Carbon Credits In India

Authors: Aman Sanghavi, Associate

Introduction

With the CERC (Terms and Conditions for Purchase and Sale of Carbon Credit Certificates) Regulations, 2026 along with The Carbon Credit Trading Scheme (CCTS) now in force, the Indian Carbon Market (ICM) has its first enforceable trading rules. These are designed to navigate the current global tension around sustainability and the environment through an intensity-based market.

THE LEGISLATIVE JOURNEY: 2001 TO 2026

India’s carbon market rests on four discrete statutory interventions spanning a quarter-century. The Energy Conservation Act, 2001 (EC Act) established the Bureau of Energy Efficiency (BEE) and created the foundational energy efficiency architecture but contained no carbon trading provisions. That changed with the Energy Conservation (Amendment) Act, 2022, which inserted Section 14AA into the EC Act; expressly empowering the Central Government to specify a Carbon Credit Trading Scheme and issue and administer Carbon Credit Certificates (CCCs).

Acting on that mandate, the Central Government notified the Carbon Credit Trading Scheme, 2023 vide Gazette Notification S.O. 2825(E) dated 28 June 2023, as amended by S.O. 5369(E) dated 19 December 2023. The CCTS established the institutional architecture: BEE as Administrator, the Grid Controller of India (GRID-INDIA) as Registry, and Central Electricity Regulatory Commission (CERC) as market regulator for trading activities. CERC’s authority derives independently from Section 66 of the Electricity Act, 2003, which empowers it to promote the development of a power market.

The fourth and most recent instrument is the CERC (Terms and Conditions for Purchase and Sale of Carbon Credit Certificates) Regulations, 2026 (CCC Regulations), notified on 27 February 2026 and published in the Official Gazette on 3 March 2026 under Section 178 read with Section 66 of the Electricity Act, 2003. These Regulations translate the CCTS’s structural design into enforceable trading rules, institutional obligations, and market safeguards.

ARCHITECTURE OF THE CCC REGULATIONS, 2026

A CCC represents the verified reduction, removal, or avoidance of one tonne of CO₂ equivalent (tCO₂e). CCCs are issued by BEE upon Central Government approval, credited to Registry accounts maintained by GRID-INDIA, and made available for exchange through CERC-approved power exchanges.

The Regulations establish two structurally distinct markets. The Compliance Market covers obligated entities, i.e. large industrial consumers across nine energy-intensive sectors (aluminium, cement, chlor-alkali, iron and steel, fertilizer, petroleum refining, petrochemicals, textiles, and pulp and paper) with mandatory emissions intensity reduction targets notified by MoEFCC under the Environment Protection Act, 1986. Entities that outperform their target receive CCCs in proportion to the excess reduction; those that fall short must purchase and surrender an equivalent number of CCCs or face financial penalties under the EC Act. The Offset Market operates in parallel, allowing non-obligated entities, i.e. operating in the energy, agriculture, waste handling and disposal, forestry, etc, industries, to register eligible activities across nine approved methodologies and receive CCCs for verified Greenhouse Gases (GHG) reductions.

If obligated entities and non-obligated entities wish to deal in CCCs, trading is mandatory on power exchanges on a monthly frequency, or as notified by CERC. Power exchanges require CERC’s prior approval for their Rules, Business Rules, and Bye-Laws before commencing CCC dealings. Pricing operates within a floor-and-forbearance price band approved by CERC on a proposal from BEE, with market-discovered pricing within that band.

Three market integrity safeguards apply: entities may not place sale bids exceeding their Registry holdings; GRID-INDIA cross-checks cumulative bids across all exchanges and voids excess bids; and entities recording more than three defaults in a quarter are barred from trading for six months, with a public defaulter list published monthly by GRID-INDIA.

CRITICAL EVALUATION: THREE OPEN QUESTIONS

Exchange-traded carbon credits in India now have a legal basis, an allocation of functions, and enforceable trading rules. However, three operational gaps are open, and one of them is the double-counting problem.

The Double-Counting Problem

A renewable energy project registered under the Offset Mechanism on 1 January 2025 can simultaneously apply for Renewable Energy Certificates (RECs) under the Renewable Purchase Obligation/Renewable Consumption Obligation framework and International Renewable Energy Certificates (I-RECs) under the international standard. Nothing in the CCC Regulations or the REC framework prevents this and the I-REC standard is unenforceable in an Indian court. The result is that the same tonne of avoided CO₂e can be presented as the basis for three separate instruments to three separate buyers, under three separate regulatory systems with no mechanism for reconciliation between them.

This may be the most pressing legal question arising from the CCC Regulations, that a single unit of renewable generation could attract all three certificates simultaneously.

The Proprietary Classification Gap

A CCC is not a financial instrument as clarified by the CCTS, 2023. Section 2(52) of the Central Goods and Services Tax Act, 2017 defines “goods” as every kind of movable property other than money and securities, and CCCs plausibly fall within that definition. Alternatively, a CCC may constitute a beneficial interest in movable property within the meaning of “actionable claim” under the Transfer of Property Act, 1882, since the holder has an entitlement to a registry credit held in a Registry account. A third characterisation is that CCCs are entirely sui generis statutory entitlements created by the Energy Conservation Act and fall under neither existing head as no regulator has issued guidance on it.

The income tax position is equally open. Section 115BBG of the Income Tax Act, 1961, taxes income from the transfer of carbon credits at a flat rate of ten per cent, but its express scope is limited to credits validated by the United Nations Framework Convention on Climate Change (UNFCCC). CCTS CCCs are not UNFCCC-validated instruments. Whether Section 115BBG applies to them at all is unresolved. CCTS CCCs carry no UNFCCC validation. Whether Section 115BBG reaches them at all is an open question, and the existing case law on whether Clean Development Mechanism (CDM) carbon credit receipts are capital or revenue in nature does not resolve it. The Madras High Court, in Principal Commissioner of Income Tax v. M/s. Lanco Tanjore Power Co. Ltd.¹, held that receipts from the sale of CDM carbon credits are capital receipts and not chargeable to tax as business income. The SLP against that decision is pending before the Supreme Court.

¹ (2021) 434 ITR 671 (Mad.)

A lender seeking security over a borrower’s CCC holdings in a project finance transaction for a covered entity needs to know whether a pledge is viable. Under Section 172 of the Indian Contract Act, 1872, pledge requires possession, which requires delivery. A Registry entry cannot be physically delivered. Whether constructive delivery to the Registry suffices, or whether the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 provides a route to create a security interest over registry-held environmental certificates, is untested.

Institutional Fragmentation

The CCC Regulations distribute authority across BEE (issuance and administration), operating under the Energy Conservation Act, 2001; GRID-INDIA (registry), a government company designated under the CCTS; and CERC (trading oversight), operating under the Electricity Act, 2003 with no single primary forum for disputes that span more than one domain. A compliance shortfall by a covered entity generates obligations under the Environment Protection Act (MoEFCC’s domain) and potential trading penalties under the CCC Regulations (CERC’s domain). The interaction between these designated entities is unspecified.

THE INDIA-EU FTA AND THE CBAM INTERSECTION

The development of the CCC Regulations warrants close examination, both on its own terms and in light of the EU’s Carbon Border Adjustment Mechanism (CBAM), which entered its definitive financial phase on 1 January 2026 and has been expressly preserved under the India-EU Free Trade Agreement (FTA) concluded the same month.

CBAM entered its definitive financial phase on 1 January 2026. EU importers must now purchase and surrender CBAM certificates covering embedded emissions in imports of steel, aluminium, cement, fertilizers, electricity, and hydrogen. For Indian exporters in those sectors, this is a quantified additional cost with no transitional relief.

The India-EU Free Trade Agreement concluded on 27 January 2026, but left CBAM expressly intact. The EU confirmed publicly that “nothing will be eliminated in terms of the implementation of CBAM.²” The FTA is not a CBAM exemption. It is a framework within which equivalence arguments can be developed, and that distinction matters practically. A point to note is that the FTA is not yet in force and requires ratification by the European Parliament and the Indian legislature before its provisions become legally operative.

Three provisions in the FTA are relevant for carbon market practitioners. A Technical Dialogue on climate and trade is scheduled for the first half of 2026 through which India can present its guidelines and seek recognition of CERC-supervised carbon pricing as a domestic carbon cost off settable against CBAM liabilities under Article 9 of the CBAM Regulation (Regulation (EU) 2023/956 Of The European Parliament And Of The Council). If accepted, Indian exporters could offset that portion of their CBAM exposure against the verified domestic price of CCCs. A Most Favoured Nation clause in the FTA ensures that if the EU grants CBAM flexibility to any third country, India receives equivalent treatment. The FTA provides for €500 million in EU climate assistance, some of which may be directed toward developing domestic infrastructure to standardize reporting guidelines in line with the CBAM Regulation.

Here the double-counting problem resurfaces at a different level of consequence. An Indian steel exporter seeking to claim domestic carbon pricing as an offset against CBAM liability must demonstrate that the specific tonne of CO₂e has not been simultaneously claimed as a CCC, a REC, and an I-REC. An exporter cannot make that case under the current regulatory framework because the CCC Regulations provide no mechanism for confirming it.

Conclusion

The CCC Regulations, 2026 complete the regulatory architecture that the CCTS, 2023 established in framework. Whether that architecture functions as intended will be determined by two instruments not yet published: the BEE Detailed Procedure for the Offset Mechanism, which must address concurrent certification across the CCC, REC, and I-REC frameworks, and the outcome of the Technical Dialogue under the India-EU FTA, which remains subject to ratification and is not yet in force.

² Reuters, “EU-India trade deal leaves bloc’s carbon border tariff intact” (27 January 2026)

Aman Sanghavi, Associate, Solomon & Co.

About Solomon & Co.

Solomon & Co. (Advocates & Solicitors) was founded in 1909 and is amongst India’s oldest law-firms. The Firm is a full-service firm that provides legal service to Indian and international companies and high net-worth individuals on all aspects of Indian law.

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