Trading boundaries in the Indian carbon market

The Indian Carbon Market operates under the Carbon Credit Trading Scheme (‘CCTS’), implementing a market‑based carbon pricing mechanism to drive emission reduction. This market-based greenhouse gas emission (‘GHGE’) reduction framework is bifurcated into the offset market and compliance market. The offset market governs non-obligated entities, registered with the Indian Carbon Market (‘ICM’). The offset market is voluntary in nature, allowing non‑obligated entities to register activities that result in GHGE reduction, avoidance, or removal for the issuance of Carbon Credit Certificates (‘CCCs’)[1]. In contrast, the compliance market governs obligated entities, that are high greenhouse gas emitters mandated to meet prescribed GHGE intensity targets. The Government has identified nine energy-intensive sectors namely, Aluminium, Cement, Steel, Paper, Chlor-Alkali, Fertilizer, Refinery, Petrochemical, and Textile, which are brought within the ambit of compliance market[2]. Obligated entities are expected to achieve compliance by reducing their own emissions to meet the prescribed targets, and if they are unable to do so, they are allowed to purchase CCCs to meet the targets. Here, a key question arises as to the source of such CCCs, particularly whether CCCs generated by voluntary participants in the offset market may be recognized for compliance by obligated entities? 

The legal position can be discerned by examining the relevant statutory framework. At first glance, the framework suggests that CCCs may be exchanged between obligated and non‑obligated entities.  The ECA[3] defines CCCs in a uniform manner, without drawing any distinction between certificates issued under the compliance mechanism and under the offset mechanism, thereby reflecting a design to treat all CCCs as fungible instruments. 

Further, the ECA provides that CCCs are issued to ‘registered entities’[4], a category that expressly includes both obligated and non‑obligated entities, confirming that the same CCCs may be held by either. The scope of ‘market’ is similarly broad and contemplates a single trading platform, without distinguishing between compliance and voluntary participants. Crucially, the framework mandates that all CCCs must be traded exclusively through the Power Exchange and expressly provides that both market segments operate on the same exchange[5]. Similarly, the CM Procedure allows obligated entities which lack necessary certificates to purchase additional CCCs[6], without stipulating any restriction on them to procure such CCCs from non-obligated entities.  The CM procedure clearly provides that both the entities will register and trade the CCC’s on the Power Exchange. The absence of any differentiation in trading venue, pricing structure, or procurement process allows an interpretation that CCCs may be treated as a single, unified instrument capable of being exchanged between obligated and non‑obligated entities. 

While the above analysis of the regulatory framework may give the impression that inter‑category trading is permissible, a closer reading of the CERC Regulations aids in interpreting the position differently[7]. The Regulation provides a separate categorization of certificates issued to obligated and non‑obligated entities[8] and allocates their trading to two distinct market segments: the compliance market for obligated entities and the offset market for non‑obligated entities[9]. This appears to reflect an intention to channel each class of certificates into its own designated market segment. 

Based on the foregoing discussion, if the Regulations are presumed to restrict trading between obligated and non‑obligated entities, the question that logically arises is why voluntary participants undertake registration and obtain CCCs under such a framework. Voluntary participants register with the ICM and generate CCCs because corporates with net‑zero or carbon‑neutrality commitments rely on the voluntary market to address residual emissions that cannot be eliminated internally. Large Indian companies have publicly announced their long‑term decarbonization goals[10]. While these goals drive carbon reductions in the initial stages, companies typically reach a point beyond which certain emissions remain technically or economically unavoidable. To address these residual or unabated emissions, corporates seek to bridge the remaining gap by purchasing carbon credits from voluntary market. This creates consistent demand for CCCs issued by voluntary participants, enabling them to earn revenue from the sale of such certificates. Consequently, even if obligated entities, as a part of CCCs trading boundaries, are presumed restricted from purchasing CCCs from voluntary participants, the certificates generated in the voluntary segment retain commercial value and serve as a viable revenue stream in the offset market.

In contrast, if the CERC Regulations are presumed to allow cross‑purchase between obligated and non‑obligated entities, a broader, market‑aligned interpretation emerges. Permitting such cross‑trading would enhance the overall liquidity of CCCs and contribute to more efficient price discovery across the market. Obligated entities would gain access to CCCs generated by green projects registered in the voluntary segment, creating a mutually beneficial arrangement in which obligated entities can meet their compliance requirements while voluntary participants secure an expanded buyer base and additional revenue opportunities. 

The discussion also raises a broader policy question as to whether maintaining strict trading boundaries between obligated and non‑obligated entities ultimately advances the larger objective of carbon reduction and climate mitigation. At first instance, it may appear that if the trading boundary between obligated and non‑obligated entities were relaxed, obligated entities could more easily achieve the prescribed carbon emission targets under the GHGE Intensity Target Rules, 2025. This is because obligated entities would be permitted to purchase carbon credits from non‑obligated entities, thereby contributing to an overall reduction in India’s GHGE and supporting the Government in meeting its commitments under the Paris Agreement. However, the countervailing concern is that permitting such flexibility may dilute the incentive for obligated entities to transition to greener technologies, cleaner production processes, low‑carbon alternatives, and energy‑efficient systems. If allowed to rely on purchasing carbon credits from non‑obligated entities, obligated entities may avoid undertaking substantive internal reforms to reduce their own emissions. Consequently, instead of actively lowering emissions, such obligated entities may evade their statutory emission‑reduction obligations through external purchases, thereby undermining the long‑term objective of achieving net-zero emissions.

Viewed in this context, the evolving contours of the ICM under the CCTS presents both opportunity and ambiguity, particularly around the extent of trading boundaries between obligated and non‑obligated entities. As the framework evolves, businesses must not only understand the regulatory intent but also position themselves to remain compliant and competitive. The key lies in getting the structuring, participation, and credit strategy right from the outset. With the credit market still taking shape, timely and well‑informed legal guidance can make a significant difference for business in achieving compliant and commercially viable outcomes. 

[The authors are Partner and Associate, respectively, in Climate Change and Sustainability practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]

[1] Bureau of Energy Efficiency, Recitals, Detailed Procedure for Offset Mechanism under CCTS, ICM (Mar. 2025), https://indiancarbonmarket.gov.in/offset-mechanism/MzI= (last visited June 5, 2026).

[2] Press Information Bureau, Parliament Question: Indian Carbon Market (Dec. 9, 2024), https://pib.gov.in/PressReleasePage.aspx?PRID=2082528 (last visited June 5, 2026).

[3] Energy Conservation Act, 2001 (‘ECA’), § 2, No. 52, Acts of Parliament, 2001 (India).

[4] ECA, § 14, No. 52, Acts of Parliament, 2001 (India).

[5] Central Electricity Regulatory Commission (Terms and Conditions for Purchase and Sale of Carbon Credit Certificates) Regulations, 2026 (‘CERC Regulations’), reg. 9 (India).

[6] Bureau of Energy Efficiency, Detailed Procedure for Compliance Mechanism, (‘CM Procedure’), ch. 3, ICM, (Mar. 2025) https://indiancarbonmarket.gov.in/compliance-mechanism/MzE= (last visited June 5, 2026).

[7] CERC Regulations, regs. 8–9 (India).

[8] CERC Regulations, reg. 8 (India).

[9] CERC Regulations, reg. 9 (India).

[10] State Bank of India, Sustainability and Business Responsibility (BR) Policy (May 2025), https://sbi.bank.in/documents/136/0/01042026_Sustainability+and+Business+Responsibility+%28BR%29+Policy.pdf; Reliance Industries Ltd., Net-Zero Carbon, https://www.ril.com/sustainability/net-zero-carbon; Tata Consultancy Services Ltd., Environment, https://www.tcs.com/investor-relations/esg/environment.