In a recent development in operationalising the compliance market, in April 2025, the Ministry of Environment, Forest and Climate Change (MoEFCC) notified the draft notification introducing the Greenhouse Gas Emissions Intensity Target Rules, 2025, as a follow-up of the Carbon Credit Trading Scheme (CCTS), 2023.
The notification defines emission targets for designated industrial sectors including cement and aluminium. These targets apply to the compliance period from 2025 to 2027 and are based on emissions per unit of production, using 2023–24 as the baseline year. The new targets are applied to over 280 industrial entities from four sectors: aluminium, chlor-alkali, pulp and paper, and cement. The government has stated that full compliance trading is expected to begin in October 2026. A closer look at the latest rules and their expected impact…
Background and policy developments so far
The foundation for India’s carbon credit framework was laid through the Energy Conservation Act, which was first notified in 2001. This act was amended in 2022 to provide a legal basis for the development of a carbon market. Each participating entity will be assigned a sector-specific emission intensity target. This is expected to incentivise emission reduction as companies that perform better than their assigned targets will receive carbon credits, which they can trade for financial incentives. Also, companies that fall short of their targets will be required to purchase credits to meet compliance. This approach incentivises cost-effective emission reductions without mandating a fixed cap.
In parallel, a voluntary carbon market is also expected to be introduced to encourage participation from non-obligated entities such as renewable energy developers and corporate buyers. This dual structure ensures that both regulated and non-regulated actors can contribute to and benefit from emission reductions.
The Indian government has also developed a plan to smoothly shift energy-intensive sectors and designated consumers from the perform, achieve and trade scheme to the compliance mechanism under the CCTS. The government has identified nine energy-intensive sectors for inclusion under the compliance mechanism of CCTS. These are aluminium, cement, steel, paper, chlor-alkali, fertiliser, refinery, petrochemicals and textiles. Under the offset mechanism, 10 sectors have been approved, which include energy, industries, waste handling and disposal, agriculture, forestry, transport, construction, fugitive emissions, solvent use and carbon capture utilisation and storage.
In 2023, the Bureau of Energy Efficiency (BEE), Ministry of Power and the MoEFCC issued a draft notification, which outlined key steps for entities to ensure compliance as per the CCTS scheme. This included a mandated Green House Gas (GHG) emissions data, which would be maintained by listed entities. They were to be based on nationally determined contributions and the cost would be borne for implementation and the availability of technology. These guidelines also required entities to regularly report their GHG emissions to the BEE.
Details of the latest rules
The draft sets a uniform formula for calculating emissions, ensuring standardisation across industries. It introduces differentiated benchmarks for integrated and stand-alone units and provides clarity on how emissions will be monitored, reported and verified, in an attempt to address greenwashing issues.
Under the draft rules, 282 plants across four sectors are subject to mandatory targets for two years (2025-26 and 2026-27), with reductions roughly distributed as 40 per cent in the first year and 60 per cent in the second. The covered sectors and entities include aluminium (13 entities), cement (186 entities), chlor-alkali (30 entities), and pulp and paper (53 entities).
As per the MoEFCC’s notification, companies that fail to meet their targets must purchase carbon credit certificates (CCCs) from the Indian carbon market portal or pay an environmental compensation equal to twice the average market price of credits for that year. They could also bank surplus certificates for use in the future.
This is aimed at enhancing market flexibility and rewards sustained low-emission performance. Relevant data and documents must be submitted through the ICM portal, within defined time limits. The Central Pollution Control Board may impose EC equal to twice the average price at which CCCs are traded during the trading cycle of that compliance year.
The draft notification also listed prominent entities such as Hindalco, NALCO, Vedanta and Ultratech Cement in the first round. Each company’s emission intensity target is defined in terms of tonnes of carbon dioxide equivalent per tonne of production, allowing for a uniform benchmarking approach across different production scales. The inclusion of leading companies from emission-heavy sectors sends a strong market signal. The amounts collected through environmental compensation will be maintained in a separate account and used for promoting the CCTS, following recommendations from the national steering committee and approved by the government.
Challenges and outlook
As a part of the United Nations Framework Convention on Climate Change, India has presented an ambitious climate plan. India has set a commitment to achieve net-zero emissions by 2070 and reduce the emission intensity of its GDP by 45 per cent by 2030 (based on 2005 levels). To achieve this, one of the mechanisms that the country has been adopting are market based. On this front, the country has passed several regulations and schemes for establishing a robust carbon credit market to support its road to decarbonisation and emission reduction. Simply put, market-based mechanisms, particularly carbon credit trading is a way to reward emission reduction through financial incentives. As of December 2024, the progress that has been made is notable. Non-fossil fuel-based sources accounted for 47.10 per cent of India’s total installed electricity generation capacity. Further, the emission intensity of the GDP had fallen by 36 per cent. Hence, both figures reflect significant momentum towards India’s climate goals.
The operationalisation of carbon credit trading opens multiple opportunities for the Indian power sector. For starters, it can help mainstream carbon pricing into electricity procurement strategies. As emission intensity targets become applicable to generation companies, carbon becomes a cost variable that can influence power despatch and help improve the competitiveness of low-emission generators and incentivise efficiency investments.
For renewable energy developers, carbon markets offer a potential revenue stream. With verified emission reductions from solar, wind and other renewable energy sources, projects can be converted into tradable carbon credits. These can be sold to obligated industries under the compliance market or to corporates under the voluntary market. This improves project economics and attracts green capital.
Despite these gains, the introduction of carbon pricing comes with multiple challenges. One of the most significant challenges is the risk of international trade friction. There are mechanisms such as the European Union’s Carbon Border Adjustment Mechanism (CBAM), which are designed to apply carbon taxes on imports from countries that do not have comparable carbon pricing systems. While India is in the process of establishing its own market, CBAM could still act as a trade barrier for energy intensive Indian exports. Another issue is market readiness as monitoring and verifying emissions across hundreds of industrial and power sector facilities will require a credible third-party infrastructure. Many thermal power plants would need to scale their verification process and go beyond annual average emissions data, along with digital integration with the carbon registry. There is also uncertainty around credit pricing. Without price stability or forward markets, entities may delay investments or underreport liabilities. Volatility could reduce confidence in carbon credits as a planning tool. In the absence of a clear price signal, the market may remain shallow and fragmented.
Overall, India’s carbon credit market has moved from vision to implementation. That said, while the carbon credit market holds promise, it must be carefully structured, phased and supported by transparent enforcement and industry engagement. With the notification of emission intensity targets and the operationalisation of the compliance mechanism, the country has taken a firm step toward embedding carbon pricing into industrial and energy decision-making. The coming years will be critical in shaping how effectively it delivers both environmental value and industrial competitiveness.
