India’s CCTS Phase 2: What Tighter Targets Mean for Each Sector and Why the Next Gazette Notification Matters More Than the First
CCTS Phase 1 (FY2025-26 and FY2026-27) was calibrated to be achievable — establishing market infrastructure without creating financial strain. Phase 2, expected from FY2027-28, will be calibrated to India’s 2035 NDC intensity trajectory. For each of the nine covered sectors, Phase 2 means something different. This analysis maps what is coming and which companies need to start investing now.
Key Takeaways
- CCTS Phase 1 covers FY2025-26 and FY2026-27 with GEI targets that require approximately 1 to 5 percent reduction from FY2023-24 baselines across the nine covered sectors. BEE’s design intent was to use Phase 1 to build the MRV infrastructure, operationalise the Indian Carbon Market Portal, establish CCC trading on IEX and PXIL, and develop the ACVA verification ecosystem — not to create material compliance financial pressure in the first two years. Phase 1 was the infrastructure-building phase of the CCTS.
- Phase 2 covers FY2027-28 onwards and will be calibrated to India’s 2035 NDC — which commits to a 47 percent reduction in GDP emission intensity by 2035 relative to 2005. For hard-to-abate industrial sectors, achieving the NDC-aligned trajectory through Phase 2 CCTS requires GEI reductions of approximately 3 to 8 percent per year from FY2027-28 — compared to Phase 1’s 1 to 5 percent. This is a significant step-up in compliance ambition. BEE is expected to notify Phase 2 targets by FY2026-27 (one year in advance) to give obligated entities planning certainty for capital investments.
- The sector most vulnerable to Phase 2 tightening is aluminium — where the Scope 2 electricity component (from coal CPPs) represents approximately 85 to 90 percent of total GEI and cannot be reduced without either switching the electricity source (major capex) or benefiting from India’s grid decarbonisation (passive GEF decline). Aluminium smelters that have not invested in open access RE by FY2027-28 will face Phase 2 targets that are very difficult to meet through GEF decline alone — especially those with captive coal CPPs insulated from the national WAEF improvement.
- For steel (BF-BOF integrated), Phase 2 tightening creates a direct investment case for scrap-EAF expansion, DRI-EAF shaft furnaces, and open access RE for auxiliary and electric arc loads. The key BEE decision is whether Phase 2 targets are set at the sector average intensity level — giving average performers no margin — or at the top-quartile performance level, which would render the bottom quartile of the fleet non-compliant without major investment. The precedent from the PAT Scheme was sector-average targeting; the CCTS’s tighter ambition suggests top-quartile targeting may be considered for Phase 2.
- For fertilisers, Phase 2 tightening intersects with the HPO mandate. If the HPO mandates 2 percent green hydrogen purchase by 2030 and Phase 2 CCTS simultaneously requires GEI reductions consistent with the NDC, the fertiliser sector faces a double compliance pressure: reducing process emission intensity (achievable through energy efficiency) and introducing green feedstock (required by HPO but commercially expensive). The companies that invest in green ammonia capacity under SIGHT before Phase 2 targets are notified will have a compliance buffer; those that wait will face simultaneous CCTS and HPO compliance costs from 2028.
- The most important near-term question for industrial companies is not what Phase 2 targets will be — that is BEE’s decision — but what the lead time is for the capital investments that Phase 2 will require. A major open access RE PPA requires 12 to 24 months from procurement decision to first delivery. A DRI-EAF transition requires 5 to 7 years from FDI to first production. A new scrap handling and EAF steelmaking facility requires 3 to 5 years. Any investment that must be operational for FY2027-28 Phase 2 compliance needs a capital commitment decision by FY2025-26 at the latest — which is now. Companies that treat Phase 2 as a future planning problem rather than a present investment decision are making a capital allocation error.
The CCTS’s two-phase design was always intended to front-load market infrastructure and back-load financial stringency. Phase 1 was the handshake between government and industry — the government establishing the regulatory framework and the market mechanics, industry establishing the MRV systems and the compliance culture. Phase 2 is the contract — where the financial consequences of non-compliance become large enough to drive real capital allocation decisions.
BEE’s Phase 2 target design process — expected to involve consultation with obligated sectors, technical working groups on sector-specific abatement potential, and alignment with MoEFCC’s NDC delivery analysis — will determine whether Phase 2 represents a manageable intensification of Phase 1 or a fundamental step-change that requires large-scale capital investment across covered sectors. The 2035 NDC’s 47 percent intensity reduction target provides the external anchor for Phase 2 calibration: BEE cannot set Phase 2 targets so loose that India’s covered industrial sectors make no meaningful contribution to the NDC trajectory. The political economy of Phase 2 target-setting — balancing industrial competitiveness concerns, NDC alignment requirements, and the government’s industrial development ambitions — is the most consequential policy decision in India’s carbon market in the next two years.
Sector-by-sector Phase 2 exposure and investment readiness
CCTS Phase 2 Sector Exposure and Required Investment — FY2027-28 Onwards
| Sector | Phase 1 GEI Reduction Required | Phase 2 Estimated Requirement | Primary Abatement Lever | Investment Lead Time | Phase 2 Readiness |
|---|---|---|---|---|---|
| Aluminium (coal CPP) | ~4–6% over Phase 1 | ~20–35% by 2030 — requires RE transition | Open access RE for smelting loads; BESS for firm power | 3–5 years for large OA RE PPA | Low — coal CPP operators must begin investment now |
| Steel (BF-BOF) | ~2–4% over Phase 1 | ~15–25% by 2030 — mix of scrap blending and RE | Scrap blending increase; DRI-EAF for new capacity; open access RE | 2–3 years for scrap; 5–7 for DRI-EAF | Medium — scrap pathway achievable; DRI-EAF requires FDI decision now |
| Fertilisers (urea) | ~3–5% over Phase 1 | ~15–20% by 2030 — HPO intersects CCTS | Green ammonia feedstock substitution; energy efficiency; N₂O abatement | 3–5 years for green ammonia capacity | Medium for SIGHT holders; low for non-SIGHT producers |
| Cement | ~2–3% over Phase 1 | ~10–15% by 2030 — already well advanced | Clinker ratio reduction; RE electricity; blended cements; waste heat recovery | 1–2 years for most levers | High — cement has been improving GEI since 2000; Phase 2 manageable |
| Petrochemicals | ~2–3% over Phase 1 | ~12–18% by 2030 — steam and hydrogen reform | Steam cracker efficiency; H₂ from RE; carbon capture on reformers | 3–5 years for meaningful reduction | Medium — large capex in refinery integration; CCUS pathway far horizon |
| Chlor-alkali | ~3–5% over Phase 1 | ~15–20% by 2030 — membrane conversion complete by then | Membrane cell technology replacement (replacing mercury/diaphragm); RE electricity | 2–3 years for membrane conversion | High — membrane conversion underway; RE brings further improvement |
Frequently Asked Questions
Will Phase 2 CCTS targets apply the same intensity-based design as Phase 1?
Yes — the CCTS framework under the EC Amendment Act 2022 is explicitly intensity-based (GHG emission intensity per unit of output) rather than absolute-cap-based. This is consistent with India’s NDC intensity framing and will not change in Phase 2. An intensity-based CCTS allows production volume to grow while still requiring emission intensity improvement — a company that doubles production while halving GEI contributes positively to the Phase 2 trajectory, even though its absolute emissions are unchanged. This design accommodates India’s industrial growth ambition while still creating genuine carbon efficiency incentives.
Can accumulated Phase 1 CCC surpluses be banked for Phase 2 compliance?
The CCTS framework does not explicitly prohibit banking of CCC surpluses between phases, but the detailed procedure for Phase 2 banking provisions has not yet been published by BEE. The PAT Scheme allowed ESCert banking between cycles, which suggests a similar provision may apply to CCC banking. However, BEE may apply a banking discount or a validity period limit to avoid excessive CCC accumulation suppressing Phase 2 prices. Companies over-achieving Phase 1 targets should engage with BEE’s Phase 2 consultation process to advocate for clear banking provisions — since banking enables the efficiency signal to carry forward and rewards early movers appropriately.
Sources
- Bureau of Energy Efficiency — CCTS Detailed Procedure and Phase 2 development roadmap
- MoEFCC — Greenhouse Gas Emission Intensity Target Rules 2025 — framework for Phase 2 calibration
- NITI Aayog — India’s 2035 NDC and sectoral decarbonisation trajectory analysis
- Climate Policy Initiative India — India carbon market Phase 2 design options analysis, 2025