We have a Perfect Recipe to Kill Carbon Market in India

Too many cooks & No Chef

India is at a crucial stage in its clean energy and climate transition, aiming to achieve 500 GW of non-fossil fuel capacity by 2030, reduce the emission intensity of its economy, and expand renewable energy across all sectors. However, its carbon and sustainability governance remains fragmented, with multiple agencies operating in silos. The Ministry of Power oversees renewable obligations and decarbonisation policy, while the Bureau of Energy Efficiency manages the Carbon Credit Trading Scheme (CCTS) under the Energy Conservation Act. The Central Electricity Regulatory Commission handles Renewable Energy Certificates (REC) and market mechanisms, the Ministry of Environment, Forest and Climate Change manages international climate commitments and voluntary carbon projects, and the Ministry of Commerce and Industry is increasingly involved as global Carbon Border Adjustment Mechanisms (CBAM) and green trade policies affect exports. In parallel, SEBI regulates ESG reporting and sustainable finance for listed companies, and state electricity commissions enforce renewable purchase obligations. This overlapping web of responsibilities, without a central coordinating authority, unified registry, or clear division of powers, has created policy confusion, duplication, and weak enforcement. At a time when India needs an integrated, transparent, and well-coordinated framework to attract investment and build a credible carbon market, it remains constrained by a scattered system that risks slowing its transition to a low-carbon, globally competitive economy.

In comparison, regions such as the European Union, the United Kingdom, China, and California each have a single authority responsible for managing key functions of their carbon markets, including the registry and trading platform, compliance and enforcement, carbon credit issuance, and penalty or buyout mechanisms. India, by contrast, relies on multiple agencies and platforms for these same functions—covering registry and trading, regulation, enforcement and compliance, credit issuance, and penalties—without any overarching coordination or umbrella authority. This fragmented structure weakens market efficiency, creates regulatory overlaps, and undermines the credibility of India’s carbon market.

This challenge is made worse by the weak and complex regulatory system that supports India’s clean energy transition. The shift from the Renewable Purchase Obligation (RPO) to the Renewable Consumption Obligation (RCO), along with new ideas like buy-out options, fixed compliance prices, and capped penalties, could turn decarbonisation into a paperwork exercise rather than a real market change. Instead of encouraging investment in renewable energy, these measures may reduce demand, shake investor confidence, and stop the carbon market from growing. This could end up being the perfect way to damage India’s young carbon ecosystem before it fully develops.
This blog will unpack the institutional shift, compare RPO vs RCO, identify the legal basis and power shift, then analyse two specific proposals — one under the Electricity Act, 2003 amendment and one under the Central Electricity Regulatory Commission (CERC) draft — and show how they undermine clean‑investment signals and the carbon market.

 1. RPO and RCO: What’s the difference?
RPO was India’s original compliance mechanism for promoting renewables. Under Section 86(1)(e) of the Electricity Act, 2003, distribution licencees, open‑access consumers and captive users (as states defined) were required to procure a specified percentage of their electricity supply from renewable sources. The logic: obligate utilities (or licensees) to purchase green power or RECs to meet targets.

RCO, by contrast, introduced via the Energy Conservation Act, 2001 (Amendment 2022), shifts focus from purchase to consumption of non‑fossil (renewable) energy by designated consumers — including DISCOMs, open‑access consumers and captive users. Under RCO, the target is set as a share of total energy consumption of a designated consumer that must come from eligible renewable sources.

Some of the key contrasts:
The RPO and the RCO differ fundamentally in their legal basis, scope, and enforcement mechanisms. The RPO derives its legal anchor from the Electricity Act, 2003, implemented through regulations framed by the State Electricity Regulatory Commissions (SERCs), whereas the RCO is rooted in the Energy Conservation Act, 2001, administered directly by the Central Government through the Bureau of Energy Efficiency (BEE). Under the RPO framework, the obligated entities are primarily distribution licensees, open access consumers, and captive users, as notified by individual states. In contrast, the RCO covers designated consumers, including DISCOMs, open access consumers, and captive users, but operates on a nationally uniform basis notified by the Central Government.

The compliance routes also diverge significantly. RPO compliance can be achieved through the procurement of renewable power or the purchase of Renewable Energy Certificates (RECs), while RCO compliance allows a broader range of options—namely, direct consumption of renewable electricity (including from storage), purchase or self-generation of RECs (including those acquired under virtual Power Purchase Agreements), and payment of a buyout price, as recently permitted through government notification. Enforcement under RPO remains state-driven, relying on SERC regulations and the penalty provisions of Section 142 of the Electricity Act, whereas RCO enforcement is centrally governed under Section 26 of the Energy Conservation Act, which prescribes statutory penalties for non-compliance with renewable consumption norms.

The co-existence of RPO and RCO has created a fundamental regulatory dilemma — one that goes beyond semantics to the core of India’s federal and legal structure. Both obligations now apply, in overlapping form, to the same set of entities — DISCOMs, captive users, and open-access consumers — but they originate from different parent laws: the Electricity Act, 2003 for RPO and the Energy Conservation Act, 2001 (as amended 2022) for RCO. This duality raises the question: which obligation prevails when targets, compliance routes, or penalty structures differ? The Electricity Act, being a concurrent-list legislation, empowers state commissions to frame RPO regulations, while the Energy Conservation Act, a central statute, mandates RCO uniformly across the country. In theory, Section 173 of the Electricity Act gives it overriding force over other laws; however, in practice, the RCO regime is newer, more specific, and centrally notified, giving it stronger legal standing. The result is a constitutional grey zone — a tug-of-war between state regulatory autonomy and central directive power, where obligated entities face compliance uncertainty and possible duplication until the two regimes are harmonised.

  2. Journey From Concurrent list to Union list
Electricity (Entry 38, List III) is a concurrent subject. Hence the Electricity Act functions in a “shared” Centre‑State space; states regulate RPO via State Electricity Regulatory Commissions (SERCs). The EC Act, however, is central legislation and the RCO mechanism gives the Central Government direct control over consumption obligations across states. The upshot: this is a shift of renewable‑energy compliance from a “concurrent/regulatory” regime (state‑led) to a “union‑dominated” regime (central).

While the Electricity Act retains its place (and Section 173 gives it a non‑obstante clause), the later and more specific EC Act Amendment 2022 may prevail. In practice, the RCO framework is central‑driven, uniform, and encroaches upon what was earlier regulated under RPO by states.
The irony is striking — the Ministry of Power (MoP) is the nodal authority behind both RPO under the Electricity Act and RCO under the Energy Conservation Act, yet it is now trying to resolve a problem largely of its own making. With India’s renewable generation share hovering around 23%, against a combined obligation level approaching 30%, there exists a 7% supply deficit between available renewable energy and mandated compliance. Instead of addressing this structural gap through accelerated renewable capacity addition or market deepening or normalising the RPO / RCO trajectory to a realistic one, MoP has chosen a compounding route — introducing penalty and buyout mechanisms to monetise shortfalls. This approach may close the compliance books on paper but not the real energy gap on the ground. By converting unmet renewable obligations into a financial settlement, the Ministry effectively replaces physical decarbonisation with fiscal appeasement — a policy shortcut that risks stalling investment, weakening enforcement credibility, and undermining the integrity of both the renewable and carbon markets.

 3. Two new proposals: risk and distortion
  3.1 Proposal 1: Amendment under Electricity Act for cap penalty for RPO non‑compliance- Amendments to the Electricity Act are being proposed to monetise RPO non‑compliance via a capped fee (₹0.35/kWh to ₹0.40/kWh). When non‑compliance is monetised at a relatively low, known cap, the incentive to invest in renewables or buy RECs falls. Entities will evaluate: is it cheaper to pay for the cap than procure renewables? If yes, procurement weakens.

 3.2 Proposal 2: CERC draft buy‑out price for RCO non‑compliance
CERC’s draft proposes a buy‑out price mechanism under RCO compliance: for FY 2024‑25, ₹245/MWh (~₹0.245/kWh), i.e. a 5% premium over the previous year’s REC price. A designated consumer may meet its RCO by paying this buy‑out price instead of consuming renewables or buying RECs. It looks flexible, but it distorts market incentives.

Unlike global carbon markets, India’s proposed RCO buyout functions as a price ceiling, not a deterrent. In the EU ETS, penalties exceed €100 per tonne of CO₂—well above market prices—to ensure real emission cuts. The UK and California maintain rising price floors, keeping compliance costlier than avoidance and sustaining investor confidence. India’s approach—fixing the buyout at just 5% above REC prices, equivalent to only US $5–6 per tonne of CO₂—does the opposite. It makes non-compliance cheaper than genuine decarbonisation, discouraging renewable procurement and effectively capping the carbon price before the market even begins.

 4. How these proposals blunt renewables investment and kill carbon markets
- Price ceiling effect: Once a buy‑out price exists, it sets a cap on REC and carbon credit prices. No one pays more than the buy‑out. Scarcity signal vanishes.
- Broken investment signal: Developers see no premium for renewables when compliance is capped; obligated entities rationally prefer to pay and avoid procurement.
- Carbon market distortion: Carbon market demand collapses; the buy‑out becomes a “pay‑to‑pollute” instrument, undermining real abatement.
- Dual compliance confusion: RPO and RCO co‑exist temporarily, creating overlap and regulatory uncertainty.

 5. Why this is a “perfect recipe” to kill the carbon market
The carbon market thrives on credible demand and scarcity pricing. The buy‑out and capped non‑compliance fees suppress this. With artificially cheap compliance, carbon and renewable attributes lose value. REC and carbon credit markets stagnate, and the expected revenue stream for developers disappears. Investors will avoid forward contracting of green attributes, killing liquidity and depth in India’s nascent carbon market.

 6. How to fix it RPO RCO conundrum

Way Forward: Introduce Floor Pricing and Limit Buyout to Preserve Market Integrity

6.1 Replace Cap with a Dynamic Floor Price:
Instead of capping the buyout or penalty at a low, fixed rate, introduce a rising floor price—set above prevailing REC or carbon credit prices (₹1.0–₹1.5/kWh)—and indexed to inflation or international carbon benchmarks. This ensures that non-compliance is always costlier than market participation, preserving the incentive to procure renewable energy or carbon credits and protecting investor confidence.

6.2 Ceiling on RCO Buyout Linked to Renewable Deficit:
The RCO buyout mechanism should not be open-ended. It should be available only up to the quantum of the national renewable generation shortfall relative to total RCO obligations—i.e., the deficit window. Once the buyout ceiling (representing, say, the 7% renewable deficit) is reached, no further buyout should be allowed, forcing the rest of the obligated entities to comply through renewable procurement or REC purchase. This ensures that buyout operates on a first-come-first-serve basis and remains a temporary backstop, not a permanent escape route.

6.3 Earmark Buyout Revenues for Capacity Expansion:
All proceeds from the buyout should be ring-fenced into a Green Expansion Fund dedicated to financing renewable generation, grid balancing infrastructure, and energy storage capacity. This creates a feedback loop where buyout payments directly address the generation shortfall they compensate for.

6.4 Maintain Market-Linked REC and Carbon Prices:
Keep REC and carbon credit pricing market-determined, not administratively capped. Allow transparent trading to reflect actual scarcity, ensuring that renewable attributes retain real value. A healthy secondary market with clear price discovery is essential for scaling investment and linking with global carbon mechanisms.

6.5 Unify RPO and RCO Under One Coherent Framework:
Eliminate dual compliance confusion by merging RPO and RCO into a single, centrally coordinated but state-implemented system. A unified obligation, single registry, and clear legal hierarchy would reduce duplication, improve enforcement, and align India’s renewable and carbon markets under one credible compliance regime.

In essence: replacing the cap with a floor strengthens investment signals, while imposing a buyout ceiling linked to actual renewable deficit prevents abuse. This twin reform would make India’s renewable and carbon markets credible, investable, and aligned with real-world decarbonisation outcomes.

  7. Conclusion
The transition from RPO to RCO is well‑intentioned but poorly designed if compliance becomes a cheap payment rather than real renewable use. The proposed capped penalty and low buy‑out price create perverse incentives — compliance without decarbonisation. If India’s carbon market is to succeed, price signals must reward renewable investment, not cap it. A low buy‑out price is indeed the perfect recipe to kill India’s carbon market before it even takes off. Creating a Carbon Market Authority of India or a similar unified regulator would bring India closer to international best practice, ensuring coherence, transparency, and investor confidence.