Unravelling carbon credit trading opportunities

India’s Carbon Credit Trading Scheme (CCTS) could become an important source of domestic revenue and direct it toward the country’s clean energy transition as it faces a central financing challenge — how to support deep industrial decarbonization while also protecting workers, communities, and state economies that remain closely tied to fossil fuels. This is according to a new report released by the Asia Society Policy Institute (ASPI). Titled ‘Carbon Credit Trading Scheme & Energy Transition Finance: Preparing India for Optimal Use of Compliance CCTS Revenue’, the report is authored by Nishtha Singh, Assistant Director of Climate at the ASPI, and Alistair Ritchie, Director of Asia-Pacific Sustainability at the ASPI, as per an ASPI news release.

“India’s transition toward a low-carbon economy requires a financing architecture capable of supporting deep industrial decarbonization, strengthening economic resilience in fossil fuel–dependent regions, and ensuring a just and equitable clean energy transition,” say Singh and Ritchie. “The Carbon Credit Trading Scheme offers a significant opportunity to mobilize domestic revenue at scale while advancing India’s climate commitments and safeguarding industrial competitiveness,” they add, as reported in the release.

Drawing on global experience, the news release says the report shows how emissions trading systems can generate substantial public revenue when allowances are auctioned and revenues are reinvested in clean energy, industrial decarbonization, energy efficiency, and social and economic transition support. The EU Emissions Trading System (EU ETS) is the world’s first carbon market, launched in 2005, and one of the largest globally. It operates in all EU countries plus Iceland, Liechtenstein, and Norway, and has been linked to the Swiss ETS since 2020. It requires polluters to pay for their GHG emissions, bringing overall EU emissions down while generating revenue to finance the clean transition. It covers emissions from electricity and heat generation, industrial manufacturing and aviation, accounting for ~40% of the EU’s total GHG emissions. The EU ETS, for example, raised approximately $297 billion by 2025.

For India, the report finds that auctioning allowances for the power sector alone could generate more than $500 billion by 2050. This opportunity comes at a critical moment. Industrial sectors such as steel, cement, aluminium, and paper will require substantial additional capital to decarbonize, while coal-dependent states face risks related to public revenues, employment, and community welfare. A predictable and transparent finance mechanism can help ensure that CCTS revenues support both industrial transformation and a just transition for fossil fuel — dependent regions. To help meet the financing needs, the report proposes a CCTS-enabled Energy Transition Finance Mechanism centred on two complementary funds. The Power and Industrial Decarbonization Fund would support high-impact mitigation technologies in the power and industrial sectors, including targeted support for micro, small, and medium enterprises and industrial clusters in coal-dependent states. The State Social and Economic Transition Fund would help fossil fuel — dependent states finance reskilling programs, economic diversification, MSME development, community infrastructure, and the repurposing of coal mines and coal-fired power plants.

According to the release, the report also sets out a governance framework for the effective use of CCTS revenues. An Independent Energy Transition Finance Authority could set funding priorities, allocate resources between the two funds, and coordinate with central ministries, state governments, industry associations, financial institutions, civil society, and affected communities. A Technical Advisory Committee would support project selection, fund allocation, and periodic recalibration as national and state-level needs evolve.

As outlined in the ASPI’s website, its project ‘Achieving Just Transition in India with an Effective Carbon Credit Trading Scheme’ aims to support the establishment of a robust CCTS as a primary mechanism for India’s industrial and power sector decarbonization to help achieve India’s NDC targets in a cost-effective way. A key focus is the development of a scheme that fully leverages the opportunity to generate climate finance to ensure that the shift to cleaner energy sources is inclusive and equitable, providing support for affected workers, communities, and industries while minimizing social and economic disruptions.

The report concludes with an action plan and phased implementation roadmap. Under the roadmap, CCTS revenues could be generated and disbursed to projects by 2031, with options to bring forward revenue mobilization to 2029 and significantly scale up available finance based on global best practices.