Integrate stability mechanism in the upcoming carbon credit trading scheme: Report  

Adopting Price or Supply Adjustment Mechanisms (PSAMs) in India’s upcoming Carbon Credit Trading Scheme (CCTS) can help avoid market imbalances and ensure credible carbon pricing, suggests a new report.

The report by the Institute for Energy Economics and Financial Analysis (IEEFA) and Environmental Defense Fund (EDF) underscores the importance of integrating stability mechanisms to avoid disruptive interventions; prevent structural oversupply; create predictability for long-term investment; and allow gradual calibration when introducing reforms.

“In India’s CCTS, the need for a PSAM is significant. While credit banking offers flexibility, the absence of limits allows credits from early, low-cost reductions to accumulate, which could lead to supply-demand imbalances, depressed prices and weaker long-term decarbonisation incentives,” says Subham Shrivastava, co-author of the report and climate finance analyst at IEEFA.

The report recommends adopting a legally and administratively efficient as well as fiscally prudent PSAM tailored to India’s CCTS design that can operate within existing institutional capacity while still providing a credible framework for supply control.

India's CCTS is more than just an environmental policy. By tying rewards to performance, it incentivises firms to improve operational efficiency, adopt cleaner technologies, and strengthen data management systems.

By assigning intensity-based targets to obligated entities and creating a framework for trading surplus reductions, the scheme aligns domestic mitigation efforts with India's Nationally Determined Contributions. Intensity-based systems suit India’s diverse industrial landscape by leveraging differences in firms’ abatement costs while encouraging cost-effective reductions.

The CCTS allows entities to bank surplus Carbon Credit Certificates across compliance cycles, offering flexibility to manage production volatility and cost uncertainties. While this intertemporal flexibility is useful, the report notes that in the absence of limits on banking, early overperformance – driven by low-cost abatement – could result in surplus accumulation. These risks lock in long-term imbalances and undermine price signals critical to sustained decarbonisation.

“India's CCTS, like all emissions trading systems, is not a market in the classical sense. It is a policy instrument shaped by institutional and market design to control emissions through regulatory definitions of supply, demand, and compliance,” explains Shrivastava.

While the Performance, Achieve and Trade (PAT) mechanism succeeded in establishing a foundation for baseline-and-credit trading, it also demonstrated important design considerations that could provide lessons for the evolution of the CCTS.

Another complementary feature proposed in the report is a vintage-based credit control system for India’s CCTS, where credits are tagged by issuance year and expire or devalue after a certain duration.

Drawing on the EU’s Emissions Trading System, Alberta’s Technology Innovation and Emissions Reduction system, and Australia’s Safeguard Mechanism, the report highlights that incorporating timely corrective mechanisms can minimise the cost of reform and build market trust.