Decarbonising Through Markets

The Union Budget 2026-27 reinforced India’s climate and industrial decarbonisation strategy, promoting cleaner production, technological innovation and a gradual shift toward low-carbon growth. A key highlight was the proposed Rs 20,000 crore support framework for Carbon Capture, Utilisation and Storage (CCUS) over five years, targeting hard-to-abate sectors such as steel, cement, refineries and chemicals. Budgetary allocations further strengthened the clean-energy ecosystem through continued support for the National Green Hydrogen Mission, renewable energy expansion (including wind and hydro), bioenergy programmes and green energy corridors. The expansion of the National Manufacturing Mission, including customs duty exemptions on 63 capital goods for lithium-ion battery production, aims to build domestic capacity in EV batteries and advanced clean technologies.

These fiscal measures complement the structural shift from regulatory compliance to market-based instruments. The role of carbon pricing is becoming increasingly central, and at the heart of this transition lies the Carbon Credit Trading Scheme (CCTS), India’s most ambitious attempt to establish a domestic carbon market.

Carbon Credit Trading Scheme

The CCTS, established under the Energy Conservation (Amendment) Act, 2022, introduces a market-based mechanism to help achieve India’s target of reducing greenhouse gas (GHG) emission intensity by 45 per cent by 2030. It creates a national compliance carbon market built on emission-intensity reduction targets for energy-intensive industries.

Nine hard-to-abate sectors are covered in the initial phase: aluminium, chlor-alkali, cement, fertiliser, iron and steel, pulp and paper, petrochemicals, petroleum refining and textiles. Together, they account for roughly 15-20 per cent of India’s total GHG emissions. The first set of emission-intensity targets, covering 282 entities, was notified for aluminium, cement, chlor-alkali and pulp and paper. In January 2026, additional targets were notified for petroleum refineries, petrochemicals, textiles and secondary aluminium, expanding coverage to nearly 490 obligated entities. Overall, the percentage reduction targets with the 2023-24 baseline range from about 2.8 to 15 per cent for 2026-27. It covers more than 700 million tonnes of CO₂ equivalent emissions. The cement sector has the largest number of obligated units (186), followed by textiles (173), pulp and paper (53), chlor-alkali (30), petroleum refineries (21), aluminium (16) and petrochemicals (11).

The CCTS operates through two mechanisms - compliance and offsets. Under the compliance mechanism, obligated entities are assigned GHG emission-intensity targets. Entities that exceed their targets earn tradable carbon credit certificates, while those that fall short must purchase credits to comply. The system functions through the Indian Carbon Market portal, enabling tracking and registry management.

The offset mechanism broadens participation by allowing non-obligated entities to register verified emission-reduction or removal projects. Ten sectors have been approved under this mechanism in two phases. Phase I includes energy, industries, waste handling, agriculture, forestry and transport and covers activities such as green hydrogen, renewable energy with storage, compressed biogas, landfill gas capture, biochar, afforestation and electric mobility. Phase II expands to construction, fugitive emissions, solvent use and CCUS, including technologies like Limestone Calcined Clay Cement (LC3), industrial gas mitigation and post-combustion carbon capture.

Key Challenges

While the framework is established, implementation will determine its credibility. Robust measurement, reporting and verification (MRV) systems are essential. Weak baselines or inflated claims could erode market trust. Price stability will also shape market effectiveness. Oversupply of credits can dilute incentives for technological transformation, while excessive volatility may deter long-term investment. Further, if caps are not stringent or baseline standards are set too leniently, the supply of credits may exceed demand, leading to depressed prices. When carbon prices remain low, they fail to send a strong market signal to drive real decarbonisation. Another serious concern is greenwashing. In the absence of strict quality controls, some companies may rely on low-quality or questionable carbon credits to claim “carbon neutrality” while continuing high-emission business practices.

Domestic technology development presents another challenge. Many low-carbon solutions, including green hydrogen systems, advanced electrolysers, carbon capture technologies and long-duration storage, remain capital-intensive and partly import-dependent. India still imports 45-75 per cent of components across key cleantech value chains. Without strong domestic R&D ecosystems and scaled manufacturing capacity, costs may rise, and supply-chain vulnerabilities increase.

Way forward

The coming years will determine whether CCTS matures into a robust climate instrument or remains a limited compliance tool. A robust MRV system, transparent digital registries, independent verification, and strict penalties are essential to prevent weak baselines and inflated claims. Emission caps must progressively tighten, and mechanisms such as a floor price or market stability reserve can prevent oversupply and ensure a meaningful carbon price signal. Clear disclosure norms and limits on offset use are necessary to curb greenwashing and ensure companies prioritise real emission reductions. At the same time, strengthening domestic clean-tech manufacturing and R&D will reduce import dependence and ensure carbon markets drive genuine industrial decarbonisation rather than mere compliance. Moreover, in an era of carbon border measures and trade-linked climate standards such as EU Carbon Border Adjustment Measures, India’s carbon accounting systems must remain transparent, rigorous and internationally credible to safeguard export competitiveness.

Ultimately, the success of this transition will depend on whether the CCTS moves from policy blueprint to operational integrity, delivering measurable decarbonisation while sustaining industrial growth.

Views expressed are personal. The writer is a research associate at Mobius Foundation, New Delhi