India's carbon markets: Transitioning from ambition to action
The journey to achieving India's ambitious goal of net-zero emissions by 2070 is fraught with financial challenges. India needs over $10 trillion USD to achieve its climate goals, while current capital sources can only meet $6.6 trillion of that. India currently manages to collect $45 billion per year, far short of the actual need. This gap between ambition and finance underscores the urgency for innovative mechanisms to drive climate action. One such mechanism is the carbon market.
ICF plays a vital role in advancing carbon markets in India, collaborating with public and private sector stakeholders to unlock the potential of this dynamic space. Our work spans supporting central ministries in target setting, helping large corporations maximize opportunities for their green assets, and providing technical assistance to sub-national governments to effectively participate in carbon markets.
Carbon markets are systems designed to reduce greenhouse gas emissions by enabling entities to buy and sell carbon credits. Each credit represents a reduction or removal of one metric ton of CO2 or its equivalent from the atmosphere. These markets provide financial incentives for industries to reduce their carbon footprint by 1) attaching a monetary value to carbon emissions, and 2) enabling their trading.
A common concern about carbon markets is whether they truly reduce emissions or just shift them elsewhere. The key lies in ensuring that carbon credit represents “additional” reductions that wouldn't have occurred without the market’s financial support. At their core, carbon markets help achieve global emissions reductions in the most cost-effective manner. When complemented with direct action taken by stakeholders and sectors to reduce emissions, they can serve as a crucial tool to mobilize funds to accelerate a low-carbon economy.
Evolving landscape of India’s carbon markets
There are two broad types of carbon marketplaces: compliance (cap-and-trade schemes operated under regulatory frameworks) and voluntary (companies and individuals buy credits, often as part of corporate sustainability goals). India has been an early adopter of carbon markets, although its participation has evolved significantly over the past two decades.
During the Kyoto Protocol era, the Clean Development Mechanism (CDM) allowed Indian projects to generate carbon credits sold to developed countries. Over time, voluntary standards like the Gold Standard (GS) and Verra (VCS) also gained prominence alongside CDM, improving the quality and credibility of these credits. For instance, 72 projects from India received credits through CDM in 2011 but that number was down to 31 projects in 2021. Comparatively, 39 projects received credits through GS/VCS in 2011, which increased to 62 projects in 2021.
The 2015 Paris Agreement introduced Article 6, emphasizing cooperative approaches and a robust international trading framework. Article 6.2 allows countries to trade credits, or International Transferred Mitigation Outcomes (ITMOs), through multilateral or bilateral agreements to achieve their domestic Nationally Determined Contributions (NDCs). Article 6.4 is another UN-supervised system, expected to create a new global framework for carbon credit transactions across 14 sectors, like the CDM under the Kyoto Protocol.
ICF is currently assisting the Bureau of Energy Efficiency with comprehensive baseline assessments for target setting and providing guidance to PAT Scheme participants for a smooth transition to the new CCTS.
More recently, India has announced its Carbon Credit Trading Scheme (CCTS) to decarbonize the economy through the Indian Carbon Market (ICM). This will be an evolution of the current Perform, Achieve, and Trade (PAT) schemes to create a GHG emission-based denomination system that is fungible, tradable, and in alignment with global standards. The CCTS framework includes both compliance mechanisms (covering nine sectors) for regulated sectors and offset or voluntary mechanisms (covering 10 sectors). The Bureau of Energy Efficiency is the administrator of the scheme and manages emission targets and credit issuance, which is expected to be implemented starting in 2026.
5 key challenges in India’s carbon market
There are five challenges India will have to overcome to achieve success:
- The continued fragmentation of markets and the independent nature of different registries mean there is no single global trading market. Each registry not only adds complexity but also increases challenges for participants. Article 6 aims to bring some uniformity, but the failure to reach a consensus at COP27 and COP28 highlights how tricky this journey will be.
- Sustainable and predictable price discovery remains a major challenge. Carbon market prices have fluctuated wildly, with instances of halving or doubling within a year, undermining market confidence. India’s experience with Renewable Energy Certificates (RECs) and Energy Saving Certificates (ESCerts) shows the risks, as both faced price collapses due to weak demand and oversupply. Instruments like market support funds and price ceilings/floors can help ensure stability.
- The lack of demand is hindering India’s domestic carbon market. Over the past decade, India generated 61 million carbon credits, but only 600,000 were sold domestically—a stark 10:1 ratio compared to international sales (BeZero, 2024). Without regulatory mandates and incentives, industries lack a compelling reason to participate.
- Carbon markets continue to face integrity problems such as double counting (voluntary credits not aligned with Article 6), inconsistent additionality definitions, lack of transparency, and inadequate oversight. Confidence in these markets remains low, as seen with companies like Shell and Nestlé withdrawing from offset schemes due to doubts about their benefits.
- India faces significant challenges in developing carbon markets due to inadequate infrastructure, limited technical expertise, insufficient financial support, and weak regulatory systems. Unreliable emissions data, underdeveloped trading platforms, and the lack of credible carbon measurement systems further hinder progress and deter investor confidence.
ICF is supporting the private sector in exploring the carbon market landscape, evaluating opportunities for strategic partnerships, and understanding the feasibility of market participation. Additionally, ICF works closely with urban local bodies, helping them understand how their green assets can be effectively leveraged in the carbon market to drive localized climate action.
Beyond energy: Increasing focus on social and cultural co-benefits
India’s carbon markets have predominantly focused on energy-related projects. For instance, 95% of all Verra projects from India are energy related. As a result, there is a growing opportunity to broaden the scope to sectors that also deliver social and cultural co-benefits. That’s true especially for the Indian market where development priorities go beyond environmental sustainability to include economic growth, social equity, and cultural preservation.
ICF actively supports clients across key sectors—renewable energy, clean and electric transport, nature-based solutions, green urban development, and low-carbon oil and gas. Carbon markets play a pivotal role in accelerating progress in each of these domains. Leveraging our cross-sectoral expertise in climate change, climate finance, and project implementation, we help clients unlock the potential of carbon markets to finance their green assets and projects.
A quick glimpse at globally registered projects clearly shows the untapped potential for India: forest restoration projects not only sequester carbon but also conserve biodiversity and improve local livelihoods; energy efficient cookstove programs result in clean air and reduced health risks: or gender-responsive safe water projects tackle water security while promoting social equity. India can create a more inclusive and impactful carbon market by focusing on these co-benefits.
Next steps and the way forward
The government has a pivotal role in shaping India’s evolving carbon market. To address the challenges, India must take decisive steps. First, aligning domestic mechanisms with Article 6 and adopting global best practices can create an integrated trading market. Mechanisms such as fungibility, price ceilings, floors, and market support funds are also needed to stabilize prices and build confidence, drawing lessons from RECs and ESCerts. Regulatory mandates and targeted incentives can boost domestic demand, ensuring active industry participation. Setting balanced targets—neither too high to burden industries nor too low to flood the market—will be critical. Finally, robust standards, transparent processes, and strong oversight are essential to restoring market trust.
Diverse stakeholders beyond the government are also paying close attention to the value proposition for carbon markets. Large corporations in energy-intensive sectors transitioning from the PAT Scheme to CCTS in 2026 require clear regulatory rules, balanced targets, and sustained engagement. Expanding a competitive domestic offset market will encourage participation and market growth. Micro, Small, and Medium Enterprises (MSMEs) face challenges like limited scale and technical capacity; aggregation models can reduce costs and improve access by bundling smaller projects. Urban Local Bodies (ULBs) can leverage carbon markets to fund renewable energy, waste-to-energy, electric buses, and other sustainability projects. Simplified CCTS participation, pre-financed models, and capacity-building programs can ease administrative burdens, align sustainability goals with financial stability, and enhance climate action.
Lastly, investments in digital MRV (Monitoring, Reporting, and Verification) systems and capacity-building programs are critical for accurate data, credible certification, and investor confidence. Close collaboration between the public and private sectors, initial handholding, and the development of knowledge products will ensure meaningful policies that translate into actionable outcomes.
India’s carbon market is not just an economic tool—it is a foundation for a future where climate action, economic growth, and social equity converge. The question is not whether India can lead but how soon this vision can become reality.
