India’s Carbon Credit Trading Scheme (CCTS) has entered its operational phase, and its future trajectory hinges on key design choices regarding sequencing and market features. The report addresses four critical themes: financial market participation, sectoral expansion, the EU’s Carbon Border Adjustment Mechanism (CBAM), and offsets under the Paris Agreement.
Financial market participation: The report emphasizes the importance of financial intermediaries for market liquidity and price discovery. While their participation is beneficial, it requires a credible scarcity signal, robust MRV, and appropriate oversight. India should establish a reference price through auctions, admit brokers and designated market makers, and prepare for derivatives trading to deepen liquidity as the market matures.
Sectoral expansion: The initial exclusion of the power sector simplifies implementation but limits early demand and price formation. The report argues for eventual inclusion, highlighting that cost-reflectivity, not market liberalization, is key. Power sector inclusion would strengthen the market, improve policy coherence, and generate significant revenue for the transition. A phased approach, supported by regulatory coordination and MRV harmonization, is recommended to balance mitigation, affordability, and reliability.
CBAM interaction: India faces exposure to CBAM, particularly in the steel sector. The report argues that CCTS design must focus on generating a carbon price high enough to qualify for CBAM deductions. This requires tightening benchmarks and potentially introducing auctions, with revenue recycled domestically to support the transition. The report suggests engaging with the EU on equivalence and strengthening CCTS credibility to leverage this external pressure for domestic policy improvement.
Offsets and Article 6: The report recommends a hybrid approach to offsets, building an internationally credible track for high-cost mitigation under Article 6 first, and designing a domestic-compliance track later. This sequencing ensures environmental integrity while preserving the CCTS’s core function of driving decarbonization. Domestic offsets should be calibrated to Indian compliance realities, with integrity determined at the system level to maintain a credible price signal.
Overall conclusion: The report stresses that the CCTS’s success depends on a deliberate sequencing of reforms, prioritizing foundational elements like credible stringency, robust MRV, and genuine enforcement. Advanced features should be designed early but activated later, with clear signalling to guide market expectations. The report concludes that a strengthening carbon price signal is essential for deeper financial participation, broader coverage, CBAM alignment, and offset integration to effectively support India’s climate goals.
