Why venture capital remains cautious about India's carbon credit ecosystem

In the rice fields of north India, crop residue that was once burned is now being mulched back into the soil, basalt rock powder is being spread across farms, and agricultural waste is being converted into biochar. These practices are quietly feeding a new climate economy where carbon itself has become a tradable asset in the form of carbon credits.

When Amazon signed a $30 million carbon-credit deal linked to India’s The Good Rice Alliance, it signalled something larger than a sustainability partnership. It underscored the growing global interest in sourcing carbon credits from India’s farms and rural ecosystems. But, beyond a handful of marquee deals, India’s voluntary carbon market remains fragmented and fragile. While climate tech continues to attract investor attention, venture capital (VC) has largely stayed cautious on carbon credit start-ups, wary of long project cycles, credibility concerns, and uncertain returns. The result is a sector caught between enormous climate promises and persistent market scepticism.

Vasudha Madhavan, CEO at Ostara Advisors, one of India’s first climate-tech focused investment banking firms, points out that investments in climate tech have broadened significantly beyond electric vehicles (EVs), which was among the first focus areas. It has moved to battery storage, precision agriculture, biofuels and so on. However, the carbon credit ecosystem remains immature, and the start-ups are at a very early stage.

Carbon credits are certificates generated by projects that reduce, avoid, or remove greenhouse gas emissions from the atmosphere. The climate impact of these projects is scientifically measured, and independent auditors verify the amount of carbon reduced or removed. Each carbon credit typically represents one tonne of carbon dioxide (CO2), which companies can buy to offset their own emissions and meet climate goals.

India has set a series of climate goals as part of its commitments under the Paris Agreement and its net-zero strategy by 2070. The country’s key targets are aimed at reducing emissions intensity, expanding clean energy, and increasing non-fossil fuel capacity. India’s carbon-credit ecosystem currently remains largely voluntary and export-driven, though the country is gradually building a domestic compliance market. The government in 2023 introduced the Carbon Credit Trading Scheme (CCTS) to regulate greenhouse gas emissions and set sector-specific intensity targets.

“Carbon credits are an offset mechanism through which high-emission companies—particularly AI and data-centre giants [like hyperscalers, etc.]—buy credits to compensate for their own emissions and move toward net-zero targets,” Madhavan explains, adding that while there is a growing momentum for deals, VC interest in the space is still nascent.

While the carbon credit ecosystem is still nascent, climate-tech start-up Varaha has emerged as one of the few Indian players building on a global scale. In 2025, the company signed an offtake agreement with Microsoft for the sale of carbon credits generated through its biochar carbon removal project in India.

Founded in 2022, Varaha operates across four carbon-removal methods — regenerative agriculture, agroforestry, biochar, and enhanced rock weathering — unlike most start-ups in the sector that typically specialise in a single pathway, according to founder and CEO Madhur Jain. Backed by Omnivore, WestBridge Capital and RTP Global, Varaha is also among the few climate-tech start-ups in India to raise growth-stage funding, most recently securing an extended Series B round of $20 million.

The company turned profitable in FY25. Speaking to Business Today, Jain notes that many start-ups experiment with methodologies in carbon credits but fail to issue verified credits.

Talking about why there are so few start-ups in the sector and why big investments are not flowing in, Jain says, “The cycle of carbon credit issuance can take anywhere between two to four years from the time a project activity begins. Most start-ups don’t survive that long, which is what makes building in this sector particularly challenging.”

According to Jain, climate tech is still in a discovery phase globally. While relatively mature categories such as solar and electric vehicles are already witnessing public listings and large-scale commercial adoption, newer segments like carbon markets, sustainability-focused deep tech, and science-led R&D start-ups are only beginning to attract serious capital. “There is a lot of investment flowing into these areas, but founders and investors alike need to ensure they are building companies with sustainable and financially sound models rather than simply chasing growth,” he says. Jain claims that Varaha has issued over 7,00,000 carbon removal credits and now works with over 2,00,000 farmers. “Most other players have not weven issued 10% of that volume,” he says, adding that globally only a handful of companies — such as Terradot, Mombak and Agreena — have managed to repeatedly issue carbon credits at a meaningful scale and build viable businesses around them.

According to Ankit Kedia, founder and lead investor at Capital A, the long-term opportunity in carbon credits is meaningful, but venture capital today is gravitating more towards tangible climate and industrial outcomes such as battery energy storage, solar efficiency, water management, cooling technologies, AI and data centre energy efficiency, and broader industrial decarbonisation.

But what’s the hesitation? Kedia answers that it is less about climate relevance and more about market maturity. “Historically, concerns around fragmented verification standards, pricing volatility, inconsistent credit quality, and limited market depth have made investors more selective,” he adds.

Kedia elaborates that India is a different market and is also likely to evolve differently from the US and Europe. “In Western markets, climate investing has been significantly accelerated through policy interventions, subsidies and compliance-driven demand creation. India’s market may evolve in a more execution-led and cost-driven manner.”

This could explain why investors are increasingly backing start-ups with measurable, commercially viable decarbonisation models over pure carbon trading plays. Another hurdle for early-stage carbon start-ups is ecosystem education. “It’s not just farmers who need to understand the category, but investors and the broader ecosystem as well,” Jain said. According to him, many founders entering the space lack deep agricultural experience, making it harder to clearly articulate how these businesses will scale financially over time. “I wouldn’t say Indian VCs are unwilling to back the sector, but clarity around execution and long-term viability becomes critical in the early stages,” he added.

While India’s carbon credit ecosystem is still at a relatively early stage and requires significant education across farmers, investors and policymakers, the sector is gradually beginning to find commercial credibility. Investors are willing to back the space, but increasingly seek measurable outcomes, scientific rigour and financially sustainable business models rather than speculative carbon trading bets. Start-ups such as Varaha and Boomitra are emerging as early movers, while large global agreements involving companies like Amazon and Microsoft are helping validate the long-term potential of the ecosystem.

While VCs are cautious and aren’t yet investing enough in the space, that could change if certain gaps like regulatory clarity, credible verification frameworks and broader industry participation are addressed.

For India’s carbon markets to scale, stronger regulations, credible verification systems and consistent demand visibility will be critical.

@palakagarwal64