India is on the cusp of launching its Carbon Credit Trading Scheme (CCTS) in 2026. However, a recent report from the Institute for Energy Economics and Financial Analysis (IEEFA) and the Environmental Defense Fund (EDF) highlights a critical need: the immediate integration of market stability mechanisms. Released on October 30, the report emphasizes India’s unique chance to build a robust and trustworthy carbon market right from the start, sidestepping the common pitfalls that have hindered similar systems worldwide.
Titled ‘Strengthening India’s Carbon Market,’ this pivotal study issues a clear warning: without proactive measures, the nation’s carbon market faces significant risks. These include a fundamental imbalance between supply and demand, a struggle with suppressed prices, and a crippling lack of investment.
Such issues are not new; they have historically plagued emissions trading systems in regions like the European Union, Alberta (Canada), and Australia. In these cases, delaying necessary reforms often led to contentious political battles and severe economic disruptions.
Subham Shrivastava, a climate finance analyst at IEEFA and co-author of the report, clarifies that India’s CCTS is more than just a typical market; it’s a carefully designed regulatory framework. Shrivastava cautions that ‘Without timely Price or Supply Adjustment Mechanisms (PSAMs), initial overperformance and credit banking could result in a structural oversupply and drive down prices.’
He further explains that while the scheme’s built-in flexibility is politically appealing, it could unintentionally create long-term vulnerabilities unless actively managed with effective supply controls.
The report starkly contrasts carbon markets that procrastinated on stability measures with those that integrated them early.
For example, California’s cap-and-trade system boasts more stable and predictable carbon prices, a direct result of its proactive approach to embedding stability tools. Conversely, the European Union Emissions Trading System endured repeated, complex reforms to combat persistent low prices and oversupply issues.
Saurabh Trivedi, IEEFA’s sustainable finance specialist, points out that India’s scenario is distinctly different and highly promising. ‘India has a golden opportunity to plan ahead,’ Trivedi states. ‘Markets that put off stability mechanisms were later forced into disruptive and politically charged reforms. We can easily avoid that path.’
The report outlines a three-pronged Price and Supply Adjustment Mechanism (PSAM) specifically designed for India. Firstly, it proposes a consignment auction system, where companies voluntarily submit their earned carbon credits for government-managed auctions. This method ensures property rights are respected while enabling transparent, rule-driven price discovery and effective supply management. Secondly, it champions vintage-based credit classification, assigning an issuance year to credits, with older credits either expiring or devaluing over time. This crucial step prevents historical surpluses from skewing future price signals. Lastly, the report recommends a flexible price corridor—a dynamic range that triggers interventions when carbon prices stray too far from expected benchmarks.
Trivedi assures that these mechanisms are not disruptive but rather complementary. ‘Consignment auctions and vintaging provide practical ways to mitigate risks without disrupting the fundamental intensity-based structure of the CCTS,’ he explains. He clarifies that vintaging serves as a governance tool, ensuring credits genuinely represent recent emissions reductions, rather than acting as a clawback.
India’s CCTS is founded on the ‘Perform, Achieve and Trade’ (PAT) mechanism, which rewards entities for their emissions performance, thereby encouraging the adoption of cleaner technologies and greater operational efficiency. While the scheme offers flexibility by allowing firms to bank surplus credits across compliance cycles, this feature also carries the risk of creating long-term market imbalances if not properly managed.
Saloni Sachdeva Michael, an energy specialist at IEEFA, highlights that India’s rapid industrial growth makes a compelling case for emissions trading. She notes, ‘In India, with its strategic focus on accelerating industrial development, a well-designed carbon market offers a powerful synergy between improving emissions performance and boosting economic efficiency.’
Furthermore, the report underscores the practicality of integrating PSAMs into India’s current regulatory landscape. Institutions like the Bureau of Energy Efficiency and the Central Electricity Regulatory Commission are ideally suited to manage and supervise these mechanisms, leveraging their extensive experience in energy efficiency and market regulation.
The authors strongly caution against any delays, emphasizing that waiting is not a neutral option. Such delays risk entrenching market instability, eroding investor confidence, and inevitably forcing future governments into expensive and complex reform cycles. They implore policymakers to view PSAMs not as optional extras, but as fundamental pillars of India’s overall climate strategy.
‘By embedding a PSAM early in the CCTS’s development, India can clearly signal its commitment to building a durable and effective carbon market for the long haul,’ concludes Mr. Shrivastava.
For comprehensive details, the full report is accessible on ieefa.org.