSTEP), a research-based think tank.