As the world intensifies its efforts to combat the climate crisis, carbon pricing has emerged as one of the most powerful tools to drive down emissions. By assigning a cost to carbon, governments and businesses are incentivised to cut emissions, fostering a shift toward cleaner, more sustainable energy systems. The European Union (EU) has long been a leader in this space, with its Emission Trading System (ETS) serving as the benchmark for other countries. India, poised at a critical juncture, has a unique opportunity to harness the potential of carbon pricing through its forthcoming Carbon Credit Trading Scheme (CCTS).
The success of the EU ETS offers valuable lessons for countries developing their own systems. Over time, the EU ETS has evolved, with carbon prices reaching notable highs of above $80 per tonne of CO2 equivalent (CO2e). To prevent carbon leakage—where companies relocate to countries with weaker environmental regulations—the EU is introducing the Carbon Border Adjustment Mechanism (CBAM). This mechanism ensures that importers pay the same carbon price as domestic producers, levelling the playing field for industries and protecting the integrity of the ETS.
Other regions, including the United Kingdom and the United States, are following suit, with discussions underway to implement their own versions of CBAM. As these carbon pricing mechanisms become more widespread, they are prompting many countries, especially in Asia, to accelerate the development of their own carbon pricing frameworks.
China, South Korea, Indonesia, Vietnam, and Japan are all at various stages of implementing or developing their own Emission Trading Systems. India, too, finds itself at a pivotal moment. The Indian government has made substantial progress toward establishing its own CCTS, with the Bureau of Energy Efficiency facilitating multiple stakeholder discussions and publishing the detailed procedure for the CCTS compliance mechanism in July 2024.
India’s upcoming CCTS presents an opportunity not only to decarbonise key sectors but also to unlock new streams of revenue and innovation. However, ensuring the success of this system will depend on several critical factors.
One of the foremost considerations in designing a successful CCTS is to ensure that it supports decarbonisation without stifling economic growth. India’s economy, particularly in energy-intensive sectors like iron and steel, aluminium, and cement, is closely linked to carbon emissions. These industries are essential for India’s development and are also among the largest emitters.
Therefore, the design of the CCTS must be informed by rigorous economic modelling and extensive stakeholder consultations. Critical decisions, such as which sectors to include, what level to set emissions targets, what types of targets and allocation approaches to apply will all play a pivotal role. The design of the CCTS must be tailored to ensure that India can achieve its climate goals without compromising on job creation or Gross Domestic Product growth.
India can draw lessons from other jurisdictions. For example, South Korea has been able to consider the abatement potential and costs across different sectors in informing its cap-setting and allocation approach, the EU has been able to set its ETS cap in a way that is most cost-effective for the economy as a whole, and both systems use detailed energy system and economic modelling, have effective tools to mitigate carbon leakage risk and have a clear link between the ETS caps and the overall NDC targets for GHG emission reductions.
The second key factor in determining the success of India’s CCTS lies in the revenue it generates and how that revenue is used. A well-designed carbon pricing mechanism has the potential to generate substantial funds that can be reinvested in decarbonisation efforts, driving political support for the system.
The EU ETS, for example, has raised over $206 billion from the auctioning of permits. These funds have been used to support climate-friendly projects and to ease the transition for industries that face high decarbonisation costs, including help with investments in advanced technologies that are not yet commercially viable without such support.
India’s energy transition will require vast amounts of investment–estimates range from $2 trillion to $2.5 trillion by 2050. A recent policy paper by the Asia Society Policy Institute suggests that India’s CCTS could generate as much as $1.4 trillion by mid-century, if there is a transition to an allowance-based system and auctioning of permits is introduced in sectors like power generation. This revenue could be crucial in helping energy-intensive industries fund their decarbonisation efforts while also supporting broader climate initiatives.
A key challenge will be in managing and distributing these funds effectively. India will need to establish a transparent and accountable governance structure that ensures that the revenues generated are reinvested in climate-related initiatives, such as renewable energy development, industrial decarbonisation, energy efficiency programmes, and just energy transition initiatives.
India’s forthcoming CCTS represents a significant opportunity for the country to not only meet its climate commitments but also to emerge as a global leader in carbon markets. As the world moves toward greater carbon pricing alignment, India has the chance to build a system that supports its economic and development goals while also driving decarbonisation at scale.
Yet, success will depend on careful planning, stakeholder engagement, and effective policy design. India must ensure that its CCTS is flexible enough to adapt to changing economic conditions and stringent enough to deliver real emissions reductions. Additionally, the revenue generated must be strategically earmarked to support the sectors and workers most affected by the transition to a low-carbon economy.
India stands at a crossroads in its climate journey. With the right design and political will, the upcoming CCTS could be the catalyst that propels the country into a cleaner, more sustainable future. By leveraging its full potential, India can not only meet its climate goals but also seize the opportunities of the carbon pricing age.
This article is authored by Nishtha Singh, assistant director of climate, Asia Society Policy Institute.
