Climate policy in action: India’s national Carbon market

India’s emission trading system signals a clear policy direction: ambitious, accountable, and aligned with global climate goals

As the world grapples with the climate crisis, countries are striving to meet their Intended Nationally Determined Contributions (INDCs) for greenhouse gas (GHG) emissions reduction, as pledged at the 21st UN Conference of Parties (COP) in Paris. Nations have recognised the importance of carbon pricing measures in achieving emissions reduction targets and the net-zero goal.

Article 6 of the Paris Agreement governs one such instrument — international carbon credit trading. It provides a framework for collaboration through mechanisms such as Internationally Transferred Mitigation Outcomes (ITMOs), allowing countries to trade carbon credits and transfer mitigation outcomes while leveraging diverse carbon reduction opportunities. These instruments have proved crucial in tackling global warming.

A World Bank study highlights that 75 carbon tax and emission trading measures are currently in place across various countries, covering nearly 24% of global emissions. With effective implementation of carbon taxation and emissions trading system, this coverage is expected to rise to 30% by 2030. The European Union Emissions Trading System (EU ETS)—the world’s first international trading system—includes EU members, Norway, Iceland, and Liechtenstein. It spans more than 11,000 energy-intensive sectors, accounting for nearly 50% of the CO2 emissions and 45% of total GHG emissions in the EU.

In developing countries, too, emission trading systems are taking shape. China launched its ETS in 2021, largely covering the power sector, which emits about 5 Gt of CO2 annually — around 45% of China’s emissions and 15% of global emissions. Similarly, Indonesia inaugurated a carbon exchange system recently, trading more than 40,000 tonnes of CO2 on its very first day.

India, committed to reducing its climate intensity of GDP by 45% by 2030, has already saved over 106 million tonnes of CO2 since 2015 under the Perform, Achieve and Trade (PAT) Scheme. This regulatory mechanism targeted the energy-intensive industry and has now transitioned into a cap-and-trade system. In September 2024, India introduced its first national Emission Trading System (ETS). Under this scheme, the government sets a cap on emissions and allows entities to trade emission allowances. Emissions are measured on the basis of fuel consumption, with Phase 1 (2023-2025) focused on creating tradable Carbon Credit Certificates (CCCs), each representing one tonne of CO2.

Phase 2 (2026 onwards) will introduce sectoral caps on emissions. The system will operate through two mechanisms:

• Compliance-based, covering emissions from energy use and heavy industry, India’s largest GHG emitters. Entities will be assigned annual emission intensity target for three years, earning or purchasing CCCs based on their performance. 
• Voluntary offsets, encouraging other sectors to act beyond compliance. 

Unlike the PAT scheme’s three-year compliance cycle, the Indian ETS will adopt a one-year compliance period, enabling greater accountability. Through this system, India seeks to stay on track towards its net-zero emissions target by 2070.

As India progresses, intensity-based targets for GHG emissions per activity are also being developed. While challenges remain—including potential increases in commodity and coal prices—the long-term benefits outweigh short-term disruptions. By implementing ETS, India demonstrates both its resolve for sustainable growth and its leadership among developing nations in the global climate dialogue. This policy signals India’s steadfast commitment towards sustainable development and sets a precedent for others to follow in adopting carbon pricing mechanisms.

No Techcircle journalist was involved in the creation/production of this content.

Monika Gupta and Aayush Sheth

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Monika Gupta is an Associate Professor of Finance and Economics at the S.P. Jain Institute of Management & Research (SPJIMR). Aayush Sheth is an alumnus of Sardar Patel Institute of Technology, Mumbai.