INTRODUCTION

India is the world’s third–largest emitter of greenhouse gases (“GHG”), accounting for roughly 7% of global emissions, yet its per capita emissions remain well below those of most developed economies.[1] That contrast frames India’s central climate challenge: sustaining economic growth while meeting its environmental commitments. Under the Paris Agreement, India has pledged to reduce the emissions intensity of its GDP from 2005 levels by 45% by 2030 and to reach net–zero emissions by 2070.[2]

Meeting these targets requires India to move from a coal–dependent economy toward renewable energy and cleaner technologies – a transition that calls for market–based tools capable of reconciling growth with decarbonisation. Emissions trading is one such tool. This article explains what emissions trading is, how it works internationally, and how India’s own legal framework – now anchored by the Carbon Credit Trading Scheme – has taken shape.

EMISSIONS TRADING AND CARBON MARKETS

A. Why Emissions are Priced

Emissions impose costs on society – through pollution, environmental damage and climate impacts – that are not reflected in the price of the goods or activities that generate them. In economic terms, they are a “negative externality”: the emitter effectively uses a shared resource (clean air) for free, while the public bears the cost. Carbon pricing addresses this by attaching a monetary value to emissions, so that the cost of environmental harm is borne by those who cause it. The underlying principle is simply that the “polluter pays”, which in turn creates a financial incentive to shift toward cleaner technologies.

B. Methods of Carbon Pricing

Carbon can be priced through markets or through taxation.

Market–based systems fall into two broad models. In a cap–and–trade system, a regulator fixes an overall ceiling (a “cap”) on sector-wide emissions and allocates or sells allowances to covered entities (depending upon the system), each allowance representing the right to emit a set quantity of GHG. Entities that cut emissions below their allocation can sell their surplus to those that exceed theirs. The cap keeps total emissions within the prescribed limit, while trading ensures reductions happen where they are cheapest. Allowances are usually distributed either free of charge (based on historical emissions or output benchmarks) or through auction.

In a baseline–and–credit system, there is no economy–wide cap. Instead, a “baseline” is set for the emissions that would have occurred without a particular climate–friendly project, and the project earns tradable credits for reductions achieved below that baseline. Each credit typically represents one metric tonne of carbon dioxide equivalent (tCO2e) reduced or removed. Issuance of credits depend on approved methodologies, proof of “additionality” (that the reductions go beyond business–as–usual or regulatory requirements) and independent verification by accredited verification agencies.

Emission reductions in both models are commonly traded as carbon credits, where one carbon credit represents the reduction or removal of one tCO2e.

A carbon tax works differently. It sets a price per unit of carbon content (typically one tCO2e) but does not guarantee any specific quantity of reductions. While this gives emitters price certainty - they know exactly what each tonne of CO2e will cost - it does not cap total emissions, meaning reductions depend entirely on how individual emitters respond to the price signal. A carbon tax also lacks the flexibility of a trading system, where participants can buy and sell allowances to find the cheapest path to compliance.

C. Compliance Markets and Voluntary Markets

Carbon markets are generally described as either compliance or voluntary.

Compliance carbon markets are created by law. Governments require designated “obligated entities” – typically large industrial emitters – to meet emission–reduction or emission–intensity obligations, usually through a cap–and–trade or baseline–and–credit mechanism, buying or surrendering allowances or approved credits to comply. Jurisdictions including the European Union, China, Canada, South Korea, New Zealand and California operate compliance systems of this kind, discussed further below.

Voluntary carbon markets operate outside any legal mandate. Corporations, NGOs and individuals buy credits to offset emissions or support climate projects for reasons such as corporate social responsibility, reputational positioning or self–imposed climate targets. There is no overarching cap; instead, the market relies on independent, third–party standards to verify the quality and additionality of credits generated by projects such as reforestation or renewable energy. Because there is no cap, participation is often driven by an entity’s desire to demonstrate environmental performance. The lack of governmental oversight has resultantly led to concerns about credit quality, transparency and “greenwashing” (a practice of making a product, service, or company appear more environmentally friendly than it actually is), limiting confidence in these markets.

D. A Case for Emissions Trading

Supporters of emissions trading value its ability to align environmental goals with economic efficiency. By creating a market for allowances or credits, the system lets companies find the lowest–cost route to reductions: those who can cut emissions cheaply can sell surplus allowances to those for whom reductions are more expensive, so that overall targets are met at the least aggregate cost. Carbon markets also send a price signal that helps businesses and governments plan long–term investment in cleaner processes, and they can be combined with other measures – such as carbon taxes and renewable–energy incentives – to form a more comprehensive policy mix. As markets mature and pricing stabilises, emissions trading tends to become a more reliable planning tool.

INTERNATIONAL COMPLIANCE MARKETS AND COOPERATION

A. Carbon Markets in Other Jurisdictions

Numerous jurisdictions operate emissions trading systems (“ETS”) or carbon taxes, and their design reflects the role the system is meant to play. Some jurisdictions use trading as the primary emission–reduction tool; others use it as a backstop to other policies.

Design also varies in structure and centralisation. The EU ETS applies a single, top–down cap set at the EU level – a centralised model. Canada, by contrast, sets a federal minimum carbon–pricing benchmark (a “backstop”) and lets provinces choose their own instruments so long as they meet that floor, producing significant variation across provinces. California’s cap–and–trade system operates as a safety net: it sits behind other mitigation policies and ensures the state’s overall target is met if those policies underperform.

Participation models differ too. The Korea Emissions Trading Scheme (K–ETS), launched in 2015, was East Asia’s first nationwide mandatory ETS, whereas Japan’s GX–ETS began as a voluntary scheme before moving toward mandatory participation. These differences reflect the distinct roles each system is designed to play.

B. International Cooperation

Coordinated international action on emissions took shape with the establishment of the Intergovernmental Panel on Climate Change (“IPCC”), whose scientific assessments led to the adoption of the United Nations Framework Convention on Climate Change (“UNFCCC”). The UNFCCC remains the central international body and is the parent framework for the Kyoto Protocol, the Paris Agreement and the annual Conference of the Parties (“COP”).

The Kyoto Protocol first popularised international market mechanisms – international emissions trading, the clean development mechanism (“CDM”) and joint implementation – allowing countries to trade surplus emission allowances or to generate reductions through projects such as reforestation.

The Paris Agreement (2015) built on this foundation, aiming to limit global temperature rise to well below 2°C above pre–industrial levels, ideally to 1.5°C. Each country submits nationally determined contributions (“NDCs”) and undergoes periodic review. Article 6.4 of the Paris Agreement creates a mechanism – now known as the Paris Agreement Crediting Mechanism (“PACM”) – through which countries can transfer carbon credits generated from emission reductions to help others meet their targets. Progress at COP29 in 2024 finalised key standards for carbon removals and crediting, moving the PACM toward operationalisation and marking a significant step in the international carbon–crediting architecture.[3]

INDIA’S EARLIER EMISSIONS AND ENERGY-EFFICIENCY SCHEMES

India’s carbon–market journey began after it started hosting CDM projects under the Kyoto Protocol, and it has since developed dedicated domestic mechanisms. Since then, two key compliance mechanisms have been devised by the Government of India (“GoI”) to lay the groundwork: (i) the Renewable Energy Certificates Scheme, 2010 (“REC Scheme”); and (ii) the Perform Achieve Trade Scheme, 2012 (“PAT Scheme”).

A. The REC Scheme

India began building a domestic market in 2010 through Renewable Purchase Obligations (“RPOs”), introduced under the Electricity Act, 2003 and the National Tariff Policy.[4] RPOs require prescribed entities – including distribution licensees, captive generators and open–access consumers – to source a set percentage of their electricity from renewables. Entities unable to meet their RPO directly can instead buy Renewable Energy Certificates (“RECs”), each representing the environmental attributes of one megawatt–hour of renewable generation. Entities outside the RPO framework may also buy RECs voluntarily.

The REC scheme remains active and is administered by the Central Electricity Regulatory Commission (“CERC”) under the CERC (Terms and Conditions for Renewable Energy Certificates for Renewable Energy Generation) Regulations, 2022.[5] Trading takes place through a periodic auction on the power exchanges. Recent reforms have widened the framework – notably by recognising Virtual Power Purchase Agreements and expanding eligibility for captive generating stations.

B. Perform Achieve Trade Scheme (PAT Scheme), 2012

To improve energy efficiency in energy–intensive industry, the Bureau of Energy Efficiency (“BEE”), under the Ministry of Power, launched the PAT scheme in 2012. PAT operates in multi–year cycles and assigns Specific Energy Consumption reduction targets to designated large consumers (“DCs”) across energy–intensive sectors such as thermal power, cement, iron and steel, aluminium, pulp and paper, textiles and petrochemicals. Entities that outperform their targets earn Energy Savings Certificates (“ESCerts”) under the Energy Conservation Act, 2001, which can be sold on the power exchanges to those that fall short.[6] Unlike the REC scheme, PAT does not allow voluntary participation by non–DCs.

PAT has driven measurable efficiency gains across successive cycles, but it is now being progressively folded into India’s newer carbon–market framework (discussed below), rather than continued as a standalone mechanism. Its principal limitations – a focus confined to designated consumers, restricted participation, and infrequent trading cycles that hampered price discovery – are among the gaps the new framework is designed to address.[7]

THE INDIAN CARBON MARKET FRAMEWORK

A. From Energy Efficiency to Carbon Intensity

India’s carbon market rests on the Energy Conservation Act, 2001, as amended by the Energy Conservation (Amendment) Act, 2022. The 2022 amendment empowered the Central Government to “specify the carbon credit trading scheme”, to direct energy–intensive industries to maintain a minimum holding of carbon credit certificates, and to provide for the issuance, tracking and extinguishment of those certificates on a registry maintained in the public domain.[8]

Exercising that power, the Central Government notified the Carbon Credit Trading Scheme, 2023 (“CCTS”) to establish the Indian Carbon Market (“ICM”) for trading carbon credit certificates (“CCCs”).[9] Building on the PAT and REC experience, the CCTS shifts the regulatory focus from energy efficiency to GHG emission intensity, and adopts a baseline–and–credit design. It also differs from PAT in two important respects: it works on annual (rather than multi–year) targets, and it permits voluntary participation by non–obligated entities alongside the mandatory compliance mechanism.

B. Institutional Framework

The CCTS is administered through a layered institutional structure:

1. The National Steering Committee for the Indian Carbon Market (“NSCICM”) – comprising representatives of relevant ministries, states and experts – oversees governance of the ICM and guides its development.
2. The BEE administers the CCTS, identifies sectors with reduction potential, and recommends their inclusion. On the recommendations of the BEE and NSCICM, the Ministry of Power decides the sectors and obligated entities to be covered.
3. The Grid Controller of India Limited operates the ICM Registry, maintaining electronic accounts of CCC holdings and recording transfers.
4. The CERC regulates trading and approves the rules for power exchanges.

C. Compliance Mechanism Under CCTS

In 2024, BEE published the “Detailed Procedure for Compliance Mechanism under CCTS” and the “Accreditation Procedure and Eligibility Criteria for Accredited Carbon Verification Agency”, operationalising the compliance side of the scheme.[10] 

I. Targets and the GEI Rules

Operational targets are set through rules made by the Ministry of Environment, Forest and Climate Change (“MoEFCC”) under the Environment (Protection) Act, 1986. The Greenhouse Gases Emission Intensity Target Rules, 2025 (“GEI Rules”) define GHG emission intensity (“GEI”) as tCO2e per unit of equivalent output or product, and require each obligated entity to meet its notified GEI target for a compliance year or make up any shortfall by purchasing CCCs.[11] The Central Government first notified GEI targets on 8 October 2025 for obligated entities in four sectors – aluminium, cement, chlor–alkali, and pulp and paper.[12] A subsequent amendment, notified on 13 January 2026, added a Second Schedule extending GEI targets to four further sectors: secondary aluminium, petroleum refineries, petrochemicals and textiles.[13] Most recently, the Greenhouse Gases Emission Intensity Target Amendment Rules, 2026 were published on 21 September 2026, continuing the phased expansion and refinement of sectoral targets – a development obligated entities and advisers should review closely as the target universe evolves.[14]

II. How credits are earned and surrendered

Under the GEI framework, an obligated entity that beats its target is issued CCCs, and one that misses its target must surrender CCCs to cover the gap. The quantities follow a simple formula: the difference between the GEI target and the achieved GEI for the compliance year, multiplied by the entity's equivalent product output for that year (i.e., its total production volume, measured in sector-specific units such as tonnes of cement or barrels of crude throughput).[15] CCCs remaining after compliance may be “banked” for future years. Targets are set on a sectoral trajectory basis by the BEE in consultation with the relevant technical committee, and PAT–covered sectors are being transitioned into the CCTS over time.

The scheme currently covers CO2 and perfluorocarbon emissions, converted to CO2e using Global Warming Potential values from the latest IPCC assessment report.

III. Monitoring and Reporting

Obligated entities must monitor emissions using either standardised default factors set out in the BEE’s Detailed Procedure or their own site–specific factors derived from analysis of their fuel, materials or processes. Emissions are measured on a “Gate–to–Gate” basis – capturing all direct and indirect emissions within the site boundary – and that boundary, once approved by the BEE, must remain consistent throughout the target period even if the entity expands or merges.

Each entity must maintain a BEE–approved monitoring plan (updated annually), keep robust data records, and report energy consumption, production and reduction measures on a quarterly and annual basis under strict quality–assurance protocols. Within four months of the end of each compliance year, the entity must submit a GHG emissions report, verified by an accredited carbon verification agency, to the BEE and the State Designated Agency.

The verification agency independently checks the accuracy of activity data, emission factors and monitoring procedures, applying a 2% materiality threshold - meaning that discrepancies between the entity's reported emissions and the agency’s verified figures are treated as material (and must be corrected) only if they exceed 2% of total reported emissions. Any errors or non–compliance must be corrected before the report is finalised. Where no material misstatement remains, a positive opinion is issued. Based on the verified report, the BEE finalises the number of CCCs to be issued or surrendered and recommends this to the NSCICM, after which certificates are issued or surrendered within prescribed timelines.

D. Obligations under the CCTS

Obligated entities are required to undertake the following activities:

1. Develop and implement the monitoring plan to monitor its GHG emissions and emission intensity.
2. Adhere to the monitoring and reporting requirements of this procedure to accurately monitor and report its GHG emissions and emission intensity.
3. Upon completion of the compliance year, undertake verification activities through accredited carbon verification agencies and submit a verified GHG emissions report.
4. Comply with the GHG emission intensity targets by implementing of GHG reduction measures.
5. If entities fail to achieve the GHG emission intensity targets, purchase / surrender the equivalent number of carbon credit certificates for compliance with GHG emission intensity targets.
6. Take all measures including implementation of long–term action plan and good practices prevalent or in use in the concerned sector to achieve the reduction in the GHG emissions from their operations.
7. Furnish the full and complete data, provide necessary documents in the form as required by the bureau or the accredited carbon verification agencies for the purpose of this scheme.

E. Penalities and Environmental Compensation

Rather than a fixed administrative fine, the GEI Rules adopt a market–linked “environmental compensation” mechanism. An entity that fails to meet its GEI target and does not surrender sufficient CCCs is liable to pay environmental compensation equal to twice the average traded price of CCCs during the relevant compliance year, as determined by the BEE, with the compensation imposed by the Central Pollution Control Board.[16] The compensation must be paid within 90 days, and the funds collected are ring–fenced in a separate account to be used for CCTS purposes on the recommendation of the NSCICM and with the approval of the Central Government. Pegging the penalty to twice the market price is intended to ensure that non–compliance is never cheaper than buying credits, thereby preserving the integrity of the market’s price signal. 

F. Offsetting Mechanism

Alongside the mandatory compliance system, the CCTS includes a voluntary offset mechanism that lets non–obligated entities register projects that reduce, remove or avoid GHG emissions. Offset projects have no mandatory cap; instead, they are assessed against a baseline and awarded CCCs once they satisfy the BEE’s detailed eligibility criteria and complete the prescribed project cycle. The BEE has notified approved offset sectors in phases: the first phase covers energy, chemical manufacturing, waste management and agriculture (using technologies such as green hydrogen, biochar, landfill–gas capture and afforestation), and the second broadens the scope to construction, fugitive emissions, and carbon capture, utilisation and storage.

Notably, both the compliance market (for obligated entities) and the offset mechanism (for non–obligated entities) issue the same instrument – CCCs – to be traded on the same exchange–based platform. This creates a hybrid market architecture, relatively unusual internationally, in which a single instrument and trading venue serves both mandatory compliance and voluntary offset objectives.

G. Pricing, Trading and Market Structure

The pricing and trading of CCCs are governed by the CERC (Terms and Conditions for Purchase and Sale of Carbon Credit Certificates) Regulations, 2026, notified on 27 February 2026, which formalise the framework for exchange–traded carbon credits.[17] The key features are:

1. Regulatory roles. The BEE acts as administrator – formulating trading procedures, registering participants and monitoring compliance – while the Grid Controller of India acts as registry, maintaining electronic accounts, verifying transactions and recording transfers.
2. Exchange–based trading. CCCs must be traded on CERC–approved power exchanges on a monthly basis, with price discovery occurring within a band set by a floor price and a forbearance (ceiling) price approved by the CERC on the BEE’s proposal. This banded pricing is intended to give the market a stable, predictable range. Given the first cycle of trading is yet to take place, it is yet to be seen how pricing compares to other evolved jurisdictions.
3. Penalty for default. Entities with more than three defaults in a quarter face a six–month trading ban, without prejudice to penalties under the Energy Conservation Act.
4. Market oversight. The CERC retains overarching powers and may intervene where it observes abnormal price movements or unusual trading volumes.

To operationalise trading, the Government launched the ICM portal on 21 March 2026 as the central digital infrastructure for the scheme. The portal is the single electronic interface for registration of obligated entities and offset developers, submission of verified emissions and production data, issuance and surrender of CCCs, and recording of transfers, and it publishes aggregated information on notified sectors, targets, and issuance and trading activity to enhance transparency and liquidity.

H. The ‘Green Credit Programme’ – A Related But Distinct Mechanism

The CCTS should not be confused with the Green Credit Programme, established under the Green Credit Rules, 2023.[18] The Green Credit Programme is a market–based mechanism that rewards environment–positive activities – such as tree plantation, water management, sustainable agriculture, waste management, mangrove restoration and sustainable buildings – with tradable “green credits”. It is administered by the Indian Council of Forestry Research and Education.[19] The first methodology notified under the programme covers tree plantation, awarding one green credit per tree grown, subject to a minimum density of 1,100 trees per hectare on land parcels of at least five hectares.[20]

Crucially, the Green Credit Programme is legally independent of the CCTS: green credits are sector–agnostic environmental credits, whereas CCCs are GHG–intensity–specific. That said, the two can overlap — the Green Credit Rules expressly provide that an activity generating green credits may also earn carbon credits under the CCTS for the same activity. In the absence of a cross-registry reconciliation mechanism or a common unit of measurement, this raises a recognised risk of double counting and dual incentivisation that the Government will need to address as both programmes mature.[21]

I. Challenges to Overcome

I. Liquidity and price discovery

A central risk is low market liquidity and weak price discovery – problems seen under PAT and common to emerging carbon markets – which could blunt the CCTS’s ability to incentivise reductions. Allowing voluntary participation should help, but it will be important to avoid an oversupply of credits that lets entities meet targets without achieving real environmental impact. The CERC’s floor–and–forbearance price band is designed to mitigate this by keeping prices within a defined range.

II. Revenue Generation

Unlike the EU ETS or Korea’s system, where governments auction allowances and recycle the proceeds into renewable energy and support for smaller businesses, the Indian framework does not yet contemplate a comparable revenue–generation mechanism. This raises questions about the system’s long–term self–sufficiency, particularly if global climate funding contracts. The environmental–compensation fund, which is ring–fenced for CCTS purposes, and the CERC’s floor–price mechanism may partly address this, but their effect remains to be seen.

III. Exclusion of MSMEs

The CCTS is aimed at large industry, yet many covered sectors depend on micro, small and medium enterprises (“MSMEs”) that fall outside the framework. Bringing MSMEs in is difficult – their fuel and raw–material sources are often informal, data collection is harder, and many operate carbon–intensive legacy technologies that make purchasing credits costly. Ensuring a level playing field between MSMEs and larger players is a continuing challenge.

IV. Offset integrity and greenwashing

Offset–credit integrity has been a recurring problem in carbon markets internationally, and India will need stringent oversight, verification and frequent audits to prevent greenwashing. The Central Consumer Protection Authority’s Guidelines for Prevention and Regulation of Greenwashing and Misleading Environmental Claims, 2024 – which define greenwashing to include vague, false or unsubstantiated environmental claims and impose penalties on violators – are a helpful complement on the disclosure side.[22] 

V. Integrating the thermal power sector

The initial CCTS rollout does not place the thermal power sector among the first entities assigned GEI targets – likely because of existing PAT coverage and energy–security concerns. This contrasts with many global systems, where the power sector is a primary focus from the outset. Given that thermal power accounts for a very large share of India’s GHG emissions, a delayed or limited inclusion means the market may initially cover a smaller portion of national emissions than is feasible, tampering the overall pace of decarbonisation. Its comprehensive and timely integration will be important to the framework’s impact. 

PRACTICAL CONSIDERATIONS FOR COMPANIES

As India’s carbon market moves from design to operation, companies – whether already designated as obligated entities or simply anticipating future coverage – should begin assessing themselves for strategic positioning and compliance readiness.

A. Compliance Readiness

Companies in sectors already covered by GEI targets (aluminium, cement, chlor–alkali, pulp and paper, petroleum refineries, petrochemicals, textiles and secondary aluminium), or in sectors likely to be covered next, should take early steps to build compliance capability. Priorities include: establishing an internal GHG inventory that captures all emission sources within the Gate–to–Gate boundary required by the BEE’s Detailed Procedure; putting in place robust data–governance processes – including metering, sampling protocols and IT systems – capable of supporting quarterly and annual reporting to the standard the CCTS demands; conducting a baseline assessment of current emission intensity against the GEI trajectory targets notified (or expected) for the relevant sector; identifying an accredited carbon verification agency and familiarising internal teams with the verification cycle, including the 2% materiality threshold and the four–month post–compliance–year reporting deadline; and registering on the ICM portal promptly once eligible, given that all submissions must be made through it.

For companies not yet notified as obligated entities, the phased expansion of GEI targets – most recently through the September 2026 amendment – signals that coverage is widening. Early investment in monitoring infrastructure is likely to be more cost–effective than a reactive build once notification arrives.

B. Strategic Positioning

The CCTS offers commercial opportunities beyond bare compliance. Companies that reduce emissions below their targets will hold surplus CCCs that can be banked or sold on the exchange, creating a potential revenue stream. Equally, the offset mechanism allows non–obligated entities to register eligible projects – in sectors such as energy, waste management, agriculture, construction and carbon capture – and earn CCCs for verified reductions. Because compliance–market and offset–market CCCs trade on the same platform, early movers in offset–project development may benefit from demand–side liquidity as the pool of obligated buyers grows.

Companies should also consider how participation in the Green Credit Programme may complement their carbon strategy: an activity generating green credits may, in principle, also earn carbon credits under the CCTS for the same activity, and green credits may be used for ESG or CSR reporting purposes. However, given the concerns regarding double counting, companies should approach dual claims with caution - ensuring that any public representation of emission reductions is supported by a clear methodology, that the same reduction is not presented to two different audiences as separate achievements, and that internal records distinguish between green credits and CCCs held for distinct purposes, pending regulatory clarity on how the two registries will be reconciled.

C. Contractual and Transactional Considerations

Carbon credit obligations and assets are increasingly relevant to commercial transactions. Key areas to address include:

1. M&A Due Diligence: Acquirers of businesses in covered sectors (or those that have voluntarily registered under the CCTS offset mechanism) should diligence the target’s compliance status under the CCTS – including whether GEI targets have been met, whether CCCs have been surrendered or banked, any pending environmental–compensation exposure, and whether the target is registered on the ICM portal with an approved monitoring plan. The treatment of banked CCCs (as assets) and outstanding shortfalls (as liabilities) will need to be reflected in the accounts of the target.
2. Representations and warranties: Sale and purchase agreements should include representations covering the target’s compliance history, the accuracy of its GHG emissions data, the status of its CCCs, and any pending or threatened regulatory action under the CCTS or the GEI Rules. These representations should be backed by specific indemnities so that if a pre-closing compliance gap, data inaccuracy or undisclosed environmental-compensation liability materialises after completion, the buyer has a contractual remedy against the seller rather than bearing the cost of inherited non-compliance.
3. Price adjustment and indemnity mechanisms: Where a target’s CCC position may change between signing and closing – for example, because a compliance–year result has not yet been finalised – parties should consider whether a price–adjustment mechanism or a specific indemnity for carbon–credit shortfalls is appropriate.
4. Supply and offtake contracts: Long–term supply agreements in covered sectors may need to allocate the cost of carbon compliance between the parties, particularly where carbon prices are expected to fluctuate within the CERC’s floor–and–forbearance band. Equally important, such contracts should clearly specify which party is entitled to claim, hold and trade any CCCs generated as a result of the contracted activity. For example, where a supplier’s production process outperforms its GEI target, the agreement should address whether the resulting surplus CCCs belong to the supplier (as the entity achieving the reduction) or the offtaker (as the party bearing the compliance cost or paying a carbon-inclusive price), and on what terms any sharing or transfer of credits will occur. Without express allocation, disputes over entitlement to what may become a valuable tradable asset are foreseeable.
5. Financing: Lenders and investors are increasingly attentive to carbon risk. Borrowers in covered sectors should expect questions about CCTS compliance in loan documentation, and green or sustainability–linked financing may reference CCC performance as a KPI.

D. Reputational Risks

Public claims about carbon neutrality, net–zero commitments and the use of carbon offsets carry significant reputational and legal risk. Companies making sustainability disclosures should ensure that any reference to carbon credits, offsets or net–zero targets is specific, substantiated, verifiable and consistent with the actual status of their CCC holdings or offset–project registrations under the CCTS.

In practical terms, this means avoiding blanket “carbon neutral” claims unless they are supported by verified, retired credits; distinguishing clearly between compliance obligations and voluntary offsets; and ensuring that marketing and ESG communications are reviewed by legal and compliance teams against the CCPA guidelines before publication.

CONCLUSION AND SUGGESTIONS

India’s goal of net–zero emissions by 2070 is a significant undertaking, and the CCTS is a meaningful step toward it – aligning industrial growth with emission–intensity reductions through a market mechanism. To realise its full potential, several priorities stand out: deepening market liquidity and price stability; using the CERC’s pricing framework and the environmental–compensation fund to support reinvestment in clean energy; bringing MSMEs into the fold to broaden participation; reinforcing transparency and credibility in the offset mechanism through recognised verification standards and regular audits; integrating the thermal power sector in line with global best practice; and ensuring a smooth, single–window transition from PAT to the CCTS. Handled well, the CCTS can evolve into a genuinely transformative instrument – one that advances India’s climate commitments while positioning the country as a serious participant in the global carbon market.

For companies, the message is straightforward: prepare now, not when a notification arrives. Entities in covered or potentially covered sectors should be building GHG monitoring and data–governance infrastructure, conducting baseline GEI assessments, and engaging accredited verification agencies. Beyond compliance, the CCTS creates commercial opportunity – surplus CCCs can be banked or traded, offset projects can generate credits, and the Green Credit Programme opens additional ESG positioning avenues. At the transactional level, CCC positions and compliance exposure are becoming a part of M&A diligence, financing documentation and supply arrangements, and representations, warranties and indemnity mechanisms should be expected in deals involving covered sectors. Companies making public sustainability claims must ensure they are specific, substantiated and aligned with the CCPA’s greenwashing guidelines as regulatory and reputational risk in this space is rising.

This paper has been written by Saurav Kumar (Senior Partner), Swathi Sreenath (Partner) and Suyash Bajpai (Associate).

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