Investing in the Future: The promise of carbon credits for India's sustainable growth

The recent incidences of extreme weather events highlighted climate breakdown globally. India's commitment to carbon credits and market expansion aims to balance economic growth with emissions reduction for a sustainable future

By Anjal Prakash , Nishant Gupta and Ayush Chakraborty

Published: Mar 4, 2025 06:34:37 PM IST

Updated: Mar 4, 2025 06:39:14 PM IST

Carbon markets allow companies to offset emissions by purchasing carbon credits, incentivising GHG reduction projects. Image: Shutterstock

The world experienced the wrath of climate breakdown in 2024. Not only was it the warmest year, but our generation witnessed extreme weather events on 93 percent of days. Despite a global consensus on the fight against climate change outlined in the Paris Agreement, the efforts have yielded a mixed bag of outcomes, at best. As the 3rd largest emitter of greenhouse gases and 5th largest economy globally, India stands at a crucial juncture of balancing economic interest with safeguarding the future of upcoming generations. To fulfil its commitment to achieving a net-zero state by 2070, India needs sustained action to decouple economic growth from emissions. However, decarbonisation efforts are dampened by hard-to-abate sectors such as steel, power & refining, and so on, due to a limited scope of reducing emissions intensity.

This necessitates a lever that could bridge the gap between economies & industries based on their emissions-offsetting potential. Carbon markets allow companies to offset emissions by purchasing carbon credits, incentivising GHG reduction projects. As per the World Bank's study, it is estimated that the adoption of carbon credits could reduce the cost of implementing countries' Nationally Determined Contributions (NDCs) by as much as $250 billion in 2030 while facilitating the removal of 50 percent more emissions by 2030 at no additional cost. Are carbon credits the anti-dote to a net zero future for India?

Understanding Carbon Credits

Carbon credits are financial instruments that quantify and trade reductions or removals of greenhouse gases. Each carbon credit represents one metric ton of carbon dioxide (CO₂) or its equivalent avoided from entering the atmosphere. They result from initiatives such as renewable energy projects, afforestation, and methane capture projects. They enable companies to compensate for emissions while encouraging investment in sustainability.

Carbon trading is conducted through the cap-and-trade system and the baseline-and-credit system. In the cap-and-trade system, there are established limits on emissions, and firms can trade excess or deficit allowances, promoting reductions at the lowest cost. The baseline-and-credit system awards credits to projects that reduce emissions beyond a defined baseline. These credits can then be traded in compliance or voluntary markets.

Carbon markets are indispensable for climate mitigation globally. Compliance markets, dominated by the European Union Emissions Trading System (EU ETS), reached €865 billion in 2022. Voluntary markets, fueled by corporate net-zero pledges, are also growing. India is the second-largest, accounting for 333 million voluntary credits. The 2022 Energy Conservation Act established a national carbon market, merging compliance and voluntary mechanisms. By utilising renewable energy, afforestation, and agriculture projects, India is moving forward with its climate goals while generating economic value.

Also read: Are India's AI and sustainable energy ambitions compatible?

Current State of Carbon Credits in India

Although still evolving, India's carbon market is a key part of climate action strategy. India's history of carbon market participation dates back to 2002, when it ratified the Kyoto Protocol and became an early adopter of the CDM (Clean Development Mechanism) framework. Put simply, the CDM framework allowed developed countries to offset carbon emissions via projects in developing nations on a compliance basis. Starting with its first project in 2003, India has become 2nd largest host of CDM projects, accounting for 20 percent of total projects globally. After the global consensus during the Paris Agreement, India is actively working on transitioning credits generated under CDM to align with those under Article 6. This augments the scope for countries to voluntarily cooperate to fulfil the targets set out in their NDCs. India has instituted two domestic carbon market frameworks, not limiting itself to global carbon markets: PAT (Perform, Achieve & Trade) scheme & REC (Renewable Energy Certificates). Launched in 2012, the PAT scheme is a domestic regulatory mechanism to improve energy efficiency across energy-intensive industries. The designated industries under this scheme generate tradable Energy Saving Certificates (ESCerts) that can be bought on local power exchanges such as IEX & PXIL. Till now, the PAT scheme has successfully saved 25.77 Million Tons of Oil Equivalent (MTOE) by achieving energy-saving targets given to 1333 designated consumers spanning 13 sectors.

Additionally, India instituted RPO (Renewable Purchase Obligation) in 2011 to promote demand for renewables, under which large power procurers such as discoms (Distribution Companies) and captive consumers are mandated to fulfil a certain proportion of the energy mix through renewables by purchasing either directly or through RECs from renewable energy producers. RECs are integral in India's strategy to promote investment in renewables as they unlock additional revenue streams for green energy producers and allow obligated customers to prove compliance in areas where sourcing renewable energy is infeasible. RECs have played an instrumental role in transforming India's energy mix over the last decade, with renewables accounting for 46 percent of total installed capacity.

To further enhance net-zero efforts, GOI amended the Energy Conservation Act of 2022 to launch CCTS (Carbon Credit Trading Scheme) to establish a national framework that integrates with international carbon markets under Article 6 of the Paris Climate Agreement. With phase-wise rollout expected in 2025-26, CCTS would improve the adoption of the PAT scheme and augment the scope to nurture both voluntary and involuntary carbon markets. The Ministry of Power will govern the program, with the Bureau of Energy Efficiency acting as the administrator. Further, India has developed the National Steering Committee for the Indian Carbon Market (NSCICM) to mitigate concerns around greenwashing and uphold the integrity of the carbon credits through rigorous monitoring, reporting, and verification processes.

Benefits of Expanding Carbon Credit Markets

Expanding carbon credit markets will be critical to investment in clean technologies and renewable energy. The monetary value attached to emission reductions in these markets creates a financial incentive for industries to opt for low-carbon solutions. The solar, wind, and electric mobility sectors benefit greatly because companies invest in projects that generate tradable credits, accelerating the shift to cleaner energy systems.

Carbon credit markets hold transformative economic potential, driving job creation, spurring technological innovation, and enabling large-scale green infrastructure development. Investments in emission reduction projects can generate employment across sectors such as renewable energy installations, carbon capture technologies, and sustainable agriculture while simultaneously advancing climate goals. Carbon markets offer a twin benefit for countries like India: aiding in the fight against climate while promoting economic growth and development through 'green infrastructure'. Environmentally, the advantages go beyond just emissions cuts. Carbon credit funding of projects also enhances air quality because it reduces the pollutants associated with fossil fuels. Natural solutions, including afforestation and wetland restoration, improve biodiversity by providing habitat for wildlife. Such solutions also increase soil health, water retention, and climate resilience in the local community.

Expanding carbon credit markets brings together economic, technological, and environmental priorities. Channelling resources into sustainable projects fights climate change and ensures sustainable socio-economic and ecological gains worldwide.

Challenges and Barriers

While India has shown a clear intent and made significant strides in implementing carbon market infrastructure, the journey has been marred with uncertainty, volatility, and inadequate enforcement. The evolving domestic market under CCTS has led to ambiguity regarding the status & utilisation of legacy credits generated from CDM markets. A lack of coherence among central and state governments has led to delayed participation in India's carbon market ecosystem.

One of the most prominent challenges is the high unpredictability of carbon credit prices in both voluntary and compliance markets, discouraging long-term investments. Furthermore, India's dominance on the supply side has led to an inventory of unsold credits, further depressing the prices and reducing incentives for new projects. The domestic demand gets further muted since many obligated entities prefer to fulfil their renewable power obligations through power purchase agreements instead of carbon credits or RECs. Other implementation challenges, such as poor enforcement of penalties in case of non-compliance to RPOs and lack of robust monitoring and verification systems to tackle greenwashing, have further prevented India from realising the true potential of carbon credits.

Policy Recommendations

Scaling India's carbon credit markets requires stronger government support and more transparent regulations. Under the Energy Conservation (Amendment) Act, 2022, the government must finalise and enforce detailed guidelines on credit verification, trading mechanisms, and sector-specific baselines. Robust regulatory frameworks will ensure greater transparency and increase investor confidence while ensuring compliance with international standards.

The public and private sectors must collaborate to attract investment in carbon credit projects. Public agencies can support private participation through tax benefits, subsidies, or low-interest financing for renewable energy, afforestation, and emission-reduction activities. However, a partnership with a private enterprise will open technologies to innovation and operational efficiencies, which are prerequisites for the rapid deployment of these projects.

The first imperative is to increase stakeholder participation by creating awareness about carbon credits. Industries, small businesses, and the local community must be educated on the economic and environmental benefits of carbon trading. Workshops, government campaigns, and cooperation with renowned academic institutions like IITs, IISc, and IISERs to develop technical expertise in carbon markets are good options. Access to trading platforms and the certification process must be simplified to enable small-scale players, such as farmers and cooperatives, to join in.

These measures will scale India's carbon credit market and position the country as a leader in climate finance. Aligning regulatory clarity, financial incentives, and stakeholder engagement will enable India to capitalise on its potential for emission reductions while fostering sustainable development.

Reflecting on the journey, India has come a long way in displaying clear intent, setting up foundations, and garnering interest across different stakeholders. However, systemic challenges such as non-enforcement of penalties and ambiguity across policies have prevented India from realising the utmost potential of carbon markets. This would require GOI to strengthen the regulatory framework, align the domestic carbon credit system with the global framework outlined in Article 6 of the Paris Agreement, and implement robust monitoring and verification protocols to establish integrity. India could also leverage learnings from past successes in digital infrastructure, such as UPI, to remove bottlenecks through technology in the carbon credits market. Lastly, with green consumerism, individuals hold significant power in boosting demand for carbon credits through choices and advocacy.

By changing the view of carbon credit markets as an obligation to an opportunity to unlock additional revenue streams and create a thriving ecosystem of start-ups working in areas such as CCUS and carbon exchanges, India can position itself as the flagbearer for leading the net-zero transition.

Anjal Prakash is a Clinical Associate Professor (Research) and Research Director at Bharti Institute of Public Policy, Indian School of Business (ISB). He teaches sustainability at ISB. He has recently been selected as the Lead Author of the IPCC's upcoming report on Cities and Climate Change.

Nishant Gupta is a PGP student at ISB and an alumnus of Punjab Engineering College, Chandigarh. Working at the centre of sustainability and analytics, he has developed data science-led solutions for CPG companies to eliminate wastage and optimise demand planning and energy consumption.

Ayush Chakraborty is a PGP student at ISB and an alumnus of IIT-BHU, Varanasi. He has worked in the supply chain divisions of Unilever and AB InBev, where he contributed to building sustainable strategies for global operations before transitioning to a Strategic role at Jodo.

[This article has been reproduced with permission from the Indian School of Business, India]