Vishleshan for Regulatory Exams: Check Daily News Analysis 19th June 2025
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In today’s Vishleshan, we are covering one important topic — “Building a Credible Carbon Market.” We explain what carbon credits and carbon trading mean, what India’s Carbon Credit Trading Scheme (CCTS) is, and how it connects to the PAT Scheme. We also discuss the challenges and what needs to be done to make this market work well by 2026.
Context: The Carbon Credit Trading Scheme (CCTS) was notified by the Government of India in June 2023, and several steps have since been taken to operationalise it. Trading is expected to begin in 2026, with market stabilisation expected by 2027.
Source: Business Standard
India is venturing into a crucial phase of its climate change mitigation strategy with the impending launch of the Carbon Credit Trading Scheme (CCTS), set to begin operations in 2026. This scheme aims to build a credible carbon market to facilitate emission reductions, particularly in hard-to-abate sectors. The CCTS is designed to complement existing initiatives like the Perform, Achieve and Trade (PAT) Scheme, signalling India’s commitment to achieving its climate targets while navigating complex implementation challenges.
Understanding Carbon Credit, Carbon Market, and Carbon Trading
To grasp the essence of India’s new initiative, it’s essential to understand the core concepts:
Carbon Credit: A carbon credit (often called a carbon offset) is a tradable permit or certificate that allows the owner to emit one tonne of carbon dioxide equivalent (CO2e) from industrial processes. The purpose of carbon credits is to reduce greenhouse gas (GHG) emissions. They are generated by projects that reduce, remove, or avoid GHG emissions. For example, a project that replaces fossil fuels with renewable energy, or a reforestation project, can generate carbon credits.
Carbon Market: A carbon market is a trading system through which carbon credits are bought and sold. It creates a financial incentive for companies or countries to reduce their carbon emissions. There are typically two types of carbon markets:
Compliance Markets: Established by mandatory national, regional, or international carbon reduction regimes (like emissions trading schemes). Participants are legally bound to reduce emissions or buy credits.
Voluntary Markets: Where companies or individuals voluntarily purchase carbon credits to offset their emissions, often as part of corporate social responsibility or sustainability goals.
Carbon Trading: Also known as emissions trading, it is a market-based approach to controlling pollution by providing economic incentives for achieving reductions in the emissions of pollutants. In a carbon trading system, a governing body sets a cap on the total amount of greenhouse gases that can be emitted. This cap is then divided into allowances (carbon credits), which companies can buy or sell. Companies that reduce their emissions below their allocated allowances can sell their surplus credits, while those that exceed their allowances must buy credits, creating a dynamic market.
Overviews of CCTS and PAT Scheme
India’s carbon market framework relies on two interconnected schemes:
Carbon Credit Trading Scheme (CCTS):
What: The CCTS was notified by the Government of India in June 2023. It is India’s upcoming regulatory framework for carbon trading.
Why: It aims to establish a national carbon market to incentivize emissions reductions, particularly in “hard-to-abate sectors”. It also seeks to unlock additional financial resources for climate action.
How: Trading is “expected to begin in 2026, with market stabilisation expected by 2028”. The Ministry of Environment, Forest and Climate Change (MoEF&CC) has “recently notified carbon emission intensity targets for a few identified entities in certain sectors”. It will involve an “offset mechanism” where entities can earn carbon credits for emission reductions and trade them. The scheme also includes provisions for monitoring, reporting, and verification (MRV) and an enforcement mechanism. The Bureau of Energy Efficiency (BEE) will be the key implementing agency.
Perform, Achieve and Trade (PAT) Scheme:
What: PAT is a market-based mechanism to improve energy efficiency in energy-intensive industries. It operates under the National Mission for Enhanced Energy Efficiency (NMEEE).
How it works: Under PAT, designated consumers (DCs) in various energy-intensive sectors are given specific energy consumption reduction targets. If a DC achieves its target, it receives Energy Saving Certificates (ESCerts), which are tradable. If it fails to meet the target, it has to buy ESCerts from others or pay a penalty.
Current Status: PAT III cycle was from 2014-15 to 2017-18. From 2008 to 2011, global trade became more tightly integrated as even a single production process was spread across multiple countries. The share of such ‘global value chains’ in overall trade, according to the report, rose steadily till 2008, and plateaued soon after. FDI flows were closely tied to the expansion of such value chains. This still continues, but at well below the pace of a couple of decades ago. The current scheme being discussed is PAT VIII (2022-23 to 2025-26).
Interlinkages between CCTS and PAT:
The CCTS builds upon the experience of PAT. The article states that the “interlinkage between the CCTS and the PAT scheme” is being modelled on the experiences of the BEE.
Under the CCTS, “pat scheme covers sectors to identify obligated entities to reduce emissions”. This implies that entities under PAT that reduce emissions beyond their targets could potentially generate carbon credits under CCTS, or their ESCerts could be converted into a form of carbon credit. This linkage ensures continuity and leverages existing infrastructure.
Analysis of the Article: Decoding the Issue
The article provides a critical analysis of India’s approach to carbon markets, highlighting both its strengths and challenges.
1. Government’s Approach and Challenges:
Remarkable Milestone: The article describes the CCTS as a “remarkable milestone” in India’s climate policy, analysing the government’s approach and highlighting key challenges in its implementation.
Focus on Easy Gains: The current approach of “not including all hard-to-abate sectors in carbon emission intensity targets will reduce market size and impact liquidity”. This means the scheme may primarily target sectors where emission reductions are easier, which, while pragmatic, might limit the overall impact and market depth.
Lack of Uniformity: One challenge is the absence of “uniformity” across various energy-intensive sectors. This makes comparison and trading difficult.
Pricing of Certificates: The “unfavourable price for certificates” in PAT cycles in the past indicates that the market mechanism might not have provided strong enough incentives for energy efficiency. This is a risk for CCTS as well if prices are too low.
Verification and Credibility: The article implicitly acknowledges the importance of robust Monitoring, Reporting, and Verification (MRV) mechanisms for market credibility. The Clean Development Mechanism (CDM) experience highlights that “complex rules for carbon credits and poor verification” can undermine market integrity.
2. Broad-Based Strategy and Stakeholders:
Target Sectors: The MoEF&CC has notified carbon emission intensity targets for “a few identified entities in certain sectors”. The MOEF&CC will drive all “hard to abate sectors”.
Key Sectors for Emission Reductions: The power sector (which has the “highest carbon footprint”) and the Federation of Indian Chambers of Commerce and Industry (FICCI) are key stakeholders.
Beyond Manufacturing: While “manufacturing has the highest weight (64.23%) in WPI”, the article also discusses emission intensity targets for “non-food manufacturing, minerals, and fuel and power segments”.
National Determined Contribution (NDC) Commitment: India’s NDC commits to “reduce the emission intensity of its gross domestic product (GDP) by 45% by 2030, compared to 2005 levels.” For industrial entities, historical emissions—with 2023-24 as the baseline—have also been taken into consideration.
3. The Role of Incentives and “Strategic Response”:
Incentivising Private Companies: The article states that “such events create incentives for governments as well as private companies to respond strategically”. This implies that the carbon market can spur innovation in emission reduction technologies.
Financial Incentives: Lowering carbon emission intensity needs “financial incentives”. The concept is that entities with “relatively high marginal costs” for emission reduction can “purchase carbon credits from the market to meet their targets”.
Optimising Public Sector Balance Sheets: The article suggests that the CCTS reflects a “broader strategy to optimize public sector balance sheets and unlock value for the exchequer”.
4. Challenges in Implementation and What Can Be Done:
Reducing Choice and Misrepresentation: The article warns against reducing choices by imposing a preset list, which might lead to misrepresentation and people opting out.
Market Design and Liquidity: Not including all hard-to-abate sectors from the outset might “reduce market size and impact liquidity”. A well-functioning carbon market needs sufficient liquidity to ensure efficient price discovery.
Transparency and Credibility: The need for “transparency and credibility” is paramount in carbon markets, as evidenced by the issues faced by the CDM.
Avoiding Distortions: The author, Ajay Tyagi, argues against “wrong prescription to improve energy efficiency” and emphasizes not “excessively lead[ing] to corresponding reduction in GHG emission intensity”. This implies that the market should be allowed to determine the most cost-effective emission reduction pathways.
Private Sector Innovation: The “private sector innovation ecosystem” needs the ability to respond to price signals or supply restrictions.
Government Support and Clarity: There must be “at least some additional government incentives as well as policy clarity for innovators”.
India’s Carbon Credit Trading Scheme is a vital step towards its climate goals, building on the PAT scheme. Its success will hinge on careful market design, ensuring liquidity, robust monitoring, transparent communication, and the ability to adapt to unforeseen challenges, all while incentivizing private sector innovation and maintaining credibility.
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