Design Without Discipline: The Role of Incentives and Enforcement in India’s Carbon Market
Carbon markets are only as effective as the institutions that enforce them. Across the world, emissions trading systems (ETSs) have often faltered not because their economic logic was flawed, but because the conditions required for that logic to function—credible enforcement, meaningful price signals, and robust monitoring—were absent.[1],[2] Oversupply, weak penalties, unambitious targets, and institutional fragility have undermined schemes, from Brussels to Beijing.[3],[4],[5]
India is launching its Carbon Credit Trading Scheme (CCTS) against this backdrop. The ICM Portal went live in March 2026, initiating the formal transition from the Perform, Achieve and Trade (PAT) scheme to the CCTS.[6] That transition carries baggage. PAT’s decade-long record was marked by limited emissions reductions, persistent non-compliance, and a price discovery mechanism that functioned poorly.[7] The entities entering the CCTS are the same ones that operated under PAT, yet they have little reason to believe that the rules have fundamentally changed.[8]
Once fully notified, the CCTS will cover some 740 entities and more than 700 million tonnes of CO₂e, making it one of the world’s largest emissions trading systems.[9] Amidst mounting climate stress and geopolitical tensions, the stakes are correspondingly high. This paper examines whether the CCTS’s design is sufficient to address the two deficiencies that have historically weakened carbon markets: inadequate economic incentives and weak external enforcement.
To understand the role of economic incentives and enforcement in the functioning of a carbon market, this paper is organised around three research questions:
1) In what ways have inadequate economic incentives and weak enforcement emerged as recurring challenges in emissions trading systems globally?
2) What design choices has India incorporated into the CCTS to address these challenges?
3) Are these design choices adequate to overcome them?
The Indian Carbon Market
In March 2026, Union Power Minister Manohar Lal launched the Indian Carbon Market (ICM) Portal, marking the regulatory beginning of the ICM.[10] Although the market has been under development since 2023—with detailed procedures for its compliance and offset mechanisms released in 2024-25[11] and target-setting rules and sectoral targets notified over the past year[12]—the portal’s launch formally initiates the registration process for Obligated Entities (OEs) ahead of the first trading cycle. Announced at the Bharat Electricity Summit 2026 on 21 March, the trading cycle is scheduled to begin four months after.
Starting in April 2025, two rounds of target-setting exercises and stakeholder consultations were conducted. Final notifications for the 2025-26 and 2026-27 compliance periods were issued in October 2025 and January 2026 for seven of the nine sectors covered under the CCTS: aluminium, chlor-alkali, cement, fertiliser, iron and steel, pulp and paper, petrochemicals, petroleum refining, and textiles.[13] At the time of writing this paper, final targets for iron and steel and fertilisers remain pending. With targets applying retrospectively to 2025-26 and prospectively to 2026-27, the transition from the PAT to the CCTS is now underway. As it was under PAT, designated consumers will be transitioned into Obligated Entities under the new system.[14]
Over the same period, methodologies for the offset mechanism underwent multiple rounds of review before finalisation, while methodologies for the remaining project categories continue to be developed. There is a marked improvement over PAT-era administrative timelines, suggesting that CCTS will likely avoid the procedural delays that plagued PAT, although this will be gleaned only when the trading cycle begins.
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