Introduction

In India, carbon trading is primarily regulated by the Energy Conservation Act, 2001, as amended in 2022 (“ECA”), which provides the statutory basis for the Carbon Credit Trading Scheme and the issuance of Carbon Credit Certificates (“CCCs”). Pursuant to this, the Government of India notified the Carbon Credit Trading Scheme, 2023, as amended in December 2023 (“CCTS”) to establish, operate, and regulate the Indian Carbon Market (“ICM”).

Carbon credit refers to a permit to emit a pre-specified quantity of carbon dioxide (“CO2”) or other greenhouse gas (“GHG”) emissions. As per Section 2(1)(c) of the CCTS, a “carbon credit” represents a value assigned to the reduction, removal, or avoidance of GHG emissions, equivalent to one ton of carbon dioxide equivalent (tCO_2e). Essentially, when one metric tonne of CO2 is reduced or removed from the atmosphere, it generates a single carbon credit. Under Section 14AA(2) of the ECA, registered entities can trade these credits in the form of CCCs in accordance with the CCTS.

Section 14AA(1) of the ECA empowers the Central Government, or its authorized agency (i.e., the Bureau of Energy Efficiency (“BEE”)) to issue CCCs. These certificates are earned either by ‘Obligated Entities’ that exceed their emission reduction targets or by ‘Non-Obligated Entities’ that implement approved climate mitigation projects. Conversely, if an Obligated Entity fails to meet its target, it must purchase CCCs to achieve compliance.

To operationalize this trading, the Central Electricity Regulatory Commission (“CERC”), in the exercise of its powers under the CCTS, has notified the Central Electricity Regulatory Commission (Terms and Conditions for Purchase and Sale of Carbon Credit Certificates) Regulations, 2026 (the “Regulations”) on February 27, 2026. These Regulations establish the domestic framework for both Obligated and Non-Obligated Entities to trade CCCs.

Key Highlights of the Trading Framework

The Regulations provide the necessary market architecture to ensure transparency, liquidity, and regulatory oversight in the trading of carbon credits. The key features of this framework are detailed below:

1.Trading Platform and Frequency:The Regulations mandate that CCCs shall be dealt with exclusively through power exchanges registered with the CERC (i.e., Indian Energy Exchange, Power Exchange India Limited and Hindustan Power Exchange) (“Power Exchanges”), unless the CERC specifically permits another mode.

2.Market Segmentation: The market is divided into two distinct segments:

(a) Compliance Market: This segment is exclusively designed for Obligated Entities that are mandated to comply with specific GHG emission intensity targets. These targets are governed by the Greenhouse Gases Emission Intensity Target Rules, 2025 (as amended in January 2026), notified by the Ministry of Environment, Forest and Climate Change (MoEFCC) and are valid till March 31, 2027. The rules currently identify Obligated Entities across hard-to-abate sectors, including Aluminum, Chlor-Alkali, Cement, Pulp & Paper, Iron & Steel, Petroleum Refineries, Petrochemicals, Aluminum (Secondary), and Textiles. Recently, the Government of India, vide press release dated March 25, 2026, announced that the Union Cabinet has approved India’s Nationally Determined Contributions (“NDCs”) for the period 2031–2035 under the United Nations Framework Convention on Climate Change (“UNFCCC”). Notably, India has committed to reducing the emissions intensity of its GDP by 47% by 2035 (from 2005 levels), marking a significant upward revision from the earlier 33–35% target. Given these enhanced climate commitments, it is anticipated that the BEE may formulate a more stringent emission reduction trajectory for Obligated Entities in subsequent compliance cycles under the CCTS.

(b) Offset Market: This segment caters to Non-Obligated Entities participating on a voluntary basis, typically to purchase credits for meeting corporate sustainability goals (ESG) or voluntary offsets. Pursuant to Paragraph 11A of the CCTS, the BEE, on September 20, 2024, has notified specific sectors eligible for project registration under this mechanism. These eligible sectors include, inter alia, Energy (encompassing renewable energy with storage, offshore wind, and green hydrogen production via electrolysis or biomass), Construction, and Waste Handling & Disposal.

3.Registration and Dealing:

• Initial Registration with the Registry: Both Obligated and Non-Obligated Entities that intend to participate in the dealing of CCCs on Power Exchanges or other modes approved by the CERC, must first register themselves with the registry i.e., the Grid Controller of India (“Registry”). Transitioning rapidly from policy design to market operations, the Government of India has recently launched the ‘Indian Carbon Market Portal’. Serving as the digital backbone of the market, this central platform will handle all registration, monitoring, reporting, and verification (MRV) of emissions. Entities must complete their registration on this portal before they can commence trading.
• Issuance and Crediting of Certificates: Following registration, the BEE, upon approval from the Central Government, issues CCCs. These CCCs are credited to the respective entity’s registry account only upon payment of the stipulated fees.
• Registration with Power Exchanges: To initiate trading, entities must subsequently register with the Power Exchanges (or other permitted entities) in accordance with their specific business rules and bylaws. Power Exchanges must first seek approval of the CERC on their rules, business rules and by-laws.
• Placement of Bids: During the designated trading sessions (which will occur on a monthly basis or such other periodicity as approved by the CERC), entities place their buy or sell bids on the Power Exchange. It must be noted that an entity is prohibited from placing cumulative sale bids across Power Exchanges that exceed the total CCCs available in its registry account.
• Validation by Registry: Prior to the dealing session, the Registry cross-checks the cumulative sale bids against the entity’s actual holdings. If a discrepancy is found where bids exceed holdings, the entity is marked as a defaulter, and its bids are rendered void and ineffective for that session. Further, if an entity defaults (i.e., bids more than it hold) more than three times in a quarter, it will be barred from trading CCCs for the next six months.
• Pricing Mechanism and Trade Execution: The denomination of one CCC will be as specified under the CCTS and will be equivalent to one tonne of CO2. The market price of CCCs will be discovered on the respective Power Exchange or permitted entity through processes approved by the CERC. Under the compliance mechanism, CCCs are to be traded within a floor price (i.e., the minimum price) and forbearance price (i.e., the maximum price) band, which will be approved by the CERC based on a proposal submitted by the BEE. Upon successful price discovery and successful dealing session, the Power Exchange will report the transaction details to the Registry. The Registry will then update the respective accounts by debiting the seller and crediting the buyer, thereby finalizing the transfer of title.

4. Banking and Validity: The Regulations clarify that the banking and surrender of CCCs will continue to be governed by the specific “Detailed Procedures for Compliance Mechanism and Offset Mechanism” issued under the CCTS. Similarly, the validity period of the certificates is determined by these respective detailed procedures. In accordance with the CCTS, the BEE has in July 2024 and March 2025 issued the ‘Detailed Procedure for Compliance Mechanism under the CCTS’ and ‘Detailed Procedure for Offset Mechanism under CCTS’ respectively.

5.Institutional Framework: The Regulations establish the following structured tripartite institutional framework:

• CERC:The CERC will act as the market regulator, responsible for exercising market oversight, approving Power Exchange bylaws, and regulating price bands. Further, the CERC retains strong oversight powers. It can intervene in case of abnormal price movements or sudden changes in trading volume. The CERC may also relax certain provisions or issue additional directions if implementation challenges arise.
• BEE:The BEE will act as an Administrator of the ICM and will be responsible for formulating detailed procedures, monitoring market transparency, and coordinating between the Registry and Power Exchanges.
• Grid Controller of India: The Grid Controller of India is designated as the Registry and will maintain electronic accounts of all participants and set up technical infrastructure required for the exchange of CCCs.

Conclusion

The notification of the Regulations, combined with the launch of the Indian Carbon Market Portal, marks the definitive transition of the ICM from policy to practice. With formal trading expected to begin soon, Obligated Entities should align their registry accounts and strategize early in terms of the newly enhanced NDC targets. Simultaneously, the Offset Market is already gaining momentum, with over 40 institutions registered to supply CCCs from approved projects in sectors like green hydrogen, biogas, and forestry. Furthermore, a robust domestic carbon market will be critical for Indian exporters needing to prove climate compliance against external carbon rules, such as the European Union’s Carbon Border Adjustment Mechanism (CBAM).

Authors – Akshay Malhotra– Partner; and Kopal Bhargava – Associate

Disclaimer: This publication only highlights key issues and is not intended to be comprehensive. The contents of this publication do not constitute any opinion or determination on, or certification in respect of, the application of Indian law by Talwar Thakore & Associates (“TT&A”). No part of this publication should be considered an advertisement or solicitation of TT&A’s professional services.