Can India get carbon credits right?

In today’s Finshots, we look at whether India can build a reliable carbon credit market that actually reduces pollution.

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Now, on to today’s story.

The Story

India is often portrayed as a relatively low polluter on a global and historical scale. And this is generally true. Since the Industrial Revolution, the country has contributed less than 5% of cumulative global emissions. However, that statistic hides a more uncomfortable reality.

Walk in parts of Delhi in winter or drive past industrial belts outside Mumbai, and you see a very different story. Pollution in these pockets is not abstract. It affects our lungs, hospital bills, school attendance, and even how productive we can be at work.

In fact, a few weeks ago economist and former deputy managing director of the IMF (International Monetary Fund), Gita Gopinath, underlined this point by arguing that air pollution imposes high economic costs on India. In her view, the pollution of productivity and public health may be more consequential for growth than trade rates or any other external obstacles.

When people get sick more often, health care spending rises and cities become harder to live in. Ultimately, it affects everything from social aspects to economic growth. So, while India may not be the biggest historical emitter, pollution is very much a current economic problem.

This is the dichotomy that India now faces. And as we push to expand our manufacturing base and become a greater global production hub, carbon management is no longer a distant climate ideal, but a practical economic question.

And in the 2026 Union Budgetthe government has signaled that it recognizes this. They announced a ₹20,000 crore investment in carbon credit programs over the next five years, with one of the primary objectives being to scale up carbon capture, utilization and storage technologies across high-emission sectors.

These are industries such as power, steel, cement, refineries and chemicals that are difficult to decarbonize quickly. At the same time, they also form the backbone of infrastructure and manufacturing. So, if India wants to grow and clean up at the same time, these sectors must be part of the solution.

This budget push is also part of a broader effort to formalize and expand India’s emerging carbon market infrastructure under the Carbon Credit Trading Scheme (CCTS).

But what is carbon trading in the first place?

Let’s understand this with an example. Imagine you are part of a gym with a mandatory wellness challenge. The gym assigns a “maximum calorie budget” for the month. And anyone who exceeds it will be hit with a massive cash fine. But if you burn enough calories, you earn a “pass coupon” that you can sell to anyone.

You go to the gym and burn significantly more than necessary, so the gym rewards you with 2 Fit-Coupons. Meanwhile, a friend at the snack bar eats too many hamburgers and exceeds their limit. To avoid this penalty, your friend is interested in buying your coupon at a price lower than the penalty. That sounds like a perfect incentive, right?

It’s a win-win situation, and in theory it does two things:

1. It places an economic value on calorie burning, and
2. This creates incentives for people to lose weight.

Continuing this analogy, companies that reduce emissions more efficiently can benefit. Those who pollute more must pay or invest in cleaner technologies. This is the economic logic.

But our early experiments with carbon-related markets show that getting the design right isn’t really that simple.

You see, in 2023 the Green Credit program under the Ministry of Environment aimed to allow corporations to earn credits for activities such as tree planting and ecosystem restoration.

On paper it sounded simple. You plant trees, earn credits and offset your environmental impact. But in practice it runs into trouble. The law ministry flag concerns about poor verification and have raised questions about whether the credits are being issued really represented real and additional climate benefits.

And it made sense. If these activities are not properly monitored and verified, companies can claim environmental merit without actually delivering a measurable impact. The risk here was that carbon credits would become an accounting tool rather than an environmental tool.

Contrast this with another model that has a clearer economic connection: farmers and sustainable farming.

Let’s go back to the previous gym example. Now imagine, instead of the gym, a farm, where a farmer can earn an incentive to practice sustainable farming. Through this farming, for every 1 ton of estimated carbon that is ‘captured’ from the air, the farmer gets a credit. They can then choose to sell it to industries that pollute the environment.

Under this approach, farmers adopt practices that increase soil carbon or improve biomass, such as regenerative agriculture or agroforestry. These practices remove carbon dioxide from the atmosphere and store it in soil or plant material. And once the credit is earned, it can then be verified and sold, usually to companies that want to offset emissions.

The appeal of this model is simple. It connects rural livelihoods with climate finance. Instead of focusing only on punitive measures for industries, it recognizes that farms can act as carbon sinks. If designed well, this could mean an additional income stream for farmers, while industries gain access to verified carbon removal credits.

Early pilot projects and private marketplaces have shown that there is interest on both sides. And the economic logic is also clear. Remove carbon. Measure it. Earn a credit. Sell ​​it.

Sounds simple, right? But here, too, scale is the challenge.

The generation of verifiable carbon credits from farming depends on robust measurement, reporting and verification (MRV) systems. Soil carbon must be accurately measured. Farmers need training and support. And more importantly, marketplaces need to be transparent so that buyers trust what they are buying.

India’s CCTS compensation mechanism now provides a formal pathway for registering such projects. Yet the integration of these credits into large-scale, liquid trading markets is still a work in progress.

Which brings us to the real task for policymakers. It is not about simply issuing more credits. It is about ensuring that each credit represents real carbon removal or a measurable reduction in emissions. The framework must be meaningful, credible and backed by proper verification. Otherwise, markets will lose confidence, and the whole exercise will prove futile.

The WEF proposes to stabilize the carbon markets by a Price or Supply Adjustment Mechanism (PSAM) which acts as a shock absorber. These include releasing credits gradually through controlled auctions to avoid oversupply or shortages, establishing expiry rules so that older credits cannot be hoarded indefinitely, and introducing price corridors with a minimum floor and maximum ceiling to prevent extreme volatility. Together, these instruments aim to keep carbon prices credible, predictable and economically viable, while ensuring that the market continues to drive real emissions reductions.

As India transitions to a larger and more industrialized economy, carbon management tools may become central to balancing growth with environmental stability. Heavy industry will only continue to expand, and the demand for energy will continue to rise.

Apart from our own consumption, however, there is also an external dimension. The European Union’s Carbon Boundary Adjustment Mechanism (CABM) was already implemented in January this year. This means that importers of certain high-emission products must purchase CABM certificates that reflect the embedded carbon in those goods. It basically puts a sort of ‘tariff’ on any exports to the EU where there is excessive pollution above normal.

This will increasingly affect carbon-intensive Indian exports, particularly steel. If exporters cannot demonstrate a lower carbon intensity or credible offsets, they may face higher costs in European markets. A well-designed domestic carbon market can help Indian industries more systematically document and reduce emissions, improving their competitiveness abroad.

If the loopholes are addressed, India has a chance to build a domestic carbon market that industries can actually use. Not simply as a gesture, but as a functioning economic tool.

In the end, getting carbon credits right shouldn’t be about planting the most trees or issuing the highest number of certificates. It has to be about credibility. Because in carbon markets, trust is the currency. And without that, no amount of budget allocation can make the system work.

Until then…

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