India’s carbon market targets too modest to drive significant industrial decarbonization, says new report

India’s proposed plant-level emissions intensity targets under its Carbon Credit Trading Scheme (CCTS) are too modest to drive significant industrial decarbonization, according to a report by Bengaluru-based think tank Climate Risk Horizons.

The report says the proposed targets are readily achievable through incremental efficiency improvements, reducing the incentive for companies to invest in low-carbon technologies. For instance, leading steel and cement producers would need to reduce emissions intensity by only 2% to 5% by FY 2026-27, creating limited pressure for real technological change.

The report argues that targets would have be ratcheted up to encourage investment in technologies that result in deeper decarbonisation.

On June 26, the Ministry of Environment, Forest and Climate Change reissued draft amendments to the Greenhouse Gas Emissions Intensity (GEI) Target Rules, 2025. The amendments introduce emissions intensity targets for the iron and steel sector under India’s Carbon Credit Trading Scheme.

The CCTS establishes the framework for India’s carbon market, under which the government has proposed plant-level emissions intensity targets for nine energy-intensive industries, including cement, aluminium, iron and steel, paper and pulp, chlor-alkali, petroleum refinery, petrochemical units, fertilisers, and textiles.

Climate Risk Horizon evaluated the latest targets for the iron and steel, cement, and aluminium industries.

India’s iron and steel industry is the world’s second-largest, cement is also second only to China and contributes about 10% of global output. While India’s aluminium industry derives 35% of output from recycling, here too primary production remains highly carbon intensive.

Due to expected carbon credit prices being low, the cost of non-compliance will probably be too marginal to incentivise operational change by major emitters.

“The financial impact of buying carbon credits to offset shortfalls is currently small, between 0.6% and 7% of the annual profit for large companies across the aluminium, cement and steel sectors, based on the expected initial carbon price being USD 10/ tonne of CO2. For many high-margin polluters, “paying to pollute” could become a preferred business strategy.,” explains Anirudh TR, author of the report.

The power sector, which is India’s single largest emissions source and responsible for about 55% of the total GHG emissions, has been omitted from mandatory targets in the current scheme.

Instead, the sector is part of the voluntary compliance mechanism along with other sectors such as agriculture, waste handling and disposal, forestry and transport. For the scheme to be meaningful, the report recommends that the next iteration include the power sector.

The report also reveals problems with governance that need to be addressed for the scheme to be effective. For example, there are other parallel and overlapping initiatives such as the Renewable Consumption Obligation (RCO that need to be harmonised with the CCTS.) Additionally, the government is both regulator and operator across many of the sectors being regulated, undermining competitive neutrality.

“We recommend forming an independent regulatory framework and referring to international best practice that calls for reserve price floors and stability reserves, which are currently not adequately featured in India’s framework. Big emitters such as the power sector must be included and financial incentives to adopt low-carbon industrial processes must be strengthened for the policy to be truly effective,” adds Anirudh TR.

“The GHG emission intensity target rules under the scheme make a long overdue start towards a market-based carbon trading system in India. However, to encourage clean technology deployment, subsequent iterations of the scheme need to set increasingly ambitious targets, in a transparent manner, under an independent governance structure”, said Ashish Fernandes, Director of Climate Risk Horizons.