As countries work towards their net-zero targets, carbon markets are increasingly being discussed as a central component of global decarbonisation efforts. By putting a price on emissions, they help nations meet their climate change goals — Nationally Determined Contributions (NDCs) — and drive investments in cleaner technologies. For instance, the European Union Emissions Trading System (EU ETS), the world’s most established carbon market, has played a crucial role in driving emissions reductions since its launch in 2005. A 2024 study showed that emissions covered by the EU ETS were 47% lower than 2005 levels, keeping the bloc well on track to meet its 2030 target of a 62% reduction.
The ‘cap-and-trade’ model used by the EU ETS also underpins the Carbon Border Adjustment Mechanism (CBAM), which extends carbon pricing to imported goods to prevent ‘carbon leakage’. Initially covering iron, steel, aluminium, cement, fertilisers, and electricity, CBAM requires importers to report emissions and, from 2026, pay for carbon-intensive imports—unless they can prove a carbon price has already been paid in the country of origin.
For Indian businesses exporting to Germany and other EU nations, this means increased reporting requirements that will undoubtedly require additional costs. At the same time, companies that proactively reduce emissions can leverage the regulation to position themselves as attractive business partners for EU companies — provided they make adequate investments to green their production process.
From a global perspective, it is clear that decarbonisation regulations and Emission Trading Systems will play a tandem role in shaping the manufacturing space. As with any major regulatory shift, concerns have been raised about what these developments would mean for India’s competitiveness.
However, it is worth noting that India is also taking significant steps to regulate carbon emissions. The country is developing its carbon market under the Carbon Credit Trading Scheme (CCTS), which will mandate industries to trade emissions allowances rather than rely solely on voluntary offsets. The Bureau of Energy Efficiency (BEE) is tasked with its development and will oversee the mechanism after its expected launch in FY 2026-27, ensuring sectors like power, steel, and cement gradually reduce their carbon footprints.
The Indian Carbon Market Framework comprises two key mechanisms: the Compliance Mechanism, which targets emissions from the energy and industrial sectors, and the Offset Mechanism, which incentivises voluntary GHG reductions from entities outside the compliance market. Together, these mechanisms provide a comprehensive approach to decarbonising the economy. The compliance market enforces reductions through the cap-and-trade system, in line with India’s Paris Agreement commitments. This transition is expected to attract foreign investment in clean energy projects, fostering collaboration in green technology and energy-efficient manufacturing.
As regulatory developments like CBAM drive European companies to reassess supplier relationships based on emissions performance, India’s transition to a compliance-driven system adds another layer of complexity for businesses – and poses potential opportunities. With carbon markets playing an increasingly central role worldwide, understanding these shifts will be crucial for companies looking to stay competitive in 2025 and beyond.
What to Expect in 2025: Trends and Emerging Strategies
1. Expansion of Carbon Markets
At the COP29, countries finalised most of the implementing guidance for Article 6 of the Paris Agreement, which pertains to market-based approaches at the national level for Parties to the Agreement. It establishes a framework for voluntarily cooperation to help countries meet their NDCs by enabling them to trade carbon credits generated through GHG reductions.
Participation in these approaches is optional, meaning Article 6 does not directly regulate or impact carbon markets involving non-Party stakeholders. However, its implementation signals a greater push for countries to implement international carbon trading systems, allowing for cross-border credit transactions and bolstering market integrity. As a result, more countries are likely to establish or strengthen their carbon trading schemes in the coming years.
According to the International Climate Action Partnership, 14 emissions trading systems are currently under development worldwide. Brazil recently adopted its own ETS, and the UK is working on a Carbon Border Adjustment Mechanism similar to the EU’s. Japan, who implemented the first mandatory carbon markets in Asia through the Tokyo and Saitama Cap-and-Trade programmes, is transitioning to a compliance-based system. Meanwhile, other countries like China – home to the world’s largest carbon market – and South Korea are refining their ETS models.
2. Stricter Regulatory Oversight
As carbon markets expand, governments are tightening compliance measures to ensure integrity and prevent loopholes. A key area of focus is the misuse of carbon offsets. While intended to support environmental projects like reforestation, some offsets have been criticised for lacking transparency and allowing companies to delay real emissions reductions.
Regulators are responding by increasing scrutiny over credit validity and strengthening mechanisms to prevent market manipulation. In November 2024, Germany intensified oversight of international offsets after its Environment Agency rejected carbon credits for 215,000 metric tons of CO2 linked to Upstream Emission Reduction (UER) projects in China.
Germany then altogether prohibited oil companies from carrying forward surplus emissions credits to meet emission reduction quotas of the Fuel Quality Directive under which the UER projects began. The reforms encourage companies to invest in tangible emission reductions rather than relying on offsets with questionable impact, with the aim to prioritise support for biofuel and green energy producers and foster meaningful decarbonisation within the transportation sector.
As other jurisdictions, including India and other emerging carbon markets, move toward compliance-driven frameworks, businesses may face greater expectations for accurate emissions reporting and credible carbon reduction strategies. Strengthened verification systems and enhanced due diligence requirements will be critical to maintaining the integrity of carbon trading markets worldwide.
3. International Collaboration
With mandatory carbon pricing gaining traction, cross-border cooperation is increasing. India is aiming to finalise a carbon credit deal with Japan in 2025, enabling emission reduction credits to be shared under Article 6.2 of the Paris Agreement. Similar negotiations are expected this year with South Korea and Singapore, with potential future deals involving Sweden and Germany.
Indo-German collaboration is also expanding through initiatives such as the Green and Sustainable Development Partnership. Projects like the Asia Low-Carbon Building Transition Project promote sustainable construction by integrating low-carbon concepts into new and existing infrastructure through financial pathways and capacity-building. Likewise, the Indo-German Support Project for Climate Action in India focuses on collaborative research and capacity-building efforts to decarbonize hard-to-abate sectors like cement and steel.
At the multilateral level, COP29 established a new global finance goal, increasing climate finance for developing nations to $300 billion annually by 2035, with a long-term ambition of mobilizing $1.3 trillion per year. This funding will support carbon markets, climate adaptation, and energy transition projects globally.
4. Integration of Advanced Technologies
Innovations in carbon reduction technologies are reshaping global decarbonisation efforts, while digital solutions may play a crucial role in the carbon market landscape – having the potential to enhance transparency, efficiency, and market integrity.
Digital Monitoring, Reporting, and Verification (MRV) systems are being adopted worldwide to ensure accurate emissions accounting. These systems, linked to national or international registries, are crucial for tracking emissions reductions and preventing double counting of carbon credits. Blockchain technology is also being integrated to provide secure and verifiable records of carbon credit transactions, ensuring that each credit is claimed only once—either by the country generating the emissions reduction or the country purchasing the credit.
Japan, Singapore, and the EU are advancing digital MRV adoption, while Jordan has pioneered one of the most comprehensive digital carbon market infrastructures in a developing country. With support from the World Bank, Jordan was the first developing nation to align its MRV and emissions registry systems with international standards.
In India, the government is identifying eligible technologies for Article 6 implementation, which will provide opportunities for industries to deploy advanced solutions in carbon capture, renewable energy, and efficiency improvements. Ongoing Indo-German collaborations are expected to drive investments in renewable energy technologies and sustainability-oriented R&D projects.
Conclusion
As the world endeavours to cut emissions, carbon pricing remains a powerful tool. Balancing economic growth with sustainability is no easy task, but with smarter policies and stronger enforcement, carbon markets have the potential to drive real climate action.
For India and Germany, strengthened partnerships will be instrumental in fostering sustainable development, policy innovation, and technological advancements. As compliance obligations grow and international trade becomes increasingly linked to emissions performance, businesses that embrace decarbonisation will not only advance global climate goals but also secure a competitive edge in the evolving global economy.