Balancing supply and demand in India’s carbon trade

Authored by - Manish Dabkara, MD and chairman, EKI Energy Services Ltd, Shingle Sebastian and Gopal K Sarangi, TERI School of Advanced Studies, New Delhi.

India’s Carbon Credit Trading Scheme (CCTS), formally introduced in June 2023 through amendments to the Energy Conservation Act, 2001, provides a foundational legal framework for a unified Indian carbon market. Structured around two key components, the compliance mechanism and the offset mechanism, it represents a major shift in India’s climate governance. The compliance mechanism evolves from the Perform-Achieve-Trade (PAT) scheme into a more robust, market-based emissions trading system, while the offset mechanism marks India’s first official baseline-and-credit programme, facilitating the issuance of credits for voluntary mitigation actions beyond regulatory obligations.

Carbon markets (Kunal Patil / HT Archive)

With this architecture in place, India has begun laying the supply-side groundwork. Institutional structures, registry systems, targets for obligated entities and methodological guidelines are progressively being developed, with full operational readiness expected by 2026. The supply pipeline has already been primed for compliance mechanism, particularly through targets for obligated entities from nine sectors. However, the challenge now is not supply, but demand, especially for the offset mechanism.

Historically, the PAT framework suffered from relatively modest efficiency targets, resulting in a surplus of ESCerts. Of the 10.3 million ESCerts issued in the first three cycles, nearly half remained unsold, highlighting the absence of strong purchasing incentives. Hence over-supply of compliance mechanism remains an issue. Additionally, no binding obligation yet in place for entities to participate in offset mechanism, current market activity is driven largely by voluntary interest, reputational positioning, early alignment with export-facing decarbonisation norms, or future-readiness. As a result, the market remains thin.

The real inflection point, however, will come when entities find compelling reasons to buy, not just because they must, but because it aligns with their economic, regulatory, or reputational imperatives. This article looks into the possible demand creation opportunities.

There are five practical levers:

* Channel CSR budgets into credit retirement: Section 135 of the Companies Act already obliges large Indian firms to spend at least two percent of average net profits on corporate social-responsibility activities. CSR outlays crossed ₹29,986 crore in FY 2022-23, illustrating a sizeable funding pool. Allowing companies to earmark part of that spending for purchasing and permanently retiring credits from Offset mechanism would convert an established general-purpose CSR flow into a measurable domestic climate contribution without altering the CSR law itself.

* Embed offset credits data inside BRSR disclosures: Since FY 2023-24, the top 1,000 listed companies must file Business Responsibility & Sustainability Reports (BRSR). If the BRSR core indicators explicitly recognise the number of offset credits surrendered, firms keen to improve their ESG scores would acquire credits to bolster those disclosures, mostly for hard to abate sectors. Third-party assurance of BRSR data, already under discussion at SEBI, would reinforce credibility, encouraging investors to reward active credit buyers or surrenders.

* Use public procurement to prefer low-carbon products: Government agencies purchase steel, cement, electricity and transport fuels at volumes that rival private demand. The ministry of steel’s forthcoming green-steel certification hints at future procurement clauses requiring low-emission materials for public projects. Extending such clauses to other hard-to-abate materials, and mandating suppliers to prove compliance by meeting the compliance market targets by surrendering CCCs, would create large, predictable demand anchored in national infrastructure budgets.

* Make export competitiveness a buying trigger: A tightening global trade landscape, led by the EU’s Carbon Border Adjustment Mechanism (CBAM), means exporters may soon need robust emissions data, and offsets, to avoid punitive levies. Currently, only European Union Allowances (EUA) are allowed to be bought to meet the compliances for CBAM. Allowing exporters to meet a portion of their compliance by purchasing offset market credits, against the embodied carbon in their products can become a defensible cost-of-doing-business, especially for steel, aluminium and cement shipments headed to Europe or other jurisdictions exploring border measures in place of EUAs. Additionally, by allowing CCTS obligated entities to meet some of their target by buying offset mechanism credits could also add another dimension to the demand.

* Tie sustainability-linked finance to credit acquisition: Banks and investors increasingly issue sustainability-linked loans and bonds whose interest rates or coupons adjust when a borrower meets, or misses, climate milestones. If lenders recognise the surrender of verified CCCs and meeting the yearly Compliance mechanism targets, as a qualifying milestone, borrowers gain a direct financial incentive to participate in the Indian carbon market, while the financial sector becomes an additional, durable source of demand. Recent commentary from Indian lenders suggests that guidance from the Reserve Bank of India could accelerate this practice.

None of these levers requires wholesale redesign of the CCTS. They rely instead on India’s existing legislative tools, CSR mandates, SEBI reporting, procurement manuals, trade diplomacy and financing mandates to nudge buyers into the market before the first compliance deadline. A richer demand base would tighten the price signal, reward genuine abatement and discourage speculative oversupply.

As the Bureau of Energy Efficiency (BEE) finalises sectoral baselines for the initial trading period, the open question is how quickly these complementary policies can move. Will corporates treat CSR and BRSR as entry points to offset carbon-credit retirement? Can public procurement create early anchor demand for low-carbon materials and demonstrate its feasibility as an effective low carbon policy instrument? The answers will determine whether India’s carbon market evolves into a true investment magnet or remains a showcase of untapped potential.

Either way, the country now possesses a functioning supply engine. The next phase is to let demand catch up, and, in doing so, convert paper certificates into concrete emissions reductions.

This article is authored by Manish Dabkara, MD and chairman, EKI Energy Services Ltd, Shingle Sebastian and Gopal K Sarangi, TERI School of Advanced Studies, New Delhi.