How does India's Carbon Credit Trading Scheme work?

Two carbon markets, and only one of them compels anyone

Carbon credits in India are traded in two kinds of market, and they work differently.

The voluntary market is the one most people have encountered. A company decides it wants to offset its emissions, buys credits from a project developer, and retires them. Nothing legally requires the purchase, and the buyer can stop buying at any time.

The compliance market is different in one decisive respect: the buyer has no choice. India’s Carbon Credit Trading Scheme, notified by the Ministry of Power on 28 June 2023 under the Energy Conservation Act, 2001, is that market. A unit inside its scope either meets its target, or buys certificates to cover the gap, or faces environmental compensation. Demand is created by law.

The two are not sealed off from each other. The Scheme defines non obligated entities as registered entities that can buy carbon credit certificates on a voluntary basis, and both kinds of buyer register on the same Indian carbon market registry and trade on the same power exchanges.

The mechanism: intensity, not a cap

The CCTS uses a baseline and credit approach built on greenhouse gas emission intensity. The Scheme says targets are set in tonnes of carbon dioxide equivalent per unit of equivalent product, and one carbon credit is equivalent to one tonne of carbon dioxide equivalent.

The sequence is set out in paragraph 11 of the Scheme. The Ministry of Power decides the sectors and units to be covered, on the recommendation of the Bureau of Energy Efficiency. The Bureau studies each sector and recommends targets. The Ministry of Environment, Forest and Climate Change then notifies the targets under the Environment (Protection) Act, 1986. The Bureau’s detailed procedure gives each unit an annual target within a three year trajectory period, after which targets are revised.

At the end of each compliance year, the unit’s achieved intensity is compared with its target. The 2025 target rules give the arithmetic:

• A unit that beats its target is issued certificates equal to its target intensity minus its achieved intensity, multiplied by its equivalent output for the year.
• A unit that misses its target must buy and surrender certificates equal to its achieved intensity minus its target intensity, multiplied by its output.
• A unit that does not comply faces an environmental compensation order from the Central Pollution Control Board, equal to twice the average price at which certificates traded during that compliance year’s trading cycle, payable within 90 days.

The last point is the economic engine. Because the compensation is pegged to twice the market price, failing to comply always costs more than buying certificates at the going rate. Buying is the cheaper route for a unit that is short, and that obligation is what creates demand for the certificates that over achieving units sell.

Certificates left over after a compliance cycle can be banked. Under the detailed procedure, banked certificates that a unit was issued can be sold or used in later cycles, while banked certificates that a unit bought can only be used for its own compliance.

Why intensity rather than an absolute cap

An absolute cap fixes total emissions. An intensity target fixes emissions per unit of output. Under an intensity target, a unit that halves its emissions per tonne of product while tripling its production has met its obligation and increased its total emissions.

For an economy that expects industrial output to grow, an absolute cap would also work as a limit on production. An intensity target pushes every unit of output to get cleaner without deciding how many units there should be. It drives efficiency rather than an absolute reduction, and that trade off is the design, not a loophole.

Who is covered

The first targets were notified in the Greenhouse Gases Emission Intensity Target Rules, 2025, published on 8 October 2025. They cover four sectors: aluminium, cement, chlor alkali, and pulp and paper. Each listed unit has a baseline intensity for 2023-24 and a target for the compliance years 2025-26 and 2026-27.

The rules carry a named schedule of units, and the government amends that schedule and adds sectors by further notification. Coverage changes, so confirm the current schedule against the latest notification rather than against any summary, including this one.

What this means if you produce credits

Three consequences matter for a project developer.

Compliance certificates and voluntary credits are different products. A certificate issued under the compliance mechanism is what an obligated unit surrenders to meet its legal requirement. A voluntary market credit issued by a private standard is not that certificate. Before designing a project around expected demand, establish which market its output can actually be sold into, because that determines who the buyer is.

Land based projects sit outside the obligated sectors. All four notified sectors are industrial. A restoration or biochar project does not receive an intensity target, so its route into the Indian scheme is the offset mechanism added in December 2023. Under that route the Bureau publishes sectoral scopes and methodologies, and non obligated entities register projects that reduce, remove or avoid emissions under them. Whether a particular land based project qualifies depends on whether a methodology covering it has been published, so that is the first thing to check.

The Indian scheme is one buyer, not the only one. A durable removal project can also sell to companies outside India meeting their own commitments, through private standards or under Article 6 of the Paris Agreement. The compliance market is important context, and for many land based projects it will not be the first customer.

The reason this scheme exists at all

A carbon credit is a mechanism for making an unsellable thing sellable. Nobody can be charged for cleaner air, because nobody can be excluded from breathing it. A credit converts the act of reducing emissions into a certificate that a specific party has a specific reason to buy, and a compliance scheme like the CCTS supplies that reason by law.

That is the same logic our own thesis is built on, and it is why we treat the question of who is obliged to pay as more important than the question of how much they might pay.

Compliance schemes are administrative and change frequently. Recheck sector coverage, target values and deadlines against the current official notification before relying on this page commercially.

Related questions

What is the difference between the CCTS compliance market and the voluntary carbon market?

In the compliance mechanism, notified units are legally required to meet an emission intensity target, and a unit that falls short must surrender certificates or face environmental compensation. In the voluntary market, buyers purchase credits because they choose to. The Scheme also lets non obligated entities buy carbon credit certificates on a voluntary basis, so the two can meet on the same exchanges.

Does the CCTS cap total emissions in India?

No. The targets are emission intensity targets, meaning tonnes of carbon dioxide equivalent per unit of equivalent product. A unit that reduces its intensity while increasing production can meet its target with higher total emissions. The Scheme drives emissions per unit of output down rather than fixing a national total.

Can a project outside the notified sectors earn certificates?

Yes, through the offset mechanism added to the Scheme in December 2023. The Bureau of Energy Efficiency publishes sectoral scopes and methodologies, and non obligated entities can register projects that reduce, remove or avoid emissions under those methodologies to seek carbon credit certificates. A project type with no published methodology has no route yet.