By Ramachandran Rajeev Kumar — 2026-03-17
From Kyoto sceptic to carbon market builder: India's 30-year U-turn
By Ramachandran Rajeev Kumar
Sometime in October 2026, if the current timeline holds, a steel plant in Odisha or a cement factory in Rajasthan will buy its first Carbon Credit Certificate on an Indian power exchange. It will be a small transaction, probably unremarkable to anyone not watching the regulatory wires. But it will mark the operational launch of one of the largest emissions trading systems on the planet -- covering over 700 million tonnes of CO2 equivalent across nine industrial sectors.
This is the same country that, in December 1997, sent a delegation to Kyoto with instructions to ensure that developing nations would bear no binding obligation to cut greenhouse gas emissions. India's negotiators argued, with considerable moral force, that a country whose per capita emissions were a fraction of the industrialised world's had no business accepting the same constraints as countries that had been burning fossil fuels for two centuries.
They succeeded. India was classified as a non-Annex-I party under the Kyoto Protocol, exempt from binding targets. The principle of "common but differentiated responsibilities" -- the idea that rich nations should act first because they had polluted first -- became the bedrock of India's climate diplomacy for the next two decades.
Twenty-nine years later, India is voluntarily building the very mechanism it once refused to accept from the outside.
What changed is not a single event but a series of shifts -- some driven by international pressure, some by domestic pragmatism, and some by the dawning recognition that the atmosphere does not grade on a curve.
The per-capita shield
India's position at Kyoto was not cynical. It was mathematically sound and morally coherent. In 1997, India's per capita CO2 emissions were roughly 0.8 tonnes -- against 20 tonnes for the United States and 9 tonnes for the European Union. The cumulative historical emissions gap was even more stark. India had contributed barely 3 per cent of the CO2 already in the atmosphere. Why should it constrain its development to fix a problem created overwhelmingly by others?
This argument carried India through two decades of climate negotiations. At Copenhagen in 2009, when the developed world pushed for universal binding commitments, India -- alongside China, Brazil, and South Africa -- helped craft the Copenhagen Accord, which preserved the voluntary, pledge-based approach for developing nations. The per-capita shield held.
But the shield had a structural weakness that became harder to ignore with each passing year. India's total emissions were rising rapidly -- it had become the world's third-largest emitter by absolute volume. Per capita emissions remained low, but the aggregate numbers were growing large enough that the moral argument, while still valid in principle, was losing diplomatic traction. The rest of the world was no longer willing to exempt the third-largest smokestack in the room simply because it was shared by 1.4 billion people.
Paris: the quiet concession
The Paris Agreement of 2015 changed the architecture of global climate politics in a way that made India's Kyoto-era position untenable. Unlike Kyoto, which divided the world into those who must act and those who need not, Paris required every country to submit a Nationally Determined Contribution -- a voluntary but public commitment to specific climate action.
The word "voluntary" was important. India had not accepted binding targets. But it had accepted the obligation to state, on the record, what it would do. India's first NDC committed to reducing the emissions intensity of GDP by 33 to 35 per cent below 2005 levels by 2030, and achieving 40 per cent cumulative electric power capacity from non-fossil sources.
These were intensity targets, not absolute caps -- a critical distinction. India's total emissions could continue rising as the economy grew, provided each unit of GDP produced fewer emissions. It was a carefully constructed position that acknowledged the problem without constraining growth.
But it was also a concession. For the first time, India had put numbers on its climate commitment and submitted them to international scrutiny. The per-capita shield was no longer a wall. It was a window -- open enough for the world to see in, and for pressure to flow through.
At COP26 in Glasgow in 2021, Prime Minister Modi announced India's commitment to reach net-zero emissions by 2070 -- a date deliberately later than the 2050 targets of Western nations, but a commitment nonetheless. In August 2022, India updated its NDC, raising the intensity reduction target to 45 per cent by 2030 and committing to 50 per cent non-fossil electricity capacity.
The trajectory was clear. The question was no longer whether India would act on emissions, but through what mechanism.
The quiet experiment
While diplomats negotiated in conference halls, India's Bureau of Energy Efficiency had been running a quiet experiment since 2012 -- the Perform, Achieve, and Trade scheme.
PAT assigned energy consumption targets to large industrial units across sectors like steel, cement, aluminium, and thermal power. Factories that exceeded their targets earned Energy Savings Certificates, which could be sold to those that fell short. It was, in essence, a proto-carbon market -- a market for efficiency rather than emissions, but built on the same economic logic: create a financial incentive for cleaner production.
The results were mixed. On the positive side, PAT expanded from 478 industrial units in its first cycle to over 1,300 by 2024, and the scheme saved more than 106 million tonnes of CO2 emissions between 2015 and mid-2024. That is not a trivial number.
On the other hand, the trading mechanism largely failed. In PAT's first cycle, only 1.5 million of the 3.8 million ESCerts issued were actually traded. The certificates flooded the market, prices collapsed, and demand remained thin. Reporting was inconsistent, audits were patchy, and non-compliant facilities faced no meaningful penalties.
PAT proved two things simultaneously: that Indian industry could reduce energy intensity when given targets, and that building a functional market for environmental certificates is harder than writing the regulation that creates them. Both lessons are directly relevant to what comes next.
The CBAM accelerator
If Paris opened the window, Europe's Carbon Border Adjustment Mechanism kicked it off its hinges.
CBAM, which entered its definitive regime on January 1, 2026, imposes a carbon cost on imports of steel, aluminium, cement, fertilisers, hydrogen, and electricity entering the EU. The cost is pegged to the EU's own carbon price under the Emissions Trading System, minus any carbon price already paid in the country of origin.
For India, the arithmetic was uncomfortable. India is expected to bear roughly 18 per cent of total CBAM costs -- nearly double its share of EU import value -- because Indian industry relies heavily on blast furnace steelmaking and has, until now, had no domestic carbon price to offset against CBAM liabilities. ICRA estimates that Indian steel exports to the EU could fall by 15 to 40 per cent between 2026 and 2030. Aluminium importers collectively face liabilities approaching half a billion euros in 2026 alone.
India's response to CBAM has been a study in pragmatism. Publicly, Indian officials have criticised it as a unilateral trade barrier dressed up as climate policy -- a position that has considerable support among developing nations. But privately, and in policy terms, India's response has been to build its own carbon market, which serves a dual purpose.
First, a domestic carbon price allows Indian exporters to offset CBAM liabilities at the EU border. If India's carbon price is recognised by the EU, exporters pay the difference rather than the full CBAM cost. The India-EU Free Trade Agreement, concluded in January 2026, includes provisions for exactly this recognition -- a forward-looking most-favoured-nation assurance on carbon price equivalence.
Second, a domestic carbon market gives India control over its own decarbonisation trajectory. Without one, India's industrial emissions are priced by Brussels. With one, they are priced by Delhi. For a country that spent three decades insisting on sovereign control over its climate policy, this is not a minor distinction.
What India has actually built
The legal foundation was laid on January 1, 2023, when the Energy Conservation (Amendment) Act, 2022 came into force, empowering the central government to create a carbon credit trading scheme. In June 2023, the government notified the Carbon Credit Trading Scheme rules. Through 2024 and into early 2026, the Ministry of Environment, Forest and Climate Change progressively notified emission intensity targets for nine sectors: aluminium, chlor-alkali, cement, fertiliser, iron and steel, pulp and paper, petrochemicals, petroleum refinery, and textiles.
On February 27, 2026, the Central Electricity Regulatory Commission notified the trading regulations -- the operational plumbing that will allow Carbon Credit Certificates to be bought and sold on India's power exchanges.
The system works as follows. Each covered entity receives an emission intensity target benchmarked against its 2023-24 baseline. Entities that reduce their intensity beyond the target earn Carbon Credit Certificates, each equivalent to one tonne of CO2. Entities that fail to meet their target must purchase and surrender an equivalent number of CCCs. Trading will occur on power exchanges under CERC supervision, with a floor price and forbearance price to prevent the kind of market collapse that crippled the PAT scheme.
Once operational, the CCTS will cover approximately 740 entities and over 700 million tonnes of CO2 equivalent -- placing India among the world's largest emissions trading systems alongside the EU ETS and China's national ETS.
What remains uncertain
Building the architecture is one thing. Making the market function is another. PAT's failure to generate meaningful trading volumes despite a decade of operation is a cautionary precedent.
The most consequential unknown is price. The CERC regulations provide for a floor and forbearance price, but these have not been set. Too low, and the market becomes a compliance formality with no real incentive to decarbonise. Too high, and industry -- already under pressure from CBAM, rising energy costs, and global competition -- faces cost burdens that could drive production offshore rather than clean up.
IEEFA and the World Economic Forum have both flagged the absence of a price stability mechanism as a significant gap. Without transparent and predictable pricing, the market risks the same thin trading and low confidence that plagued PAT.
Enforcement is the second question. PAT's penalties for non-compliance were weak enough to be widely ignored. The CCTS framework includes the power to penalise, but the track record of Indian environmental regulation does not inspire automatic confidence that penalties will be applied consistently.
The third question is scope. Nine sectors covering 16 per cent of India's total emissions is a start, not a solution. Agriculture, transport, and construction -- where much of India's emission growth is concentrated -- remain outside the scheme. Expanding coverage will require political will that is always harder to summon after the first round of industrial complaints arrives.
The principle survived
The temptation is to frame this as India abandoning its principles under pressure. That reading is too simple.
India's core argument at Kyoto was not that emissions do not matter. It was that the burden of addressing them should reflect historical responsibility and current capability. The CCTS is designed consistently with that principle. It uses intensity targets rather than absolute caps, allowing emissions to scale with economic growth. It applies to energy-intensive industry, not to the broader economy. It prices carbon at levels set by Indian regulators, not by the EU. And it preserves the fundamental position that India's development trajectory should not be constrained by the same standards applied to economies that industrialised a century earlier.
What has changed is not the principle but the context. In 1997, India's emissions were small enough that the per-capita argument was sufficient. In 2026, they are large enough that the argument, while still valid, no longer exempts India from action. The atmosphere does not process moral claims. It processes molecules.
India's response has been to build a market that reflects its own circumstances rather than accept one designed in Brussels or Geneva. That is not a U-turn. It is a pivot -- from defending the right to emit to controlling the terms on which emissions are priced.
Whether the market works will depend on execution, enforcement, and political courage. India has built the architecture. The test is whether it has the institutional discipline to make the architecture mean something.
The first trade, when it comes, will be a small transaction on a power exchange. But it will close a chapter that opened in a conference hall in Kyoto nearly three decades ago, when India said no. The word now is not yes. It is: on our terms.
Ramachandran Rajeev Kumar is the Chief Executive Officer of the Aarksee Group of Companies, based in Saudi Arabia.
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