India's Upcoming Carbon Market:

With compliance trading set to commence and 490 entities now obligated, India's Carbon Credit Trading Scheme is moving from policy to practice.

India's carbon market isn't "upcoming" anymore. It's here, it's expanding, and if your business operates in energy-intensive sectors, you're likely already part of it or soon will be.

On January 16, 2026, the Bureau of Energy Efficiency notified final greenhouse gas emission intensity targets for three additional sectors: petroleum refining, petrochemicals, and textiles, along with secondary aluminum production. This January 2026 expansion significantly increased coverage, bringing the total to 490 obligated entities.

That's 490 businesses that must now track emissions, meet intensity targets, and participate in carbon credit trading. External assessments such as ICAP estimate that the scheme’s initial compliance coverage exceeds 700 million tCO2e, which would place India among the world’s largest carbon market systems by covered emissions.

Compliance trading is set to commence in 2026, with the first compliance years being 2025-26 and 2026-27, using FY 2023-24 as the baseline. For many businesses, this means the measurement and reporting requirements they've been preparing for are about to become financially material.

Understanding the Two-Track System

India's carbon market operates on two parallel tracks, each serving different purposes and involving different participants.

The Compliance Market (Mandatory)

This is the core of CCTS, covering seven energy-intensive sectors where carbon pricing is mandatory. The current coverage includes aluminum, cement, chlor-alkali, pulp and paper, iron and steel, fertilizer, petroleum refining, petrochemicals, and textiles.

The system works on an intensity-based baseline-and-credit approach. Each sector has specific targets defined as tonnes of CO2 per unit of product output. A cement plant might have a target of 0.65 tonnes CO2 per tonne of cement. A steel mill might target 2.0 tonnes CO2 per tonne of crude steel.

Facilities performing better than their targets (lower emissions per unit) generate Carbon Credit Certificates (CCCs). Those exceeding targets (higher emissions) must purchase CCCs to comply. This creates a market where emission reductions have direct financial value.

The Offset Market (Voluntary)

In March 2025, the government approved eight methodologies under the offset mechanism. Since then, official sources indicate the offset framework has expanded to nine methodologies. These cover renewable electricity, hydrogen from electrolysis, industrial energy efficiency and fuel switching, hydrogen from methane extracted from biogas, landfill methane recovery, flaring/use of landfill gas, methane recovery from livestock/manure at households and small farms, and afforestation/reforestation of degraded mangroves and of lands except wetlands.

The offset market allows entities outside the compliance sectors to generate carbon credits from verified emission reduction projects. These credits can potentially be sold to compliance entities or used for voluntary carbon neutrality claims, though the exact rules for offset usage in compliance are still being finalized.

Who This Actually Affects

The immediate impact falls on the 490 obligated entities in the nine covered sectors. But the ripple effects extend far beyond these companies.

Direct obligations apply to:

Large energy-intensive facilities in aluminum, cement, chlor-alkali, pulp and paper, iron and steel, fertilizer, petroleum refining, petrochemical, and textile sectors. The Bureau of Energy Efficiency has notified specific facilities based on energy consumption thresholds.

These entities must measure emissions, calculate intensity metrics, report annually, and participate in credit trading to meet compliance obligations. Non-compliance triggers penalties that make credit purchases financially preferable.

Indirect impacts reach:

Suppliers to obligated entities who may face carbon data requests or procurement preferences favoring lower-carbon inputs. Companies in sectors likely to be added in future expansion phases. Businesses pursuing voluntary sustainability commitments who might use offset credits.

Financial institutions providing credit or investment to carbon-intensive sectors, as carbon pricing affects project economics and credit risk. Consultants, verifiers, technology providers, and other service providers supporting carbon market participation.

Understanding how CCTS sets targets is crucial for businesses assessing their position.

The system uses emission intensity rather than absolute emissions. This means targets are expressed as emissions per unit of production, not total facility emissions. A cement plant producing 1 million tonnes annually with a target of 0.65 tonnes CO2 per tonne has an allowable total of 650,000 tonnes CO2.

If the plant actually emits only 600,000 tonnes (0.60 intensity), it generates 50,000 tonnes worth of credits. If it emits 700,000 tonnes (0.70 intensity), it must purchase 50,000 tonnes worth of credits.

Why intensity matters:

This approach allows production to grow without automatically creating compliance deficits. A facility can increase output and total emissions while still meeting targets if efficiency improves. This aligns carbon pricing with economic growth rather than penalizing expansion.

It also recognizes that different facilities have different efficiency levels due to technology, fuel sources, raw material quality, and operational factors. Targets are set based on sector benchmarks, with variations for different production routes.

Baseline, Compliance Years, and Trading

The temporal structure of CCTS determines when obligations arise and when trading happens.

FY 2023-24 serves as the baseline year. Facilities' emissions during this period establish starting positions. Companies that were already efficient relative to targets in the baseline year start with advantages.

Compliance years 2025-26 and 2026-27 are when obligations crystallize. Facilities must meet intensity targets averaged across these two years. Performance below target in one year can be offset by better performance in the other.

The regulatory framework for purchase and sale has now been notified, while actual market price formation will depend on market operations. The exact trading mechanisms, price discovery processes, and settlement procedures are being finalized. Carbon Credit Certificates are intended to be traded through approved electronic trading platforms/power exchanges under the CERC-regulated framework.

The CBAM Connection That Changes Everything

For Indian exporters to Europe, CCTS isn't just about domestic compliance. It's potentially a mechanism to reduce exposure to the EU's Carbon Border Adjustment Mechanism.

Starting 2026, the EU taxes imports of carbon-intensive goods including steel, cement, aluminum, and fertilizers based on embedded emissions. Indian exporters face paying EU carbon prices (currently around €80-90 per tonne CO2) on their products' carbon footprints.

CBAM includes provisions for deducting carbon prices paid in exporting countries. If Indian companies pay domestic carbon prices under CCTS, those payments could potentially offset CBAM obligations for the same emissions.

CBAM allows deduction for carbon price effectively paid in the country of origin, subject to EU rules and evidence requirements. For Indian exporters, the practical benefit from CCTS will therefore depend on how payments under India’s system are treated under CBAM implementation rules.

What Businesses Should Do Now

Whether you're directly obligated under CCTS or indirectly affected, several immediate actions matter.

For obligated entities:

Verify your emission intensity position against sector targets using FY 2023-24 baseline data. Determine whether you're likely to generate credits or need to purchase them. Build measurement and reporting systems that satisfy Bureau of Energy Efficiency verification requirements.

Assess efficiency improvement opportunities that could reduce intensity and create credit generation. Model financial impacts under different carbon price scenarios. Prepare internal teams for carbon trading processes including credit purchasing, sales, and compliance documentation.

For potentially affected businesses:

Monitor sector expansion announcements. Additional sectors will likely be added in future phases. Industries with high energy intensity or emission profiles should prepare for potential inclusion.

Build carbon accounting capabilities even if not currently mandated. Voluntary measurement positions you favorably if obligations expand to your sector.

Consider voluntary offset projects under approved methodologies. These could generate credits for sale while demonstrating environmental commitment.

For all businesses:

Track carbon price developments in the trading market once it launches. Prices will signal the economic value of emission reductions across the economy.

Understand how carbon pricing affects your sector's cost structure and competitiveness. Even if not directly obligated, carbon costs in your supply chain or customer base may affect your business.

Consider implications for capital allocation and investment decisions. Projects reducing carbon intensity may have enhanced returns in a carbon-priced environment.

CCTS requires robust measurement, reporting, and verification systems that many Indian companies are still building.

Emission measurement must follow standardized protocols aligned with international best practices. The Bureau of Energy Efficiency has issued guidelines on calculation methodologies, emission factors, and data quality requirements.

Annual reporting to designated authorities provides the basis for determining credit generation or purchase obligations. Reports must be verified by accredited third-party agencies before credits are issued or obligations finalized.

The verification infrastructure is developing rapidly. Accredited verifiers are being trained and certified. Technology platforms for emissions tracking and reporting are being deployed. The ecosystem needed to operate a credible carbon market is taking shape.

The Broader Climate Policy Context

CCTS isn't an isolated policy. It's part of India's comprehensive climate strategy including renewable energy expansion targets (500 GW by 2030), energy efficiency programs under the Perform, Achieve and Trade (PAT) scheme, and commitments to reduce emissions intensity of GDP by 45% by 2030 compared to 2005 levels.

Carbon pricing through CCTS creates economic incentives that align with these broader climate goals. It makes cleaner technologies more competitive, rewards efficiency improvements, and generates revenue that can support further climate action.

Internationally, India's carbon market positions the country as a leader among developing nations on climate policy. It demonstrates that emerging economies can implement sophisticated market-based mechanisms while maintaining economic growth.

What Comes Next

The 2026 commencement of compliance trading marks a shift from policy design to market operation. Actual price discovery will reveal the true economic value of emission reductions in different sectors.

Expansion to additional sectors seems inevitable. Industries currently watching from the sidelines should prepare for potential inclusion in future phases. The government has indicated that coverage will broaden as the system matures and administrative capacity grows.

Integration with international carbon markets is a longer-term possibility. As carbon pricing spreads globally, linking mechanisms between different national systems could emerge, creating larger and more liquid markets.

For Indian businesses, the message is clear: carbon pricing is no longer theoretical. It's operational, expanding, and becoming a permanent feature of the economic landscape. The companies treating CCTS as a compliance burden are missing the strategic opportunity. Those building carbon management capabilities and positioning for a carbon-priced economy are gaining competitive advantages that will compound over time.

Ready to navigate India's carbon market with confidence? WOCE provides comprehensive carbon management solutions including emissions measurement, CCTS compliance support, offset project development, and strategic advisory. Contact us at contact@worldofcirculareconomy.com to build your carbon market strategy.