Carbon markets have crossed $100 billion globally: India is still warming up

Carbon markets across the world are expanding at an unprecedented scale. Global revenues from carbon taxes and emissions trading systems crossed $100 billion for the second consecutive year, according to the World Bank report State and Trends of Carbon Pricing 2025.

Nearly 28 per cent of global greenhouse gas (GHG) emissions are now covered by a direct carbon price, compared to just 5 per cent in 2005.

This expansion reflects growing acceptance of carbon pricing as a climate policy tool. However, rising revenues and wider coverage do not automatically translate into deep emission reductions.

For India, which is in the process of implementing its Carbon Credit Trading Scheme (CCTS), the global experience offers both lessons and warnings. Evidence from India’s earlier market-based programmes suggests that weak targets, limited sectoral coverage and poor governance can significantly dilute climate outcomes.

What global experience shows

The World Bank report noted that there are now 80 direct carbon pricing instruments operating worldwide, including 37 emissions trading systems and 43 carbon taxes. Much of the recent expansion has come from middle-income economies.

China, in particular, played a decisive role in 2024 by expanding its national emissions trading system beyond the power sector to include cement, steel and aluminium. This step brought nearly three billion tonnes of carbon dioxide-equivalent under carbon pricing in a single year, increasing China’s total coverage to more than half of its national emissions.

Carbon pricing is also increasingly being used as a fiscal instrument. In 2024, 56 per cent of global carbon pricing revenues were directed towards environmental programmes, infrastructure and development spending. In several countries, these revenues are being used to support renewable energy, industrial transition and social protection measures.

At the same time, the report highlighted important design challenges. Many emerging economies, including India, have adopted rate-based emissions trading systems, which regulate emissions per unit of output rather than imposing an absolute cap on total emissions. While this approach provided flexibility in growing economies, it offers less certainty on absolute emission reductions and typically generates little public revenue. 

India’s carbon market & legacy of PAT

India notified detailed regulations for its Carbon Credit Trading Scheme in July 2024. The scheme initially covers nine energy-intensive industrial sectors and is intended to help India meet its commitment to reduce the emissions intensity of GDP by 45 per cent by 2030.

However, an analysis by the Centre for Science and Environment (CSE) examines the scheme’s design. In its report The Indian Carbon Market: Pathway Towards an Effective Mechanism, CSE noted that CCTS is largely built on the framework of the Perform, Achieve and Trade (PAT) scheme, which is a point of concern.

PAT has been India’s primary market-based energy efficiency programme since 2012. While it helped improve data collection and compliance systems, the report mentions that its impact on actual carbon dioxide reductions has been limited. Targets under PAT were generally modest, allowing many industries to not only easily comply but also overachieve without significant technological upgrades.

This led to a surplus of energy-saving certificates, particularly during PAT Cycle II, when more than two million excess certificates entered the market. Prices collapsed, reducing incentives for further efficiency improvements. In practice, compliance became cheaper than investing in cleaner technologies.

The thermal power sector highlighted these limitations. Despite being India’s largest source of emissions, cumulative carbon dioxide emission reductions achieved under PAT over six years were less than 2.5 per cent of emissions in a single year (2016). Delays in trading and enforcement further weakened the scheme’s effectiveness.

Missing piece: Thermal power & key market parameters

One of the most significant gaps in the current design of CCTS is the exclusion of the thermal power sector from its initial phases. Globally, the power sector has the highest carbon pricing coverage, reflecting its central role in national emissions profiles.

In India, thermal power accounts for nearly 40 per cent of total GHG emissions, yet the initial phases of the CCTS will cover only about 10 per cent of national emissions. This significantly limits the scheme’s ability to influence economy-wide decarbonisation. Without the inclusion of the largest emitter, the carbon market risks having only a marginal climate impact.

CSE argued that strengthening CCTS requires a set of clear policy choices. These include setting ambitious benchmarks followed by a credible carbon price, introducing a robust and well-funded market stability mechanism, gradually integrating the thermal power sector and establishing a revenue-generation mechanism.

Such revenue could be used to support micro, small and medium enterprises, which often lack access to capital for decarbonisation. Equally important are strong provisions for data integrity through a robust MRV system and greater awareness among stakeholders, including public disclosure of emissions data, random inspections, and strict limits on the use of offset credits. The system should also begin transitioning towards a more credible and effective carbon market.

Why choices made now matter

In mature markets such as the European Union, carbon prices have reached levels that influence investment decisions and accelerate the adoption of clean technologies. India’s carbon market has the potential to play a similar role, but only if it is designed with ambition and integrity.

An article on Down To Earth mentioned that India notified greenhouse gas emission-intensity targets for only four industrial sectors after a significant delay, diluting ambition and reducing potential emission reductions under the CCTS.

It noted that while nine sectors are envisaged under the scheme, currently India has notified targets for just four sectors, but key sectors like petrochemicals and steel are still awaiting notifications. This staggered and delayed rollout risks oversupply of credits and weakens the credibility of the market.

For now, India’s carbon market remains in its warming-up phase. Without tighter targets, wider sectoral coverage and stronger enforcement, the CCTS risks repeating the limitations of earlier market-based schemes, high participation, low impact.

Whether it becomes a meaningful climate instrument or another compliance mechanism will depend on whether India is willing to match global scale with domestic ambition.