Indian carbon market success hinges on transparent, stable design

New Haven, Connecticut: India plans to hold the first trading session of Indian Carbon Market (ICM) later this year, marking the culmination of a process that has been underway since 2023. The launch is a major milestone, introducing a powerful new policy instrument to reduce carbon emissions intensity of the manufacturing sector.

Market-based regulation is the best way to meet environmental goals while promoting economic growth. We had advised Gujarat on setting up a market for local air pollution. The new market cut pollution at sharply lower economic costs than existing policy. The same market principles can work for GHGs.

While the potential is great, experience of environmental markets in India has not been a uniform success.


The Perform, Achieve and Trade (PAT) scheme, a predecessor to ICM, issued far too many permits for energy savings. As a result, industries had little incentive to conserve.

The trading programme in renewable energy certificates (RECs) was never active. Supply of certificates outpaced demand. RE is bounding ahead in India. But these gains have come from other policies and private investment.

How can ICM succeed where these predecessors have stumbled? Reducing emissions intensity is a long game. Short-term results are not as important as the integrity of the market: all participants need to believe that the market is here to stay and offers a source of possible gains for their businesses.

The market can establish this confidence through 3 pillars:

Transparency This means running open auctions to discover price of permits. Only with knowledge of these prices can participants judge RoI to reduce emissions. In the first year of ICM, emissions for compliance purposes were measured over FY26, with trading to take place only late in 2026, by which time emissions will have been set in stone.

Industries should be able to buy and sell permits from the start. GoI can kickstart trading with an auction before each compliance period. India has thriving commodity and power exchanges. In Gujarat, we found that early auctions sparked wide participation in the emissions market. Only through market trade can industries see a clear price signal of how valuable abatement will be each year.

Stability This means setting a price band to limit large moves in market prices. Carbon markets have proven effective around the world, but carbon prices have been volatile. That volatility might undermine the commitment to the market from both industries and GoI.

The government should tamp this down by establishing floor and ceiling prices to contain price fluctuations. A reasonable range to start would be ₹600-3,000 per tonne of CO2-equivalent (tCO2e). This range can be calculated to be roughly the social cost of carbon for India alone from an additional tonne of CO₂ emissions.

The social cost of carbon represents the total damage - in terms of lost economic output, increased mortality and other harms - that additional climate change causes to India. The proposed ceiling price can also be justified as being close to the cost of carbon abatement from enhancing solar generation in the power grid.

Credibility GoI needs to make sure it enforces the requirement that all industries hold enough permits to cover their emissions per unit of output. That is the backbone of the whole market. Credibility also means supervising ministries backing up the price band by buying and selling permits.

If the price band exists only on paper, it will not spur industries to invest. A proper floor price means GoI should stand willing to buy back, and then retire, all permits that industries offer to sell at that price. The one-off cost of such intervention is negligible compared to the credibility it bestows on the market and can easily be recouped through future permit sales.

ICM is larger than a technocratic policy. It is a symbol of India's willingness to pursue a clean growth path, despite not being responsible for GHG emissions. Resonance of that symbol around the world will depend on launching a market that works.