India's Carbon Credit Trading Scheme has moved from policy to legal obligation. For the industries it covers, emissions are now a measured, verified and tradeable quantity, and missing a target carries a defined financial consequence. This changes how businesses should approach their data, their investment decisions and their contracts.
Until recently, a company's carbon emissions in India were largely a matter for its sustainability report. That is no longer the case. Under the Carbon Credit Trading Scheme ("CCTS"), several hundred industrial plants now have legally binding targets for the greenhouse gases they emit per unit of output, and a plant that misses its target must either buy carbon credits from another company or pay environmental compensation. Hence, a tonne of carbon dioxide now has a price on a company's balance sheet, much like a unit of power or a tonne of raw material. However, many businesses still treat the scheme as a technical matter for their plant engineers. This article examines how the CCTS works, which businesses it affects, what happens when targets are missed, the role of carbon credit trading, and the steps companies should take to prepare their internal systems and contracts.
The Legal Framework
The CCTS was notified by the Ministry of Power in June 2023 under the Energy Conservation Act, 2001, as amended in 2022 to empower the Central Government to establish a carbon credit trading scheme. It has two parts, i.e., a compliance mechanism, under which designated industrial entities ("obligated entities") must meet emission intensity targets, and an offset mechanism, under which other entities may voluntarily register projects that reduce or remove emissions and earn credits for them.
The scheme is administered by several bodies. The Bureau of Energy Efficiency ("BEE") acts as administrator, a National Steering Committee oversees the market and recommends targets, the Grid Controller of India acts as the registry, and the Central Electricity Regulatory Commission ("CERC") regulates trading. The targets themselves are notified by the Ministry of Environment, Forest and Climate Change under the Environment (Protection) Act, 1986. Each Carbon Credit Certificate ("CCC") represents one tonne of carbon dioxide equivalent. In February 2026, CERC notified regulations under which CCCs are to be traded on power exchanges, ordinarily once a month, within floor and forbearance price bands.
Importantly, the CCTS is an intensity-based scheme and not a cap on total emissions. An obligated entity is measured against the emissions it produces per tonne of cement, aluminium or other product, and not against an absolute limit. Thus, a company can grow its output and still comply, provided it becomes more efficient.
Which Businesses Are Affected
The first targets were notified on 8 October 2025 for 282 plants in four sectors, i.e., aluminium, cement, chlor-alkali, and pulp and paper. A second notification in January 2026 extended targets to petroleum refining, petrochemicals, textiles and secondary aluminium, bringing the total to roughly 490 obligated entities. Targets for the iron and steel sector, covering 255 units, were issued in revised draft form in June 2026, while targets for fertilisers are still awaited. The baseline year is 2023-24, and the first targets apply to 2025-26 and 2026-27.
However, the impact of the scheme extends beyond obligated entities. Companies that buy cement, aluminium or steel will increasingly find that the carbon cost of their inputs is reflected in price negotiations. Exporters face an additional pressure, as the European Union's Carbon Border Adjustment Mechanism ("CBAM") entered its definitive phase on 1 January 2026 for goods including cement, iron and steel, aluminium and fertilisers. CBAM allows an importer to reduce its liability by a carbon price effectively paid in the country of origin, but whether payments under the CCTS will qualify has not yet been settled. Developers of renewable energy, afforestation and other projects may also earn credits under the offset mechanism, which opens a new source of revenue for businesses outside the compliance market.
What Happens If Targets Are Missed
An obligated entity that does better than its target receives CCCs equal to the difference, which it may hold for future use or sell. An entity that falls short must surrender CCCs equal to its shortfall, either from its own banked holdings or by purchasing them. If it fails to do so, the Central Pollution Control Board may impose environmental compensation equal to twice the average price at which CCCs were traded during the relevant compliance year. The compensation must be paid within 90 days of the order, after the entity has been given an opportunity to be heard, and non-payment attracts penalties under the Environment (Protection) Act, 1986.
Compliance is also a matter of process. Obligated entities must file verified data on their emissions and production for each compliance year, and the filing deadline for 2025-26 fell on 31 July 2026. An entity that fails to submit the required documents may have its shortfall calculated under a prescribed formula, which is unlikely to work in its favour. Hence, weak data is not a neutral failing under the CCTS but one which can increase the cost of compliance.
The Role Of Carbon Credit Trading
Trading is what turns the CCTS from a set of targets into a market. A company that can reduce its emissions cheaply earns credits which it can sell to a company for which reductions are more expensive, so that overall reductions are achieved at a lower cost. However, the market is still at an early stage. As of early October 2026, no CCC had yet been traded, and the first trades on power exchanges were expected around October.
The likely price is the central commercial uncertainty. Independent analysis by the Council on Energy, Environment and Water found that the final targets for the first four sectors were roughly 16 per cent less ambitious than the drafts, and that cement and aluminium producers could generate surplus credits, which raises the possibility of oversupply. A July 2026 report by Climate Risk Horizons estimated an initial price of around USD 10 per tonne and found that, for many large companies, buying credits to cover a shortfall would cost between 0.6 and 7 per cent of annual profit. Thus, at least in the early years, some businesses may find it cheaper to buy credits than to invest in reductions. In our view, this would be a short-sighted reading of the market, as targets are expected to tighten over time and credits bought today do nothing to reduce exposure to CBAM or to future targets.
Preparing Internal Systems And Contracts
For businesses which are, or may soon become, obligated entities, preparation begins with data. Emissions and production figures need to be collected at plant level, in the format the scheme requires, and must be capable of verification by an accredited agency. Listed companies which already report emissions under SEBI's Business Responsibility and Sustainability Reporting framework should also ensure that the two sets of figures can be reconciled, as inconsistencies will be difficult to explain to either regulator.
Responsibility should sit at the right level. Since a shortfall now carries a financial liability, carbon compliance should form part of management and board reporting rather than being left to the sustainability team alone. The same forum should take the commercial decisions the scheme requires, i.e., whether to invest in reducing emissions or to buy credits, and whether to bank surplus CCCs or sell them.
Contracts need equal attention, as most of them were drafted before carbon had a price. Long-term supply and offtake agreements should state expressly who bears the cost of carbon compliance, whether through a price adjustment mechanism or a pass-through, and should require counterparties to share emissions data where it is needed. Change-in-law clauses limited to new taxes or duties may not capture a tightening of emission intensity targets, which is precisely the change most likely to occur over the life of a long-term contract. In acquisitions, CCC holdings, any shortfall for the current year and any pending environmental compensation should be covered in due diligence and in specific warranties and indemnities. Further, since CERC's regulations currently require CCCs to be traded on power exchanges, private arrangements to buy or sell credits outside the exchanges should be approached with caution.
Finally, exporters to the European Union should keep the data needed to calculate the embedded emissions of their products, as CBAM requires this regardless of how CCTS payments are eventually treated.
Conclusion
The CCTS marks a significant change in how Indian industry is regulated. For the first time, emissions are being measured, verified and priced under a binding legal framework, and the consequences of missing a target are clearly defined. However, the scheme is still young. Targets for major sectors such as iron and steel and fertilisers are yet to be finalised, prices are still to be discovered, and the relationship with CBAM remains unresolved. In our view, the scheme would benefit from a clear price stability mechanism, timely notification of the remaining targets, and early engagement with the European Union on the recognition of CCTS payments, as each of these would give businesses the certainty they need to commit to long-term investment. For businesses, the lesson is that carbon compliance can no longer be treated as a reporting exercise, i.e., it is now a legal and commercial obligation which should be reflected in their data, their decisions and their contracts.
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