Introduction
India’s formal entry into structured domestic carbon trading with the Energy Conservation (Amendment) Act 2022 and the subsequent Carbon Credit Trading Scheme 2023 represents a significant inflection point in the country’s climate governance architecture. For decades, Indian entities participated in international carbon markets primarily through the Kyoto Protocol’s Clean Development Mechanism (CDM), accumulating Certified Emission Reduction credits that were sold to European and other developed-country buyers seeking to offset their compliance obligations. That era of largely passive participation in externally governed markets is giving way to an attempt to build a sovereign carbon market with its own rules, its own registry, and its own standards.
Yet the timing of India’s market construction coincides with a global crisis of confidence in carbon credit integrity. Investigative journalism, academic research, and regulatory scrutiny have converged to expose systematic exaggeration of emission reductions in voluntary carbon markets, particularly in the forest carbon and renewable energy sectors that dominate India’s credit supply. The establishment of the Indian Carbon Market therefore arrives at a moment when the fundamental credibility of carbon markets as an environmental policy tool is under sustained and justified attack. This article examines the regulatory architecture of India’s emerging carbon market, analyses the integrity challenges that threaten its environmental effectiveness, and situates India’s experience within the broader global debate about carbon market governance.
Legal Framework
The Energy Conservation Act 2001 was the foundational statute for India’s energy efficiency governance, establishing the Bureau of Energy Efficiency (BEE) and creating the enabling framework for energy norms and standards. The Energy Conservation (Amendment) Act 2022 substantially expanded this framework by introducing two new elements of direct relevance to carbon markets. First, it established the statutory basis for a carbon credit trading scheme, empowering the Central Government to specify the modalities of such a scheme by notification. Second, it broadened the BEE’s mandate to encompass carbon credit markets as part of the national energy transition agenda.
The Carbon Credit Trading Scheme (CCTS), notified by the Ministry of Power in June 2023, established the Indian Carbon Market (ICM) in two tracks. The first is an Obligatory Mechanism applicable to energy-intensive industries designated as Obligated Entities, which must meet specific energy consumption or emission intensity targets. Entities that outperform their targets generate Carbon Credit Certificates (CCCs) that can be traded; those that underperform must purchase credits to comply. The second is a Voluntary Mechanism under which non-obligated entities may generate and trade credits, though the detailed modalities for the voluntary track remain under development.
The BEE serves as the Administrator of the ICM, with Grid Controller of India Limited (GCI) designated as the Scheme Administrator for the trading platform. A Governing Council chaired by the Minister of Power provides oversight. The CCTS mandates that CCCs be issued only upon verification of emission reductions by accredited third-party verifiers, and that all credits be registered on a national registry. The scheme draws an explicit connection to India’s Nationally Determined Contributions (NDCs) under the Paris Agreement, designating ICM as one of the instruments through which India will achieve its emission intensity reduction targets.
The Perform Achieve and Trade (PAT) scheme, operating since 2012 under the BEE’s authority, constitutes the institutional and operational precursor to the ICM. PAT covers energy-intensive sectors including aluminium, cement, chlor-alkali, fertilisers, iron and steel, paper and pulp, petrochemicals, power, railways, and textiles. Designated consumers under PAT receive specific energy consumption targets, and those achieving reductions beyond their targets earn Energy Saving Certificates (ESCerts) tradeable on the power exchanges. The ICM effectively seeks to convert this energy efficiency framework into a carbon market by expressing obligations and credits in terms of carbon dioxide equivalent rather than energy units.
Judicial Developments
The courts have not yet directly adjudicated the CCTS framework, which is too recent for substantial litigation to have accumulated. However, judicial pronouncements in related areas are shaping the legal environment within which carbon markets must operate. The National Green Tribunal has repeatedly addressed the regulatory adequacy of India’s industrial pollution control framework, and several of its orders on cumulative environmental impact assessments are relevant to the additionality determinations that underpin carbon credit claims.
The Supreme Court’s jurisprudence on the precautionary principle and the polluter pays principle, developed through cases from the Vellore Citizens Welfare Forum (1996) to the recent environmental cases of the 2020s, establishes a constitutional expectation that industrial activities internalise their environmental costs. The carbon market framework, insofar as it enables polluting industries to continue emissions in exchange for purchasing credits, must demonstrate that it genuinely reduces overall emissions rather than merely redistributing the permission to pollute. Courts have not yet been asked to evaluate carbon markets through this analytical lens, but the jurisprudential tools for doing so exist.
The Securities and Exchange Board of India (SEBI) has been developing a regulatory framework for carbon credits as financial instruments. SEBI issued a consultation paper in 2023 examining how carbon credits should be classified for securities law purposes, whether trading in carbon credits requires registration as a securities intermediary, and what disclosure and investor protection obligations should apply to carbon market participants. The intersection of environmental regulation and securities law creates potential jurisdictional complexity, particularly if disputes arise between the BEE’s administrative framework and SEBI’s market regulation.
Contemporary Issues and Analysis
The integrity crisis in global voluntary carbon markets provides the most important context for understanding the challenges facing India’s ICM. In January 2023, the Guardian newspaper, in collaboration with Corporate Accountability and other organisations, published an investigation finding that more than ninety percent of Verra’s rainforest offset credits, the most popular category globally, did not represent genuine carbon reductions. Verra, which operates the Verified Carbon Standard (VCS), is the world’s largest voluntary carbon standard setter. Subsequent academic research, notably a study published in Science in 2023, used satellite imagery and statistical methods to show that forest protection projects claiming carbon credits systematically overstated the deforestation threat they were preventing.
These findings are directly relevant to India’s carbon market because forest carbon projects constitute a significant portion of Indian voluntary carbon supply. The REDD+ (Reducing Emissions from Deforestation and Forest Degradation) mechanism, under which forest carbon credits are generated, faces three fundamental integrity challenges in the Indian context. Additionality, the requirement that emission reductions would not have occurred without the carbon finance, is difficult to establish for forests already protected under the Forest Conservation Act 1980. Permanence, the requirement that carbon sequestered in forests remains sequestered indefinitely, is threatened by climate change itself, which is increasing wildfire frequency and drought stress on Indian forests. Leakage, the risk that preventing deforestation in one location merely displaces it elsewhere, is particularly acute in India where agricultural and infrastructure pressures are geographically mobile.
The CDM legacy presents a related problem. Indian entities accumulated a substantial portfolio of CDM credits under the Kyoto Protocol, including credits from large hydropower projects, wind energy installations, and industrial gas destruction projects. Many of these credits, known as Certified Emission Reductions (CERs), remain on registries at discounted values because the projects generating them are no longer regarded as additional under current market conditions. The decision about whether and how to allow these legacy CERs to flow into the ICM or to be used towards Paris Agreement targets under Article 6 has been deeply contested in international negotiations.
Article 6 of the Paris Agreement, which provides the framework for international carbon market mechanisms, was operationalised through the Glasgow and Sharm el-Sheikh decisions but remains contested in its implementation. Article 6.4 establishes the Supervisory Body for a centralised UN mechanism for international carbon trading. The rules for corresponding adjustments, which prevent double counting of emission reductions between seller and buyer countries, have been among the most technically complex and politically contentious elements of Paris Agreement implementation. India’s decision about which credits to authorise for international transfer under Article 6.2 bilateral arrangements, and which to retain for domestic NDC purposes, has significant implications for both the ICM’s supply and India’s overall carbon accounting.
Comparative and International Perspective
The European Union Emissions Trading System (EU ETS), the world’s largest and most mature compliance carbon market, offers the most instructive comparative benchmark. The EU ETS has evolved through four trading phases since 2005, progressively tightening the emission cap, phasing out free allowance allocation, and expanding sectoral coverage. Its price discovery mechanism, through which the carbon price has risen from near zero in 2008 to over one hundred euros per tonne in 2022 before moderating, demonstrates that well-designed scarcity-based markets can generate meaningful decarbonisation incentives. Critically, EU ETS credits are not based on claimed emission reductions but on verified excess reductions against a declining cap, which avoids many of the additionality problems that plague offset markets.
The International Organisation of Securities Commissions (IOSCO) published principles for voluntary carbon markets in 2023, addressing governance, transparency, and market integrity. SEBI’s approach to carbon market regulation should be informed by these principles, particularly in relation to market manipulation risks in a relatively illiquid domestic market. The IOSCO principles emphasise the importance of high-quality underlying credits, robust third-party verification, transparent price formation, and market surveillance.
California’s cap-and-trade system, linked with Quebec’s, offers another relevant comparison. California has been particularly aggressive in policing offset credit integrity, commissioning independent studies of its forest offset protocol and making methodological revisions when studies found systematic overestimation. India’s ICM would benefit from similar commitment to adaptive management of its credit methodologies.
Practical and Policy Implications
The practical credibility of the ICM depends on resolving several design questions that remain unclear in the CCTS framework. The most fundamental is the stringency of the emission intensity targets set for Obligated Entities. If targets are set below business-as-usual trajectories, companies can generate and sell credits without making genuine emission reductions, flooding the market with worthless credits and undermining the carbon price signal. The PAT scheme has been criticised in several academic analyses for exactly this problem, with some studies finding that a significant proportion of ESCerts were generated without genuine energy savings.
Third-party verification quality is the second critical design element. The CCTS requires accredited verifiers but does not yet specify in detail the competency standards, conflict of interest rules, and random audit requirements that would ensure verification integrity. The experience of voluntary carbon markets globally demonstrates that the pressure to generate fee income creates systematic incentives for verifiers to approve credit claims that should be rejected.
The exclusion of the informal economy and small-scale emitters from the CCTS framework may limit its environmental reach. India’s small and medium enterprises, which collectively account for a substantial share of industrial emissions, fall outside the Obligated Entity designation. Their inclusion, through simplified small-scale methodologies, would both expand the market’s environmental coverage and provide a decarbonisation pathway for a sector that currently has limited access to clean technology finance.
Suggestions and Reforms
India should establish an independent Carbon Market Integrity Commission with statutory powers to audit credit methodologies, conduct random reverification of issued credits, and impose financial penalties for credit overstatement. The BEE, as the market administrator, has inherent conflicts of interest in also serving as the integrity regulator; regulatory separation is essential.
The CCTS should adopt a dynamic baseline methodology that adjusts additionality determinations based on changing technology costs. As renewable energy and industrial efficiency technologies become cheaper, the baseline against which emission reductions are measured must rise accordingly, preventing the generation of credits for technology adoption that would have occurred without carbon finance.
India should ratify and implement the Paris Agreement’s Article 6.4 mechanism transparently, maintaining a public registry of all corresponding adjustment decisions and ensuring that domestic NDC accounting is not compromised by international credit transfers. Public access to this registry, with detailed project-level data, would enable civil society oversight of market integrity.
The voluntary carbon market segment of the ICM should incorporate the IOSCO principles and develop a sectoral certification system analogous to the Gold Standard’s product hierarchy, distinguishing between credits with different levels of environmental and social co-benefits. Credits from projects that demonstrably benefit forest communities, biodiversity, and water security should command premium recognition, creating incentives for higher-quality project design.
Conclusion
India’s Indian Carbon Market is an ambitious institutional construction that arrives at a moment of global uncertainty about whether carbon markets can deliver genuine emission reductions at scale. The regulatory architecture established through the Energy Conservation Amendment Act 2022 and the CCTS 2023 provides a credible statutory foundation, but the critical design choices about target stringency, verification quality, and integrity governance will determine whether the ICM becomes a genuine decarbonisation instrument or a compliance theatre that enables continued emissions while creating paper credits.
The global integrity crisis in voluntary carbon markets is not an argument against carbon markets as a policy tool; it is an argument for more rigorous market design and more vigilant regulatory oversight. India has the opportunity to build a domestic carbon market that learns from the failures of the CDM era and the voluntary market scandals of the 2020s. Whether it seizes this opportunity will depend on whether the institutional pressures toward economic growth and industrial accommodation are balanced by the constitutional imperatives of environmental protection that India’s courts have been articulating with increasing confidence.
