Designing a prospective carbon trading market in India: Key properties, enabling features and linkages

India is setting up a national carbon trading market and this paper aims to provide inputs regarding the design of a prospective carbon trading market in India. We address two related questions: first, what should be the key properties of this market and their enabling features; and second, how this market would connect to existing domestic market instruments in India such as Perform, Achieve and Trade (PAT) and Renewable Energy Certificate (REC)? Our suggested properties (P1-P5) of a well-functioning carbon market include homogeneity, low entry barriers, liquidity, efficiency, and transparency, which are instrumentalized through ten enabling features (F1-F10). To integrate India’s existing market mechanisms PAT and REC into a unified carbon market, we suggest fungibility of trading units of REC and PAT, common compliance and trading cycle and creation of single meta-registry. Finally, we propose a 3-phase framework for an integrated and fully functional Indian carbon market over the next 10 years outlining its key features, challenges and implementation strategies. We believe that our recommended carbon market design is well suited to India’s context and would lead to better outcomes. Our design framework can be utilized by other jurisdictions setting up new carbon markets as well as to implement linkages with related domestic market mechanisms.