Market-driven solution for India's net-zero promise? Cautionary lessons from the past

By Rajiv Shah

India’s ambitious net-zero target by 2070 hinges critically on the success of its soon-to-be operational Indian Carbon Market (ICM). As per the CRISIL–Eversource Capital report, the ICM, structured under the Carbon Credit Trading Scheme (CCTS), 2023, is designed to create economic value out of emission reductions through a market-based carbon trading framework. But can a market-based solution work for India’s development context—and what are the risks?

The report, "Building a Global Carbon Market: Accelerating India’s Progress Towards Net Zero", outlines that India ranks third globally in total CO₂ emissions after China and the US, but is 136th in per capita emissions, highlighting its developmental asymmetry. India’s emissions are expected to peak between 2045 and 2050, suggesting a narrow window to deploy scalable mitigation tools. The CCTS, scheduled for launch in early 2026, proposes a phased rollout of carbon trading across industries, eventually covering all major sectors and pollutants.

A central feature of the ICM is the shift from a baseline-and-credit mechanism—where credits are awarded to entities reducing emissions below a target—to a cap-and-trade mechanism by Phase III (post-2036). Initially, nine emission-intensive sectors—like cement, steel, petrochemicals, and aluminium—will participate, covering about 22% of India's GHG emissions. This is projected to expand to 65% with the inclusion of power and transport sectors in Phase II, and eventually to 100% when agriculture is added.

Is this phased, market-driven model sufficient to steer India toward deep decarbonisation?

The report argues for strong pricing signals to drive technological innovation, stating:

“The price of carbon credits should always be higher than the costs associated with implementing newer, cleaner technologies… [to] discourage easier purchase of carbon credits instead of investing in emissions-reducing technologies.” (p. 10)

However, India’s previous attempts at market-based environmental regulation—Perform, Achieve and Trade (PAT) and the Renewable Energy Certificate (REC) schemes—offer cautionary lessons. As the report notes:

“Both schemes fell short of achieving their potential. Chief among these challenges were weak enforcement mechanisms, low prices of certificates, and unambitious target-setting.” (p. 18)

Global CO2 emissions

In the PAT scheme, energy saving certificates (ESCerts) traded at just $7 per tonne of CO₂, and RECs traded as low as $2.3 per tonne, far below the social cost of carbon. These low prices failed to drive genuine mitigation or investment in green technologies.

The report warns that the new ICM must avoid becoming a "buyers’ market," where firms opt to buy cheap credits rather than decarbonise. To guard against this, it recommends price floors and ceilings, banking restrictions, and eventually a Market Stability Reserve (MSR)—a mechanism already in use in the EU ETS—to control supply-demand mismatches and limit price volatility.

The authors acknowledge the limitations of relying solely on markets. They caution that price discovery is not automatic:

“Achieving a perfect equilibrium—where the number of allowances saved equals the number required—is difficult. Therefore, it is crucial to implement mechanisms that align demand and supply effectively.” (p. 24)

Even with improved infrastructure and regulation, challenges persist. For example, in the early phases, the government will allocate allowances for free. Auctioning—which is central to price discovery and revenue generation—will only begin in the later cap-and-trade phase. Until then, revenues will depend on penalties for non-compliance, which are uncertain and difficult to enforce. The report admits that

“The government’s revenue potential is low as auctioning of allowances is not possible under the [initial] mechanism.” (p. 19)

Moreover, market readiness is uneven across sectors. In agriculture and small manufacturing, monitoring emissions is technologically and administratively complex. The report proposes a digital MRV (Monitoring, Reporting and Verification) system using blockchain, IoT sensors, and AI, but these systems are costly and still limited in coverage.

Sectorwise CO2 emissions

It acknowledges that:

“The current MRV systems often rely on proxies and estimates rather than direct measurements, leading to inaccuracies… These limitations are more prevalent in developing markets.” (p. 27)

Despite these challenges, the report maintains that a well-calibrated carbon market can “unlock sustainable growth while balancing economic and social considerations.” (p. 7) But it insists on transparent governance, strict enforcement, and market design that reflects India's specific developmental context.

In conclusion, the CRISIL–Eversource report is optimistic about the role of market mechanisms in enabling India’s climate transition. But it is equally clear that market forces alone—without robust policy, state support, and regulatory oversight—will not deliver deep decarbonisation. The Indian Carbon Market may become a powerful economic tool, but only if designed with sharp price signals, strong institutions, and safeguards against the very market failures that have hindered similar efforts in the past.

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