A sharp fall in India’s steel and aluminium exports to the European Union even before carbon border charges kick in has put the spotlight on whether India’s Carbon Credit Trading Scheme can become a credible market signal for industry, rather than a narrow compliance mechanism.
India’s steel and aluminium exports to the EU fell 24.4% in FY25, with steel alone down 35.1%, before any financial obligation under the EU’s Carbon Border Adjustment Mechanism had taken effect, according to an IEEFA report prepared with the Environmental Defense Fund. The decline suggests European buyers are already shifting towards lower-emission producers.
The development comes as India’s compliance carbon market under the CCTS moves into its operational phase. Intensity targets have been announced for seven sectors, covering about 490 obligated entities and an estimated 700 million metric tonnes of CO2 equivalent annually. The coverage is expected to expand with the inclusion of iron and steel, and fertiliser sectors.
The next two to five years will determine whether the scheme creates a carbon price strong enough to guide capital-intensive industrial investment over 15- to 30-year horizons, or settles into an administrative compliance exercise with limited impact.
The report said the immediate priority should be credible stringency, robust monitoring, reporting and verification, and genuine enforcement. More advanced features such as financial intermediaries, offsets and auctioning should be designed early but introduced only as the market matures.
“Every major emissions trading system began with compliance entities only. The CCTS is right to do the same,” said Saurabh Trivedi, co-author of the report and Lead Specialist, Sustainable Finance and Carbon Markets at IEEFA, South Asia.
He said financial intermediaries will matter eventually because they enable “continuous price discovery” and hedging for companies planning large decarbonisation investments. But he added that “the precondition for financial intermediaries’ inclusion is genuine scarcity and credible enforcement”.
The warning is important because India’s earlier Perform, Achieve and Trade scheme struggled to create a deep market. The report said only about 3.4 million of the 5.2 million Energy Saving Certificates mandated for purchase were actually transacted, all at the floor price, reflecting weak targets, uneven MRV and insufficient enforcement.
Another major design challenge is the power sector. It accounts for nearly 40% of India’s greenhouse gas emissions but remains outside the initial CCTS compliance boundary. Its eventual inclusion will require coordination across electricity regulation, dispatch decisions and cost recovery.
“International experience shows that regulated electricity markets can also support carbon pricing,” said Saloni Sachdeva Michael, Energy Specialist, India Clean Energy Transition at IEEFA, South Asia. She said India’s power sector has enabling features, including change-in-law provisions in power purchase agreements, but future integration will need careful coordination between carbon market and electricity regulators.
On CBAM, Subham Shrivastava, climate finance analyst and consultant at IEEFA, said the key issue is how the EU recognises carbon prices paid in third countries and how CCTS is calibrated so domestic carbon costs are credited at the border.
“A stronger domestic carbon market supports industrial competitiveness and helps ensure that more of any carbon value is recognised and retained within India,” Shrivastava said.
The report also cautioned against rushing offsets. “Offsets are best sequenced to follow market conditions, rather than lead them,” Shrivastava said.