India’s Carbon Market Strategy

India is redefining its climate policy architecture through carbon pricing, positioning itself as a key player in the global transition toward low-carbon development. With a growing economy and expanding energy demand, India is balancing decarbonisation with development. At the heart of this shift is a strategic mix of regulatory instruments, including carbon markets, voluntary credit mechanisms, and energy efficiency mandates. Together, they signal a structural transformation in how India aligns economic progress with its climate commitments.

Why carbon pricing is crucial for India

Carbon pricing assigns a monetary value to greenhouse gas (GHG) emissions, effectively internalising environmental costs into economic decision-making. For India, it serves two interlinked purposes. First, it acts as a tool to reduce emissions and incentivise cleaner alternatives. Second, it helps mobilise investment towards low-carbon technologies. This dual role is significant for a country that remains one of the fastest-growing economies and the third-largest emitter globally.

The World Bank’s State and Trends of Carbon Pricing 2025 report identifies India as one of the most promising jurisdictions in carbon market development among emerging economies. Alongside Brazil and Türkiye, India is taking decisive steps to integrate market-based mechanisms into its climate strategy. This comes at a time when carbon pricing instruments cover nearly 28% of global GHG emissions.

The Carbon Credit Trading Scheme: India’s formal entry into carbon markets

India launched the Carbon Credit Trading Scheme (CCTS) in July 2024. The scheme represents a transition from earlier programmes like the Perform, Achieve, and Trade (PAT) scheme to a more robust market mechanism. Unlike cap-and-trade systems that impose absolute emission limits, the CCTS is a rate-based Emissions Trading System (ETS). It regulates emissions intensity—emissions per unit of output—rather than total emissions, allowing industries to grow while improving efficiency.

The first compliance cycle includes nine energy-intensive sectors such as cement, steel, pulp and paper, and aluminium. Entities that outperform sectoral intensity benchmarks earn tradable Credit Certificates. Those that underperform must purchase credits to bridge the gap. The system aims to improve emissions performance without constraining economic growth, an essential feature for a developing country like India.

Building a voluntary carbon market

In addition to mandatory compliance, India is developing a domestic voluntary carbon market to expand participation. In March 2025, the Ministry of Power approved eight crediting methodologies to generate voluntary carbon credits. These include:

• Renewable energy generation

• Green hydrogen production

• Industrial energy efficiency improvements

• Mangrove afforestation and reforestation

This voluntary market targets sectors not covered by the CCTS, including agriculture, forestry, and household energy. It enables corporates, non-governmental organisations, and individuals to finance emission reduction projects and earn tradable carbon credits. By offering standardised methodologies, the market ensures integrity, promotes transparency, and opens up new investment channels for climate mitigation projects.

The policy framework behind carbon pricing

India’s carbon market is backed by a comprehensive legal and institutional framework. The Energy Conservation (Amendment) Act of 2022 provided the legal authority for issuing carbon credit certificates and establishing a regulated market. It authorised the government to set up both compliance and voluntary mechanisms, paving the way for the CCTS.

The National Green Hydrogen Mission further aligns with India’s carbon market objectives. The mission targets 5 million metric tons of annual green hydrogen production by 2030. The crediting methodologies notified in 2025 include hydrogen production, enabling integration into both compliance and voluntary markets.

The legacy PAT scheme, launched in 2012 by the Bureau of Energy Efficiency (BEE), has achieved emissions intensity reductions between 15% and 25% across sectors. In 2025, PAT is being integrated into the carbon credit ecosystem, ensuring continuity in India’s energy transition efforts.

In parallel, India aims to install 500 gigawatts of non-fossil fuel-based power generation capacity by 2030. This renewable energy target aligns with both domestic development goals and international climate commitments, such as the Nationally Determined Contributions (NDCs) under the Paris Agreement.

Mission LiFE: Behavioural change as policy

Mission LiFE (Lifestyle for Environment) complements regulatory approaches by encouraging behavioural shifts. Launched by the Government of India, the initiative aims to promote sustainable consumption habits across households and communities. The mission targets one billion people globally to adopt sustainable practices by 2028 and convert 80% of India’s villages and urban local bodies into green communities.

Mission LiFE promotes resource-efficient lifestyles through campaigns focused on waste reduction, energy conservation, and responsible consumption. By mainstreaming pro-environmental behaviour, it creates long-term social buy-in for climate policies and markets.

The Green Credit Program: Incentivising ecosystem restoration

India operationalised the Green Credit Program (GCP) under the Environment Protection Act of 1986, with a notification issued on October 12, 2023. This voluntary market-based mechanism provides tradable Green Credits for afforestation on degraded forest lands. Participants include public agencies, private entities, and individuals.

The process involves forest departments registering degraded parcels on a digital portal, forming a “land bank.” Participants select a site, carry out afforestation within two years, and maintain it for ten years. Credits are awarded based on verified tree counts, with digital tracking and third-party audits ensuring accuracy.

The GCP aims to enhance India’s forest cover, improve ecological resilience, and develop a structured inventory of degraded lands. It also provides financial incentives for environmental stewardship, aligning local restoration efforts with national and global goals.

Institutional architecture: NSCICM and BEE

The carbon market’s operational integrity depends on strong institutions. The National Steering Committee for the Indian Carbon Market (NSCICM) plays a central role in policy coordination. Comprising representatives from central ministries, state governments, and industry experts, the committee guides rule-making, target-setting, and credit issuance for the Indian Carbon Market (ICM).

The Bureau of Energy Efficiency (BEE), under the Ministry of Power, functions as the system operator for the carbon market. It is responsible for defining sectoral baselines, verifying performance, and facilitating trading platforms. The BEE also leads initiatives in energy efficiency through standards and labelling programmes, building codes, and industrial benchmarks.

Together, NSCICM and BEE ensure the market’s credibility and alignment with broader national priorities, including energy access, environmental sustainability, and economic competitiveness.

Balancing development and decarbonisation

India’s carbon pricing strategy is shaped by its unique socio-economic context. The rate-based ETS structure provides industries the flexibility to improve emissions performance without constraining growth. This approach reflects the principle of Common but Differentiated Responsibilities and Respective Capabilities (CBDRRC), reiterated by India at COP 27.

Carbon pricing is integrated into India’s broader climate finance and investment strategy. It aims to unlock capital flows, reduce technology costs, and build domestic capacity for clean energy transitions. For a country where energy demand is projected to double by 2040, this balancing act is essential.

Challenges and evolving solutions

Despite the strong foundation, the carbon market faces several challenges. Regulatory clarity, institutional capacity, and technical readiness are still being built. Ensuring high-quality credits, avoiding double-counting, and maintaining transparency in transactions require robust oversight mechanisms.

Another concern is the European Union’s Carbon Border Adjustment Mechanism (CBAM), which will impose tariffs on carbon-intensive imports. Indian exporters, particularly in steel and cement, must accelerate decarbonisation to retain market access. India’s carbon market offers a solution by creating financial incentives for low-carbon production.

On the opportunity side, the voluntary carbon market could mobilise billions of rupees for climate-positive projects. Sectors like clean cooking, afforestation, and rural electrification stand to benefit. As regulations mature, India is likely to attract both domestic and international investors seeking credible offsets and high-impact climate solutions.

India’s position in the global carbon market landscape

India’s carbon pricing model is gaining attention for its balanced and inclusive approach. The World Bank highlights India as one of the emerging leaders in implementing market-based climate instruments. By focusing on emissions intensity, India offers an alternative to cap-based models that may be unsuitable for high-growth economies.

Globally, 80 carbon pricing instruments are now in force, including taxes and ETSs, covering 28% of emissions—up from 24% in 2023. Major expansions include China’s national ETS and policy advancements in Brazil, Türkiye, Colombia, and Indonesia. Carbon revenues exceeded $100 billion in 2024, although prices in large ETSs such as the EU and South Korea saw modest declines.

India’s entry into this space not only strengthens domestic climate action but also enhances its role in international carbon finance, trade, and diplomacy. Its focus on voluntary markets, lifestyle changes, and ecological restoration adds depth to the global carbon pricing narrative.

Conclusion

India’s carbon pricing evolution marks a significant step in the global climate transition. Through the Carbon Credit Trading Scheme, voluntary credit markets, and complementary policies like Mission LiFE and the Green Credit Program, the country is creating a multi-layered framework for sustainable development.

India’s approach blends ambition with pragmatism, offering a replicable model for other emerging economies. It balances industrial growth with emissions control, central regulation with decentralised participation, and market incentives with behavioural change.

As the global economy shifts toward decarbonisation, India’s carbon market could play a critical role in shaping international norms, finance flows, and cooperative climate action. With the right regulatory refinements and institutional support, India is well-positioned to lead by example.

Sources:

Press Information Bureau, Government of India, “Carbon Pricing in India: Market Mechanisms for Climate Leadership,” June 23, 2025.
World Bank, State and Trends of Carbon Pricing 2025, Washington, DC: World Bank, 2025.