Why Policy Predictability Matters in Carbon Credit Projects

India’s transition to a low-carbon economy to comply with the Paris Climate Agreement will require investments in the hundreds of billions of dollars across renewable energy, industrial decarbonisation, sustainable infrastructure, clean cooking, waste management, and climate-resilient development. 

A well-functioning and robust domestic carbon market can help the country partly meet its financial needs by unlocking private capital at scale, thereby strengthening the country’s capacity to finance its climate transition. 

But to realise this potential, there is a pressing need for a predictable and credible policy environment that fosters long-term investor confidence and helps channel private capital towards India’s climate ambitions. 

The Long Game  

India’s climate ambitions will require not only significant amounts of capital, but also the confidence to deploy that capital into projects that can take years to develop, implement and generate returns. 

Projects such as afforestation/reforestation, ecosystem restoration, biochar, carbon removals, and some forms of industrial decarbonisation may take years to generate verified credits and meaningful returns.

Investors are therefore less likely to commit capital unless they have confidence that the underlying regulatory landscape will remain sufficiently predictable to safeguard the long-term economic viability of their investments. 

Similarly, in the case of projects with shorter rollout timelines, such as clean cooking, renewable energy, landfill gas capture, or methane-abatement projects, there is often a need for significant upfront capital expenditure. 

These investments are required because projects must undergo development, validation, monitoring and third-party verification before credits can be issued.  

For investors, policy predictability does not mean that regulations should never change. Carbon markets are evolving, and governments must retain the ability to respond to new scientific evidence, international developments, market integrity concerns and national priorities. 

What investors need, however, is greater clarity on how and when policies may change, the criteria that will guide those changes, and how projects that are already under development or have attracted investment will be treated during periods of transition. 

This distinction is important because policy uncertainty can directly affect project economics.

Changes in eligibility, methodologies, approval processes or crediting rules can alter revenue assumptions, increase financing risks and, ultimately, determine whether a climate project is able to proceed. 

The Missing Link 

Despite the growing momentum around carbon markets’ potential in India, greater clarity and consistency on policy and regulatory processes remain a critical missing link in the sector's development and scale-up. 

India has made significant progress in establishing a domestic carbon market. The Carbon Credit Trading Scheme (CCTS), notified in 2023, was subsequently expanded to include an offset mechanism for eligible projects. 

These are important steps towards building a credible market. The next phase will require greater clarity on implementation, project eligibility, methodologies, approval timelines, verification, market oversight, and the interaction between domestic and international carbon markets. 

The exclusion of clean cooking interventions from India’s positive list of activities eligible under its Article 6.2 framework has highlighted how changes in eligibility criteria can materially affect the economics and financing prospects of climate projects. 

Policy change is both inevitable and necessary. For investors and project developers, however, the key is whether such changes are introduced in a transparent, predictable and well-signaled manner 

Clear communication, transparent criteria, adequate notice, and appropriate transition arrangements can help ensure that policy evolution does not unnecessarily undermine investor confidence or projects already under development. 

Apart from changes to the eligibility of particular project types, carbon projects such as afforestation and reforestation (ARR), regenerative agriculture, biochar, methane capture and industrial decarbonisation also face structural challenges related to land aggregation, measurement, reporting and verification (MRV), and long credit issuance cycles. 

Addressing these challenges will be important if India is to move from establishing the foundations of a carbon market to building a market capable of mobilising capital at scale. 

The Way Forward 

The success of the CCTS in the long run will therefore depend not only on the strength of its governance framework, but also on the confidence that market participants have in how that framework will operate over time. 

Where changes are necessary, clear communication and appropriate transition arrangements can help protect confidence while allowing the regulatory framework to improve. 

Transparent rules, predictable approval processes, credible MRV systems and clarity around the treatment of projects during policy transitions can help reduce investment risk, strengthen market integrity and encourage greater private-sector participation. 

If India can combine policy ambition with policy predictability, its carbon market can become more than a mechanism for accounting for emissions reductions.

It can become an important channel for mobilising the private capital needed to finance the country’s broader climate transition and translate its Paris Agreement commitments into meaningful action. 

( Disclaimer: Views expressed are personal.

About the Author: Narendra Prajapati is CEO, MicroEnergy Credits)