In the Perform, Achieve and Trade (PAT) scheme Cycle I, the non-compliance rate was 9 percent; by PAT Cycle II, this rate had increased to about 56 percent; the Designated Consumers (DCs) obligated to purchase 86 percent of the mandated ESCerts were found to be unregistered; and the ESCerts that were purchased were sold at the floor price mandated by the Bureau of Energy Efficiency due to an oversupply of certificates. The Carbon Credit Trading Scheme (CCTS) inherits this history along with its participants. Whether it inherits its systemic gaps depends on three things that the design alone cannot guarantee: enforcement, verification, and price.
Structural Weaknesses in PAT
The PAT scheme’s compliance record did not collapse suddenly. It deteriorated because firms responded rationally to what they observed: delays, concessions and the absence of action. The ESCerts for PAT II, which should have been issued by December 2019, were only issued in August 2021, and trading did not conclude until October 2023. Nearly two years of slippage on a three-year compliance cycle. These same delays have continued over the next few PAT cycles, expanding temporally. Overall, these procedural pushbacks signalled that compliance was a future problem rather than a current concern. This deterioration deepened when the non-complying DCs from the first two cycles were allowed to trade in the third cycle, effectively rendering even future consequences non-existent. Cumulatively, 34 lakh out of 52 lakh ESCerts mandated for purchase at the end of all three cycles were left unattended. These numbers indicate that the DCs openly defied the PAT scheme’s rules and regulations.
The PAT scheme’s compliance record did not collapse suddenly. It deteriorated because firms responded rationally to what they observed: delays, concessions and the absence of action.
Even with a stronger enforcement mechanism, target-setting can compound the issue, as was the case in PAT. With extremely lenient targets, DCs were able to overachieve their energy savings and flood the market with excessive ESCerts despite minimal demand. Approximately 103 lakh ESCerts were issued in the first three PAT cycles, out of which only 52 lakh were mandated for purchase. This created a structural oversupply before the market opened. The market generated tradable instruments but no economic signal, and lost its price discovery mechanism entirely as it concluded all trades at the floor price. The implications for real abatement were evident in sectoral data, particularly in cement and steel, which exceeded their targets by more than 40 percent in the first two PAT cycles but did not achieve commensurate reductions in emissions.
Design Improvements, Persistent Governance Risks
CCTS attempts to close these gaps by formalising the compliance architecture. Obligated entities that fail to meet their emissions intensity targets must purchase Carbon Credit Certificates (CCCs) from the Indian Carbon Market (ICM) platform or face a financial penalty calculated at twice the average trading price of CCCs in the relevant compliance period, as determined by the BEE. This is a clearer formulation than PAT’s penalty provisions on paper, which do not specify a clear penalty amount. In addition to these provisions, mandatory annual GHG reporting within four months of the financial year together creates genuine structural improvements over PAT, which followed three-year cycles. The scheme, once fully operational, will cover around 740 entities and over 700 million tonnes of CO₂e, placing India among the world’s largest emissions trading systems by coverage.
The design speaks of improvement, yet the verification architecture remains the primary structural weakness, feeding into the enforcement problem. CCTS relies on Accredited Carbon Verification Agencies (ACVAs) to validate emissions data submitted by obligated entities. While the verifying agencies must undergo a thorough accreditation process, once completed, the assignment of entities to verifiers is left entirely outside government control and is undertaken by obligated entities. This mirrors the structural conflict of interest that has undermined voluntary carbon markets globally. Robust verification systems address this through randomised assignment, mandatory rotation of verifiers, or centralised government allocation. CCTS currently specifies accreditation criteria but does not mandate any of these mechanisms. This matters because data integrity fundamentally determines credit quality, instils buyer confidence, shapes market behaviour, and helps avoid a surplus of credits with ambiguous quality that buyers are wary of investing in.
The market generated tradable instruments but no economic signal, and lost its price discovery mechanism entirely as it concluded all trades at the floor price.
The second weakness arises when the existence of a penalty is confused with enforcement. Under PAT, penalties were defined in the Energy Conservation Act and were never applied consistently. Even the largest and most visible non-compliers, namely the power sector, face no real consequences. If CCTS enforcement is administered through the same institutions that lacked capacity and experienced delays under PAT, the nominal value of the penalty will become irrelevant. Ultimately, procedural delays will signal non-compliance. What determines firm behaviour is the expected cost of non-compliance, which is a function of penalty magnitude and the probability of enforcement. CCTS’s verification design cannot alone ensure a different outcome; it must be coupled with strong enforcement.
The surplus problem could be carried forward from PAT to CCTS, creating a third weak point. The demand side of the CCTS market is undermined by a structural absence that PAT’s record makes impossible to ignore. Under PAT, thermal power plants and DISCOMs accounted for 78 percent and 89 percent of total ESCerts required to be purchased in PAT Cycles II and III, respectively. They therefore dominated the demand side of the PAT market. The power sector, in particular, was the market’s primary source of demand, and its non-compliance weakened price discovery. Over the first two completed PAT cycles, emission reductions from thermal power plants amounted for just 3 percent of the sector’s total annual emissions. The CCTS has so far excluded the power sector from its compliance mechanism. The nine covered sectors account for approximately 16 percent of India’s total GHG emissions, meaning the scheme covers less than a fifth of national emissions at launch. This is not simply an environmental failure. A carbon market that excludes the sector that drove most demand-side compliance under its predecessor risks a demand deficit and oversupply.
The Way Forward
These weaknesses illustrate how the interaction between price, penalties, and firm behaviour determines whether CCTS drives real abatement or merely administrative compliance. These shortcomings point directly to the changes required for CCTS to deliver a different outcome. The operational architecture must be strengthened, beginning with monitoring and verification. A centralised framework with randomised assignment of Accredited Carbon Verification Agencies to obligated entities, along with mandatory rotation between compliance cycles, would remove the structural bias that currently undermines verification integrity.
CCTS is the right instrument; whether it becomes the right intervention depends entirely on the rigour of its enforcement, and on that question, the evidence so far offers cautious grounds for hope, not confidence.
The cost of non-compliance must substantially exceed the cost of compliance, which requires increasing environmental compensation fees. The Chinese ETS offers a useful benchmark, levying penalties at five to ten times the average credit price in a trading cycle. Such penalties are only credible if they are enforced within the timeframes set out in the Detailed Compliance Procedure; procedural delays signal administrative unseriousness and erode market discipline. Therefore, capacity and resource constraints must be addressed at the ministry level, with increased budget allocation for administrative operations within the BEE.
For the market to sustain itself, a robust price discovery mechanism is essential. Since a compliance market does not generate demand organically, baselines must be set tightly enough to create it. This requires both tightening existing baselines and expanding sectoral coverage to include high-emitting industries, especially the thermal power and DISCOM sectors, whose inclusion has proven to generate meaningful demand for credits.
Overall, CCTS improves on PAT in design, but the firms entering this scheme are the same firms that have navigated PAT’s compliance gaps for a decade. They understand where the system gives way. Therefore, the challenge lies in driving substantial change in market behaviour, which can only be achieved through serious enforcement. CCTS is the right instrument; whether it becomes the right intervention depends entirely on the rigour of its enforcement, and on that question, the evidence so far offers cautious grounds for hope, not confidence.
Diya Shah is a Research Assistant with the Centre for Economy and Growth at the Observer Research Foundation.
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