Courting Controversy: Green becomes the new Gold: India’s Carbon Market opens for business

As Diwali approaches and Delhi braces for its annual smog season, conversations about air quality usually turn to firecrackers and stubble burning. These conversations seem to miss out on pollution caused by factories, power plants and furnaces that run all year and are a steadier source of pollution. This is a fitting moment to ask what India’s biggest industrial emitters have been doing, and how the 2026 UN Climate Change COP31 will bring about an environmental change for the better.

Starting November, for the first time, Indian factories will be able to buy and sell carbon credit certificates on power exchanges, finally turning a carbon credit trading scheme which was notified by the government in 2023, into a working market reality. The legal foundation for the concept is the Energy Conservation (Amendment) Act, 2022, which empowered the government to create an Indian carbon market and a carbon credit trading scheme which was notified in 2023. The Bureau of Energy Efficiency has issued emission targets to around 490 industrial units across seven sectors and credits are expected to be issued this month, with trading between November and January. 

To understand this better how the carbon credit market works, think back to school. Imagine a school where every student gets a fixed number of late passes each term. The punctual kids end up with spares and the chronic latecomers run short. Now let them trade. The early birds sell their extras, the sleepyheads buy them, and the school still meets its overall punctuality target. Replace late passes with tonnes of carbon dioxide and students with factories, and what you have is carbon credit trading.

The idea is simple. A government sets emission targets for polluting industries. A company that beats its target earns certain credits, one for every tonne of carbon dioxide it avoided. A company that misses must buy credits from the one who met its targets. Therefore, pollution gets a price tag, and environment friendly industry practices becomes a way of earning money instead of a cost.  

While the efficacy of the scheme, and the volume of trade it inspires, remains to be seen, there are interesting aspects of the scheme which deserve to be highlighted.

Firstly, the credit trading scheme operates differently from other types of environment policies. For instance a green tax, such as a carbon tax or India’s former coal cess, puts a fixed price on pollution. Every company pays for every tonne it emits, and the money goes to the government. As opposed to this, the carbon credit trading scheme would target the emissions more directly leading to actual reduction while letting the market set the price for per unit emission.

Secondly, the scheme has a dual benefit: it cuts pollution while putting money in motion, since companies that clean up earn credits to sell their certificates. One market research firm valued India’s carbon credit market at about 34 billion dollars in 2025 and expects it to grow more than tenfold by 2034. The scheme also helps India keep its promises under the Paris Agreement, where it has pledged to cut the emissions intensity of its economy by 47 percent by 2035.

Lastly, the scheme sets targets as emissions per unit of output rather than as a cap on total emissions per industry. That choice matters for a developing country like India, where industry must keep expanding to support growth and jobs. An intensity-based approach lets factories grow while still rewarding them for producing more cleanly.  

It does, however, raise two concerns. The first is a practical one: since industries would expand and output would rise even if per unit emissions becomes cleaner, India’s total emissions may still continue to climb in the long run. The second concern is more fundamental: the scheme risks becoming a permission slip to pollute, letting heavy emitters buy their way out of their obligations instead of changing how they operate.

So is this a climate tool or an accounting trick? The answer would depend upon its enforcement. A carbon market with tough targets, honest verification and real penalties would ultimately make clean factories richer. While lasting positive impact on climate would require cleaner technology, stronger enforcement and steady shifts in how industry operates, the carbon credit scheme is a meaningful first step in that direction because it would incentivise industries to invest in developing cleaner technologies with the aim of long term monetary gains.

Nakul Dewan is a Senior Advocate and King’s Counsel.