India has committed to two long-term national objectives: achieving net-zero emissions by 2070 and attaining developed-economy status by 2047. These goals are often framed as competing priorities. They are not. Economic growth expands the fiscal space required for decarbonisation, while well-designed climate policy can unlock new sources of investment, employment, and income. Carbon markets sit at this intersection. When designed with rigour, they can convert emissions reduction into a financial incentive rather than a regulatory burden.
Technology will remain central to India’s energy transition. But technology alone does not mobilise capital at scale. Market-based instruments, particularly carbon markets, perform that task by pricing emissions and directing private finance towards mitigation where it is cheapest and most effective.
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India’s compliance market marks a structural shift
India’s first formal compliance carbon market, the Carbon Credit Trading Scheme (CCTS), has been notified under the Energy Conservation Act, 2001. The scheme initially covers nine emission-intensive industrial sectors: aluminium, chlor-alkali, cement, fertilisers, iron and steel, petrochemicals, petroleum refineries, pulp and paper, and textiles. Around 800 large firms across these sectors have been designated as “obligated entities”.
Each obligated entity will receive annual emissions targets. Firms that outperform their targets will earn carbon credits, while those that fall short must purchase credits to make up the gap. This creates a direct financial reward for cutting emissions beyond compliance. The design mirrors established cap-and-trade systems, with government oversight governing target-setting, verification, credit issuance, and trading.
For heavy industry, such regulatory discipline is essential. These sectors account for a disproportionate share of India’s emissions and capital stock. But industrial compliance markets alone will not deliver a net-zero pathway.
Why voluntary carbon markets matter for India
Most of India’s emissions reductions over the next three decades must come from sectors that fall outside the CCTS. Agriculture, forestry, waste management, and small-scale energy systems cannot be regulated through firm-level emission caps. This is where voluntary carbon markets become indispensable.
Voluntary markets reward verified emissions reductions or removals, regardless of the sector or project size. A farmer adopting low-emission cultivation practices, a community forestry project that increases carbon sequestration, or a waste-to-energy facility capturing methane can all generate offsets. These offsets can be sold domestically or internationally to firms seeking to meet climate commitments.
India already plays a dominant role in this space. Of the roughly one billion verified carbon offsets issued globally, about 151 million, nearly 15%, originate in India. The United States follows with around 14%, while China accounts for about 8.5%. However, India’s offset portfolio remains narrow. Most credits come from renewable energy projects, while global markets are increasingly shifting towards nature-based solutions such as afforestation, improved forest management, and landfill methane capture.
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Market integrity, pricing, and institutional readiness
Yet, the expansion of voluntary carbon markets cannot proceed on optimism alone. Globally, offset markets have faced sustained scrutiny over weak additionality, uncertain permanence, and inconsistent verification, particularly in renewable energy and some nature-based projects. For India, scale without credibility would be counterproductive. Carbon offset exports will succeed only if domestic standards align with evolving global expectations on measurement, reporting, and verification.
Equally important is price discovery. Carbon markets influence behaviour only when prices are credible, predictable, and sufficiently strong to alter investment decisions. Thin trading, excess supply, or loosely defined baselines can suppress prices and weaken incentives. Early design choices such as phased tightening of targets and transparent trading mechanisms will determine whether market signals remain meaningful.
Finally, carbon markets are institution-intensive. Their success depends on robust regulatory capacity, digital MRV systems, and independent verification. Strengthening these foundations is as critical as expanding coverage, because market integrity ultimately rests on trust, not volume.
Agriculture and forestry offer untapped potential
India’s land-use profile gives it a structural advantage in voluntary markets. The country has roughly 180 million hectares of agricultural land and about 80 million hectares under forest and tree cover. Agriculture and livestock together account for about 14% of national greenhouse-gas emissions, yet they remain largely excluded from formal carbon pricing.
Offsets can change this equation by channelling private capital into low-emission farming, soil carbon enhancement, agro-forestry, and improved livestock management. The income implications are significant. Nearly 46% of India’s workforce depends on agriculture and forestry, but these sectors contribute only about 16% of GDP. Carbon revenues, even if modest per hectare, can supplement farm incomes and improve resilience.
The Union government has notified offset-generation rules across ten sectors, including agriculture, forestry, and waste management. These rules create a foundation for scale. What they do not yet permit is linkage with the compliance market.
Linking markets can stabilise demand
Under current rules, offsets generated in voluntary markets cannot be used by firms covered under the CCTS. This separation limits demand and price discovery. International experience suggests that limited, carefully designed linkages can deepen markets without compromising environmental integrity.
Several jurisdictions allow regulated firms to meet a capped share of their compliance obligation through high-quality offsets. Such arrangements create predictable demand, stabilise prices, and channel finance into sectors that are otherwise difficult to decarbonise. India should consider a calibrated pathway towards linkage, with strict limits and rigorous verification.
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States must become active partners
Carbon market policy in India has so far been driven largely from the Centre. While national coordination is essential for credibility and standard-setting, implementation depends heavily on state governments. Land use, agriculture, forestry, and waste management fall squarely within state jurisdiction.
States are best placed to identify low-cost, high-impact decarbonisation models that also deliver local economic benefits. Bioenergy projects using crop residue, for example, can generate offsets, reduce stubble burning, and lower fossil fuel imports. Similar opportunities exist in municipal waste management and degraded forest restoration.
Decarbonisation need not be a zero-sum game
The launch of the CCTS is a significant institutional milestone. But India’s decarbonisation strategy cannot operate in silos. Expanding high-quality offset generation beyond industry, aligning domestic standards with global benchmarks, and gradually linking voluntary and compliance markets can transform carbon markets into a development tool.
Global demand for credible offsets is expected to rise as disclosure norms tighten and climate risks are priced more explicitly. If India positions itself early, carbon offset exports can become a stable source of foreign exchange while supporting rural incomes and ecological restoration.
Decarbonisation, done right, does not constrain growth. It reshapes it. For India, carbon markets offer a pathway where climate ambition and economic development reinforce each other rather than compete.
Devana Varshith is a public policy professional currently working at the Foundation for Democratic Reforms (FDR), a public policy think tank. He holds a postgraduate Diploma in Cities and Governance from Tata Institute of Social Sciences and a Bachelor’s degree in Electrical and Electronics Engineering.