Carbon credit trading in India faces depth test as banks stay out
It will leave the CCTS with fewer participants to support credible carbon price discovery.
India's Carbon Credit Trading Scheme (CCTS) is set to launch without the participation of financial intermediaries, raising early concerns about market depth, price stability, and the scheme's ability to attract the institutional capital needed to drive industrial decarbonisation at scale.
The Institute for Energy Economics and Financial Analysis (IEEFA) warned that the absence of financial players — who account for roughly 65% of secondary market activity— will leave the CCTS with fewer participants to provide liquidity, absorb short-term price fluctuations, and support credible carbon price discovery in its formative years.
The report draws a direct parallel with the EU ETS, where financial intermediary participation proved essential to market function. Without a comparable cohort in India's scheme, the CCTS risks becoming illiquid and volatile — outcomes that could undermine the carbon price signal before it gains traction with investors.
The liquidity concern is further compounded by structural inelasticity on both the supply and demand sides of the market. Industrial abatement in sectors such as steel, cement, and aluminium is capital-intensive and tied to investment cycles of 15 to 30 years, leaving obligated firms with limited capacity to respond quickly to price signals even if liquidity conditions improve.
"Industrial firms are making capital allocation decisions today that will shape their emissions profiles through the 2030s and beyond," said Saloni Sachdeva Michael, Lead Energy Specialist, India Clean Energy Transition at IEEFA.
She added that building the CCTS's credibility in its early years through predictable rules, transparent tightening trajectories, and well-coordinated policy design will be essential to ensuring the scheme fulfils its role in India's decarbonisation journey.
To address these structural vulnerabilities, the IEEFA report recommends that supply adjustment mechanisms, forward guidance on benchmark tightening, and clear banking rules be built into the CCTS architecture from the outset — before liquidity pressures emerge rather than in response to them.
The report points to South Korea's experience as an instructive reference point, where reforms from 2022 progressively embedded carbon costs into energy dispatch decisions, even where retail price pass-through remained constrained.
A similarly sequenced approach, the report argues, could allow India to phase in financial intermediaries and broaden market participation as institutional capabilities mature.
"Understanding how these design features interact with India's economic and regulatory context is essential for the scheme to fulfil its potential as an instrument for industrial decarbonisation," said Saurabh Trivedi, Lead Specialist, Sustainable Finance and Carbon Markets at IEEFA.
