India must embed stability tools in the carbon market to avoid costly reforms, say experts

As India prepares to operationalise its Carbon Credit Trading Scheme (CCTS) in 2026, a new report, jointly authored by the Institute for Energy Economics and Financial Analysis (IEEFA), a U.S.-based non-profit think tank, and the Environmental Defense Fund (EDF), a New York-based environmental NGO, has called for the early adoption of market stability mechanisms. The report, released on October 30, argues that India has a unique opportunity to design a durable and credible carbon market from the outset — one that avoids the pitfalls experienced by other global emissions trading systems. 

The study, titled ‘Strengthening India’s Carbon Market’, warns that without timely intervention, India’s carbon market could face structural supply-demand imbalance, suppressed prices, and investment inertia.  

These challenges have plagued emissions trading systems in regions including the European Union, Alberta (in Canada), and Australia, where delayed reforms eventually became politically contentious and economically disruptive. 

India’s CCTS is not a classical market but a regulatory construct, Subham Shrivastava, climate finance analyst at the IEEFA and one of the report’s co-authors, said. “Without timely Price or Supply Adjustment Mechanisms (PSAMs), early overperformance and credit banking could lead to structural oversupply and depressed prices,” Mr. Shrivastava said.  

The flexibility built into the scheme, while politically feasible, could inadvertently lock in fragility unless complemented by proactive supply management, Mr. Shrivastava said. 

The report draws a sharp contrast between markets that delayed stability interventions and those that embedded them early.  

California’s cap-and-trade system, for instance, has sustained stronger with more predictable carbon prices due to its early integration of stability tools. In contrast, the European Union Emissions Trading System had to undergo multiple rounds of reform to correct for prolonged periods of low prices and oversupply. 

Saurabh Trivedi, sustainable finance specialist at the IEEFA, noted that India’s situation is different — and promising. “India has the opportunity to act with foresight. Markets that postponed stability mechanisms had to undertake disruptive and politically contentious reforms later. We can avoid that,” Mr. Trivedi said. 

The report proposes a PSAM tailored to India’s context, comprising three interlinked components. First, it recommends a consignment auction system, where firms voluntarily submit earned credits for government-managed auctions. This approach preserves property rights while allowing for transparent, rule-based price discovery and supply control. Second, it advocates for vintage-based credit classification, where credits are tagged by issuance year and older credits expire or devalue after a set period. This would prevent legacy surpluses from distorting future price signals. Third, the report suggests a price corridor — a dynamic band that guides interventions when carbon prices deviate significantly from expected levels. 

These mechanisms are not disruptive but complementary. Mr. Trivedi said. “Consignment auctions and vintaging offer pragmatic tools to address risks without undermining the core intensity-based design of the CCTS,” he said. Vintaging is not a clawback but a governance tool that ensures credits reflect timely abatement, he added. 

India’s CCTS builds on the ‘Perform, Achieve and Trade’ mechanism and ties rewards to emissions performance, incentivising firms to adopt cleaner technologies and improve operational efficiency. The scheme allows entities to bank surplus credits across compliance cycles, offering flexibility, but also risking long-term imbalances, if not managed. 

India’s industrial growth trajectory makes the case for emissions trading particularly compelling, Saloni Sachdeva Michael, energy specialist at IEEFA, said. “In India, where accelerating industrial development is a strategic priority, the alignment between emissions performance and economic efficiency offers a strong rationale for a well-designed carbon market,” she said. 

The report also highlights the institutional feasibility of implementing PSAMs within India’s existing regulatory framework. The Bureau of Energy Efficiency and the Central Electricity Regulatory Commission are well-positioned to administer and oversee these mechanisms, given their experience with energy efficiency and market regulation. 

The authors caution that delay is not neutral. It risks locking in market fragility, undermining investor confidence, and forcing future governments into costly reform cycles. They urge policymakers to treat PSAMs not as optional add-ons but as core components of India’s climate strategy. 

“Embedding a PSAM early in the lifecycle of CCTS could signal that India’s carbon market is built for durability and long-term effectiveness,” Mr. Shrivastava said. 

The full report is available at ieefa.org.