As the world races toward a low-carbon future, carbon markets have emerged as both a policy instrument and a financial mechanism shaping the global economy. For countries like India, which announced a net-zero target by 2070, the carbon market is no longer a theoretical construct—it’s a looming reality that will impact everything from trade margins to industrial competitiveness.
Understanding Carbon Markets And Why They Matter
A carbon market is a system where carbon credits – representing the right to emit one ton of carbon dioxide (CO₂) or eq. Greenhouse gases are bought, sold, or traded. These credits are issued under two types of systems: Compliance Markets, regulated by governments (such as the EU Emissions Trading System), and Voluntary Markets, where companies offset emissions to meet internal sustainability goals or trade carbon credits. The very presence of a voluntary carbon market indicates substantial financial opportunities within the carbon trading ecosystem.
The compliance carbon market incentivises emission reductions through mechanisms like cap-and-trade, where companies emitting less than their allotted quota can sell excess credits. High-emission companies must either invest in green technology or buy additional credits, raising their cost of operations. This structure has profound implications for cost competitiveness and global trade dynamics.
For instance, in 2024, the EU’s Emissions Trading System (EU ETS) priced carbon between €80–€100 per ton of CO₂. Meanwhile, China’s National ETS traded credits for as low as $6–$10. The disparity creates financial asymmetry, benefiting economies that are further along in decarbonisation.
Carbon Markets And The Global Supply Chain
Decarbonisation is reshaping the global supply chain. Logistics firms are facing surging costs due to carbon taxes and emission reporting requirements. The EU ETS now includes maritime shipping, making long-distance freight more expensive. Airlines must comply with CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation), adding carbon costs to air cargo.
As companies face growing pressure to map Scope 1, 2, and 3 emissions—direct, indirect, and value chain-related emissions, respectively—supply chain compliance becomes a bottleneck. Firms unable to certify low-emission manufacturing or logistics risk losing access to carbon-sensitive markets, particularly in Europe and the USA. Suppliers from countries with lenient climate policies will either face border taxes, like the EU’s Carbon Border Adjustment Mechanism (CBAM), or invest in costly certifications and offsets. In the near future, carbon efficiency will rival labour costs as a driver of supply chain decisions.
India’s Carbon Challenge: Financial Risk And Opportunity
India is the third-largest emitter globally, but unlike the US or EU, it lacks a mature carbon market. The current framework, led by the Perform, Achieve, and Trade (PAT) scheme, which generates Energy Savings Certificates (ESCerts) and the proposed Carbon Credit Trading Scheme (CCTS) are still evolving. The government aims to transition from ESCerts to a full-scale ETS with sectoral emission caps. Pilot projects are being tested in Gujarat and Tamil Nadu. Without high-integrity carbon credit systems, Indian companies risk having their offsets deemed low quality in global markets, reducing their trading power and increasing costs. Hence, if we do not act right now, the price of Indian carbon credits will be priced lower than global standards, further to meet the net-zero targets we will be reliant on high-priced EU or US credits.
Moreover, India’s “highly insufficient” SDG 13 climate performance ranking highlights regulatory gaps and a robust framework, especially in international shipping, aviation, and Scope 3 emissions. If not addressed, these could make India a net importer of carbon credits by 2050, increasing the cost of doing business and undermining export competitiveness.
As G7 countries reach net-zero by 2050, their industries will operate with reduced carbon-related cash costs, putting Indian exporters at a disadvantage. A 2021 UNEP report estimated that carbon markets could reduce decarbonisation costs by 40–60% – this will push Indian industry towards carbon trading; however, it will not help in reaching true-zero, thereby creating a domino effect of purchasing carbon credits.
Why India Must Act Now: The Cost Of Inaction
India’s commitment to achieving net-zero emissions by 2070 is an important milestone—but in a rapidly decarbonising world, late adoption comes at a steep price. If India does not act now, it faces a combination of financial, trade, and geopolitical risks that could severely hamper its growth trajectory. The financial stakes involving carbon neutrality are rising. Delayed carbon reforms could invite:
- Trade Sanctions & Green Tariffs on Indian Exports: Global carbon regulations are evolving faster than India’s domestic frameworks. Mechanisms like CBAM will effectively penalise Indian exports, especially in carbon-intensive sectors like steel, cement, and chemicals, by imposing taxes that account for emissions generated during production. These are not just theoretical risks. Starting in 2026, the EU will begin collecting fees on imports based on embedded carbon emissions.
Such measures mean that even if Indian goods remain competitive in terms of labour and manufacturing costs, they will become less attractive due to added carbon costs. Over time, non-compliance with global sustainability standards will not just limit access to developed markets—it will make Indian exporters less profitable.
- Higher Capital and Financing Costs: Global financial institutions are tightening climate-related lending criteria. Projects or companies with high climate risk profiles are already seeing higher interest rates, lower credit ratings, and limited access to capital. There is growing pressure from ESG-conscious investors to divest from high-emission industries. India, being a capital-intensive economy, relies heavily on foreign institutional investment. Without a credible carbon pricing mechanism and transparent emission disclosures, Indian industries could face a funding squeeze, particularly in sectors like infrastructure, power, and manufacturing.
- Weak Carbon Credits, Missed Revenue: India is poised to become a major player in carbon offset projects, especially through reforestation, clean energy and sustainable agriculture. However, without strong verification and pricing mechanisms, credits from India may be considered low quality in the international market. This not only limits revenue potential from voluntary carbon markets but also forces Indian firms to purchase more expensive, foreign carbon credits to meet compliance or ESG goals, creating a double financial burden.
- Strategic Vulnerability and Global Perception: Failing to meet climate targets weakens India’s global negotiating power. As international forums increasingly link environmental performance with economic cooperation, aid, and technology transfer, India risks being perceived as a laggard. Geopolitically, this could result in: Reduced participation in green supply chain alliances, Lower priority in bilateral climate funding, Dependence on Western green technologies under costly licensing terms, etc.
The Road Ahead: Turning Risk Into Opportunity
To compete in a carbon-regulated world, India must:
- Establish a high-integrity national carbon market, aligned with global verification standards: India must accelerate the implementation of its Carbon Credit Trading Scheme (CCTS) and move from pilot programs to nationwide rollouts. This includes setting enforceable emission caps for high-emission sectors, ensuring third-party verification of credits and integrating with global carbon exchanges. High-integrity credits will not only attract international buyers but also improve the pricing power of Indian projects in voluntary markets.
- Emission Disclosures: While Scope 1 and 2 emissions are increasingly reported by large corporations, Scope 3 emissions, which account for a company’s major carbon footprint, remain underreported. India should mandate carbon footprint disclosure across the value chain- Supply chain partners, Logistics & warehousing providers, End-of-life product usage & disposal, etc,. before a foreign regulatory party does so.
- Green Technology Research & Development: India should continue aggressive investment in renewables (eg. targeting 500 GW by 2030), while also supporting: Carbon capture, utilization, and storage (CCUS) technology; Direct Air Capture (DAC); Hydrogen-based fuels and EV infrastructure; Smart grid and energy efficiency projects; etc. These initiatives reduce long-term carbon liabilities while creating jobs, attracting FDI, and promoting technology exports. Indian industry should fund research projects and tie up with institutions.
- Forge Global Climate Alliances: Joining platforms focused on carbon credit harmonisation, green finance, and sustainable development can elevate India’s global stature. Additionally, India could leverage multilateral green funds and climate-linked development finance from institutions like the World Bank, the IMF, and the GCF (Green Climate Fund). These can ease the transition costs for MSMEs and vulnerable sectors. However, in the long run, India should come up with its own green funding mechanism to avoid higher financing costs.
To summarize, sustainability is no longer optional – it’s a business imperative. The carbon market is not just about emissions; it’s about economic survival. For India, the time to act is now.
