India’s carbon market has moved from design to implementation. Greenhouse-gas intensity targets now apply to 490 industrial units across seven energy-intensive sectors for the 2025-26 and 2026-27 compliance years. Meanwhile, the Bureau of Energy Efficiency has approved 12 methodologies for projects seeking credits through the voluntary offset mechanism.
The two parts of the market serve different purposes. The compliance segment is meant to change investment decisions in industry. The offset segment channels finance to emission reductions and carbon removals outside the mandatory system. India should retain this distinction as the market develops.
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The case for eventually combining the two will appear persuasive. A common pool of certificates would increase trading volumes and may reduce compliance costs. Credits from tree planting, mangrove restoration or changes in farming practices could also cost less than replacing industrial equipment. That price difference, however, could allow factories to meet their obligations without making the investments that the compliance market was established to encourage.
Carbon prices must change industrial investment
Under the Carbon Credit Trading Scheme, an obligated unit that beats its greenhouse-gas intensity target earns certificates. A unit that misses its target must buy and surrender enough certificates to cover the shortfall. The Bureau of Energy Efficiency describes this as the mandatory component of the Indian carbon market.
The system will work only if the prospect of a continuing carbon liability influences capital expenditure. A cement producer should have an incentive to use less clinker, switch fuels, recover waste heat and invest in cleaner power. Refineries and petrochemical plants must similarly weigh the cost of certificates against expenditure on efficiency and lower-carbon production.
The 490 covered units include 186 cement facilities and 173 textile facilities. Together, the two sectors account for nearly three-fourths of the entities brought under the first phase. Their targets are expressed as emissions per unit of output rather than absolute emission caps. A factory can therefore raise production and total emissions while remaining compliant, provided its emission intensity falls sufficiently.
This makes the quality of the price signal especially important. If a plant that misses its target can buy plentiful and cheaper credits from forestry or agriculture, compliance may remain affordable even when industrial emissions do not fall as intended. The company would have less reason to replace equipment or alter its production process.
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Offset finance has a different purpose
Keeping the markets separate does not diminish the value of offsets. India needs credible carbon finance for agriculture, forestry, waste management and other activities outside the compliance system.
The 12 methodologies approved by BEE include afforestation and reforestation on degraded mangrove habitats and eligible land outside wetlands. The agriculture methodologies cover improved rice cultivation and methane recovery from livestock and manure. Such projects can reduce emissions, support ecosystem restoration and provide farmers with an additional source of income.
Their carbon accounting nevertheless differs from that of industrial abatement. Carbon stored in trees may be released through fire, drought, disease, harvesting or a later change in land use. A farmer may abandon a cultivation practice after the crediting period. Estimates depend on the choice of baseline, field measurements and assumptions about whether the project would have happened without carbon revenue.
An efficiency investment that permanently avoids the combustion of fossil fuel has a different risk profile. The avoided emission cannot be reversed by a forest fire years later. Treating both outcomes as one tonne of carbon dioxide equivalent may be necessary for measurement, but it does not make them equally suitable for every regulatory purpose.
This difference has consequences for market design. Standardised certificates make trading possible. Regulators must still account for variations in durability, additionality and measurement risk.
Liquidity is a means, not the objective
The Central Electricity Regulatory Commission’s 2026 trading regulations provide separate segments for compliance and offset certificates. That separation has sometimes been regarded as an obstacle to liquidity. It is better understood as protection for the industrial price signal.
The compliance market should reward improvements within covered industries. The offset market should mobilise finance for mitigation outside them. Forcing both into a common pool could make certificates easier to trade while weakening the environmental result.
Agriculture and forestry also operate under different economics from heavy industry. Carbon revenue can help finance mangrove restoration or compensate farmers for adopting improved rice practices. These projects should be assessed on the additional mitigation they produce, the durability of the outcome and the quality of verification. Their prospects should not depend on serving as a low-cost escape route for industrial polluters.
There is a related question about the industrial targets themselves. India is beginning with intensity benchmarks rather than absolute caps. If those benchmarks prove weak, generous access to offsets would make compliance still easier. Trading volumes might grow without a corresponding change in industrial technology.
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India’s carbon market: Linkage can wait
The case for limited linkage may become stronger after the compliance market has produced a credible carbon price and reliable emissions data. Any future opening should begin with a low quantitative ceiling on the use of offsets. Land-based credits would also require conservative accounting and safeguards against reversal.
Before granting such flexibility, the government should examine whether the industrial targets are inducing additional investment. Evidence of sustained changes in fuels, processes and equipment would be more useful than the number of certificates traded.
India needs cleaner factories as well as more finance for farms, forests and ecosystems. Each market can contribute to one side of that task. Combining them too early could allow the cheaper credit to determine the outcome.
The government has begun with the sounder arrangement. It should resist pressure to dilute it merely to increase liquidity or lower compliance costs. Farmers and restoration projects deserve carbon finance for verifiable mitigation. Industrial units should earn compliance through improvements in industrial carbon intensity. Credits generated in the countryside should not provide the reason for a factory to postpone cleaning up its production.
Sayanta Ghosh is a Senior Associate Fellow at The Energy and Resources Institute (TERI), New Delhi, working on carbon markets, nature-based solutions and geospatial approaches for climate and land-use planning.