Introduction

India launched a Carbon Credit Trading Scheme (CCTS) in 2023 as one of the key mechanisms to drive industrial decarbonization. In October 2025, the Ministry of Environment, Forest, and Climate Change (MoEFCC) announced greenhouse gas emissions intensity targets (GEI) for 283 obligated entities (OEs) across four sectors viz. Aluminium, Cement, Chlor Alkali, and Pulp and Paper. In January 2026, GEI targets were issued for 208 OEs across four more sectors viz. Textile, Petrochemical units, Secondary Aluminium and Petroleum refinery.

Targets have been set for FY2026 and FY2027. Obligated Entities that reduce their emission intensities below the specified targets will receive carbon credits equivalent to their total quantum of avoided GHG emissions corresponding to their production in the target years. OEs that do not meet their targets are required to meet the shortfall by purchasing carbon credits from the upcoming Indian Carbon Market at a market-discovered price. Trading under the Indian Carbon Market is expected to begin in the second half of 2026.

For the CCTS to succeed, emission intensity targets must be set at an adequately ambitious level. If the targets are set too leniently, most obligated entities will exceed them, leading to an oversupply of carbon credits. This was one of the factors contributing to the excess supply of Energy Saving Certificates (ESCerts) under the Perform, Achieve, and Trade (PAT) scheme. On the other hand, if targets are set too stringently, compliance may require significant cost increases, potentially raise prices and affect the broader economy. Target-setting therefore involves a careful balancing act backed by rigorous and transparent techno-economic analysis.

In this article, we examine the GHG Emission Intensity (GEI) targets for the primary Aluminium sector. We compare these targets with the likely emission intensity reduction in the sector, considering energy efficiency improvement trends and the legal requirement to meet renewable energy consumption targets. We start by looking at the target setting process prescribed under the CCTS.

2. Target Setting Process

The Bureau of Energy Efficiency (BEE) is the administrator of the Carbon Credit Trading Scheme. Among other responsibilities, BEE is entrusted with developing the GHG emission intensity trajectory and targets for the obligated entities. BEE has published a methodology for setting these targets. As per this methodology, BEE will consult with a committee of experts to determine sectoral and sub-sectoral GHG emission intensity targets, aligned with India's Nationally Determined Contributions (NDCs). A trajectory will be set up to 2030, which will be reviewed periodically. This trajectory will consider available technology and costs of implementation. Individual targets for obligated entities will then be assigned based on their relative GHG emissions-intensity compared to the lowest level within the relevant sub-sector.

BEE has published targets for individual Obligated Entities. However, it has not released the underlying rationale, assumptions, or analytical basis for these targets, as per its stated methodology. Publication of such a document is critical to establishing the credibility and transparency of the targets. Furthermore, the targets have been published only for two years. Ideally, the targets should have been published through 2030, with a provision for mid-term review. This is particularly important because most meaningful investment decisions are made on the basis of long-term policy certainty.

3. GEI targets under CCTS

As per the Greenhouse Gases Emission Intensity Target Rules, 2025, GEI target has been given to each Obligated Entity in terms of tonne CO2 equivalent / tonne of equivalent product of its output. The notification also provides GEI and equivalent major product output for the baseline year FY2024. Based on this data, the total GHG emissions of the OEs in the baseline year is about 480 million tCO2 eq. This is about 11% of India's estimated total GHG emissions (4371 million tCO2 eq.) in that year. The Iron and Steel sector with about 350 million tCO2 eq. is not covered under the current CCTS scheme, although it was included in a draft notification issued in June 2025. Sector-wise targets vary with the highest targets set for the Pulp & Paper sector of reducing its emission intensity in FY2027 by 6.5% relative to the baseline of FY2024 and the lowest target is 2.7% for the Cement sector. The primary aluminium sector is the third-largest emitter and accounts for about 16% of the total baseline emissions covered under the current CCTS scheme. It is expected to reduce the emission intensity by 4.8% at an aggregate level by FY2027.

Figure 1: (a) % Share of GHG emissions of different sectors under the CCTS in baseline year, FY2024, (b) No. of OEs, (c) % Reduction in the weighted GEI of all OEs in the sector as per the target in FY2027, relative to baseline FY2024

Source: Prayas (Energy Group) compilation from GEI Target Rules notifications dated 08.10.2025 & 13.01.2026

4. GEI targets for Aluminium Sector

The manufacturing of primary aluminium involves two major steps: refining bauxite to produce alumina in a refinery; and producing primary aluminium from the refined alumina in a smelter.

Alumina is refined from bauxite using the Bayer process. Typically, about 2.5–3.0 tonnes of bauxite are required to produce 1 tonne of alumina, depending on ore quality. The process primarily requires thermal energy of about 8-14 GJ per tonne of alumina. The CCTS covers five alumina refineries: the three largest refineries, located in Odisha, which together account for more than 85% of India’s total alumina production, and two smaller refineries, one located in Karnataka and the other in Jharkhand.

Primary aluminium is produced from alumina using the Hall-Heroult electrolytic process. Approximately 2-3 tonnes of alumina are required to produce 1 tonne of Aluminium. The process is highly electricity-intensive, requiring around 13–15 MWh of electricity per tonne of aluminium. As per the FY2023 production levels, this approximately translates to about 10% of India's total industrial electricity consumption for FY2023. Furthermore, the process demands continuous, highly reliable power supply, as interruptions can damage the electrolysis cells. Consequently, most large aluminium producers in India operate captive thermal coal-based power plants. The CCTS covers eight smelters: 5 of them in Odisha and 1 each in Chhattisgarh, Uttar Pradesh, and Madhya Pradesh.

Figure 2. GHG emissions of smelters and refineries in FY2024 as per GEI notifications

Source: Prayas (Energy Group) compilation from GEI Target Rules notification dated 08.10.2025

As shown in Figure 2, smelters account for 91% of the total emissions from the aluminium sector under CCTS. The majority of the total emissions arise from energy consumption, whereas process-related emissions constitute only a minor share.

At an aggregate level, the targets imply a reduction in emission intensity of about 4.5% by FY2027 compared to the FY2024 baseline for the refineries and 4.9% for the smelters. The required reduction in FY2027 over FY2026 is almost double the reduction required in FY2026 over the baseline year.

Figure 3 (a) GEI targets for smelters (b) GEI targets for refineries

Source Prayas (Energy Group) compilation from GEI Target Rules notification dated 08.10.2025

The targets set for smelters are observed to have some consistency with respect to their performance; but this is not so in the case of refineries. In the baseline year FY2024, the smelter with the lowest GEI has an emission intensity about 32% lower than that of the smelter with the highest GEI. This lowest-GEI smelter has been given an improvement target of 4.26% in FY2027 over the FY2024 baseline. All smelters, except one, have been given targets proportional to the ratio of their GEI to the lowest GEI. For instance, a smelter with a GEI 1.13 times the lowest is assigned a target of 4.80%, which is 1.13 times the target of the lowest-GEI smelter.

For the baseline year FY2024, the refinery with the lowest GEI has an emission intensity that is 61% lower than that of the refinery with the highest GEI. No direct correlation between the comparative performance of the refineries and the GEI reduction targets is observed. Two out of the five refineries are given targets which are less stringent than the target given to the best performing refinery.

5. Analysing the targets

To assess the targets, we focus on two key decarbonization levers: energy efficiency and renewable energy. While other mitigation options exist, such as inert anodes, fuel switching to natural gas, and carbon capture, utilisation and storage (CCUS), these are unlikely to be commercially feasible at scale before 2030. Furthermore, we limit the analysis to the smelting process, which accounts for approximately 91% of the total GHG emissions of the primary aluminium sector currently covered under the CCTS.

5.1 Energy Efficiency

Aluminium smelters have been covered under the Perform, Achieve and Trade (PAT) scheme since 2012. PAT data indicates that by 2019, the specific energy consumption (SEC) of aluminium smelters had declined by nearly 26% compared to 2010, corresponding to an average annual reduction rate of about 3%¹. The Aluminium sector has consistently exceeded its assigned PAT targets across cycles and is currently estimated to hold around 1 million unsold ESCerts.

Assuming a modest 0.5% annual improvement in SEC for smelters², the energy efficiency improvements would lead to an overall reduction of 1.5% in the energy intensity by FY27 relative to the baseline year FY24. To estimate the corresponding emission reduction due to this reduced energy intensity, it is important to understand that the main source of emissions from smelters is the electricity consumption. Most of the smelters in India have captive coal-based power plants. Hence, considering an emission factor of about 1 kg of CO2/ kWh, this translates to a reduction of about 1.5% in the emission intensity. This reduction is less than that projected in NITI Aayog’s Roadmap for Aluminium Sector Decarbonization published in January 2026.

5.2 Renewable Energy

The Ministry of Power (MoP) has notified Renewable Consumption Obligations (RCOs) for designated consumers, which include all aluminium smelters covered under the CCTS. RCOs prescribe annual targets for the share of renewable energy (RE) in total power procurement. These obligations also apply to non-utility power procurement, which constitutes the bulk of electricity consumption for aluminium smelters. RCO compliance is assessed at the corporate level, rather than at individual plant level. Furthermore, aluminium smelters have been granted a concession, given its legacy captive thermal power plants, whereby only 50% of fossil-fuel based electricity consumption is considered for RCO compliance.

Taking these provisions into account, we estimate that aluminium smelters would need to source approximately 21.9%³ of their electricity consumption from renewable energy by FY2027, up from about 1% at present. It has to be noted that this is a legal requirement. While this represents a significant scale-up, it is also aligned with the publicly stated targets of 30% renewable energy by 2030 announced by two out of the three major aluminium producers in their annual reports⁴. Accordingly, compliance with existing legal requirement alone would result in an estimated 20.9% reduction in GHG emission intensity by FY2027 relative to the baseline year, compared to the CCTS target of about 4.9% for smelters, again considering an emission factor of 1 kg of CO2/ kWh.

Hence, a combination of the likely energy efficiency improvements and compliance with the legally mandated renewable energy consumption obligation is expected to deliver an overall GHG emission intensity reduction of approximately 22.4% by FY2027, substantially exceeding the targets set under the CCTS (4.9%). Assuming a 5%⁵ per year increase in primary aluminium production, this would result in an estimated 13 million carbon credits accruing to aluminium smelters by the end of FY2027, in addition to the roughly 1 million ESCerts already held by the sector.

Figure 4 - GEI of smelters: baseline, target, and possible trajectory

Source: Prayas (Energy Group) analysis based on PAT Cycles 1, 2 and 7 notifications, company reported data, PIER 2.0, RCO notification and amendment, GEI Target Rules notifications dated 08.10.2025 and 13.01.2026

6. Conclusion and Way Forward

Target setting in carbon markets is inherently complex and requires a careful balance between development objectives and emissions reduction goals. Our analysis of aluminium smelters indicates that the current CCTS targets seem to be weaker than what can be achieved through a combination of likely energy efficiency improvements and existing legal mandate for renewable energy uptake. As a result, the sector is likely to generate surplus carbon credits. This could lead to an oversupply of credits in the market, unless the other sectors have been assigned sufficiently stringent targets to absorb this excess.

Going forward, we recommend that the underlying data and studies used for target setting be made public to strengthen the credibility of and confidence in the CCTS. Furthermore, the approach used for setting individual targets for obligated entities should be uniform and available in the public domain. Modelling of likely scenarios can provide better estimates of target achievement and potential carbon market behaviour. Finally, compliance data should also be disclosed, as greater transparency can play a significant role in improving compliance.

Second, there is a need for an integrated and coherent policy vision, at least for critical sectors. For example, the aluminium sector is currently subject to GHG emission intensity targets as well as RCO targets, while parallel policies are being introduced to expand production. These objectives must be aligned to avoid policy contradictions and ensure that decarbonization goals are met alongside industrial growth.

Carbon Credit Trading Scheme is an ambitious scheme aimed at accelerating industrial decarbonization, and it builds substantially on the experience gained from the Perform, Achieve, and Trade scheme. However, given lessons from international experience, we should expect that CCTS will require its own learning curve. It is therefore important to continuously review the scheme and make timely mid-course corrections.