Carbon Pricing as a Valuation Input: A 2026 Practitioner’s Guide

India’s Carbon Credit Trading Scheme (CCTS), notified June 2023 under Section 14(w) of the Energy Conservation (Amendment) Act, 2022, has moved from a design exercise into binding law. Emission intensity targets for seven of nine obligated sectors — aluminium, cement, chlor-alkali, pulp and paper, petroleum refining, petrochemicals, and textiles, covering roughly 490 entities — are now in force for compliance years FY2025-26 and FY2026-27, baselined against FY2023-24. Iron & steel and fertiliser targets remain pending. Entities beating their intensity target earn tradeable Carbon Credit Certificates (CCCs, 1 tCO2e each); shortfalls require purchase and surrender, with first CCC trading expected mid-2026 on power exchanges under CERC oversight, registry held by Grid Controller of India.

The EU’s Carbon Border Adjustment Mechanism entered its definitive, financially binding phase on 1 January 2026. The Commission published the first quarterly certificate price — EUR 75.36/tCO2 for Q1 2026 — on 7 April 2026. For Indian exporters of steel, aluminium, cement, and fertiliser, this converts embedded carbon into an explicit, quantifiable cost at the EU border for the first time, with the payable share of embedded emissions rising from 2.5% in 2026 to 100% by 2034.

The single most important and counter-intuitive finding for valuers: as of June 2026, a domestic carbon price paid under India’s CCTS does not reduce a company’s CBAM liability. CBAM Article 9 permits deduction of a carbon price effectively paid in the country of origin, but the EU’s implementing regulation (draft published 13 May 2026) names the UK, China, and California as recognised origin-price jurisdictions — India is not on that list. This means an Indian exporter can pay twice: once domestically under CCTS, and again at the EU border under CBAM, with no netting between the two regimes at present.

There is no settled, India-specific Ind AS pronouncement on how to classify CCCs on the balance sheet. Internationally, IFRIC 3 (withdrawn but still influential in practice) required separate accounting for the credits, the obligation, and any free allocation rather than a single net position — and the absence of explicit guidance has produced documented inconsistency in how entities classify carbon credits (inventory vs. intangible asset vs. government grant) under IAS 38/Ind AS 38 principles. The FASB’s own exposure draft on environmental credit accounting exists specifically because no jurisdiction has fully resolved this classification question.

For valuation practitioners, this creates a genuine, current-dated input problem: a DCF for an obligated entity must decide whether to model CCC purchase/sale as a recurring opex/revenue line, whether banked CCCs (unlimited banking is permitted; borrowing is not) constitute a balance-sheet asset to be separately valued, and whether CBAM exposure should be reflected as a terminal-value haircut for EU-dependent revenue streams given the absence of any origin-price offset for India specifically.

Domestic tax treatment of CCC sale proceeds and the environmental compensation levy (2x average CCC trading price for shortfalls) falls to be read under both the Income Tax Act, 1961 and the Income Tax Act, 2025, since CCC transactions raise business income and capital receipt questions within the general charging and business income framework common to both Acts.

Until recently, carbon pricing showed up in an Indian valuation report as a paragraph in the ESG section — context, not cash flow. That has changed faster than most valuation models have caught up with. Two regimes that were theoretical even eighteen months ago are now binding law with real settlement dates: India’s own Carbon Credit Trading Scheme, and the European Union’s Carbon Border Adjustment Mechanism. Between them, a meaningful share of Indian industrial output now carries a carbon cost that is measurable, dated, and — this is the part valuers are still getting wrong — does not net out the way most people assume.

Two Regimes, Not One, and They Do Not Talk to Each Other

The CCTS, notified under Section 14(w) of the Energy Conservation (Amendment) Act, 2022, is India’s domestic compliance carbon market. Seven of nine obligated sectors — aluminium, cement, chlor-alkali, pulp and paper, refining, petrochemicals, and textiles, covering roughly 490 entities — now carry legally binding emission intensity targets for FY2025-26 and FY2026-27, measured against an FY2023-24 baseline. Entities that beat their target earn Carbon Credit Certificates they can bank indefinitely or sell; entities that miss must buy and surrender CCCs, with a shortfall penalty set at twice the average CCC trading price for that compliance year. First trading is expected on power exchanges by mid-2026.

Run alongside this, CBAM entered its definitive, financially binding phase on 1 January 2026. The European Commission published its first quarterly certificate price — EUR 75.36 per tonne of CO2 — in April 2026, and that price now attaches directly to embedded emissions in steel, aluminium, cement, and fertiliser shipped into the EU. The payable share starts modest, at 2.5% of embedded emissions in 2026, but climbs to 100% by 2034, which means the cost trajectory a valuer should be modelling today is considerably steeper than the headline 2026 number suggests.

Here is the finding that should change how every CFO in a CBAM-exposed sector reads their own compliance position: CBAM’s Article 9 allows an EU importer to deduct a carbon price ‘effectively paid’ at the point of origin, reducing the certificates owed. The European Commission’s implementing regulation — published in draft on 13 May 2026 — names the carbon-pricing jurisdictions it currently recognises for that deduction. The United Kingdom, China, and California are on that list. India, as of that publication, is not. A domestic carbon cost paid under CCTS, in other words, does not at present reduce a single euro of CBAM liability for the same tonne of steel or aluminium. An Indian exporter obligated under both regimes can end up paying twice on the same embedded emissions, with no mechanism to net one against the other.

What This Means Inside a DCF, Not Just in the Footnotes

For a valuer building a forward cash flow model for an obligated entity, this asymmetry is not background context — it is a direct input with at least three distinct lines to model separately rather than blend into one generic ‘carbon cost’ assumption.

The first is the domestic CCTS position, which behaves like a variable cost that can flip sign. An entity comfortably beating its intensity target generates a credit position that is a real, monetisable asset — subject to the practical caveat that unlimited banking is permitted but borrowing against future targets is not, and the targets themselves tighten meaningfully between FY26 and FY27 across every notified sector. A DCF that assumes a stable annual credit surplus without testing that assumption against the steeper FY27 trajectory is likely overstating a benefit that compresses on its own design.

The second is CBAM exposure on the export book, which should be modelled as a rising cost curve rather than a flat one, given the explicit 2.5%-to-100% payable-share schedule running to 2034. For an EU-dependent exporter, the terminal value calculation in particular needs to reflect that a cost that looks immaterial in year one of the explicit forecast period is not immaterial by year eight or nine, and treating it as a rounding error in the base year while ignoring its trajectory is the single most common modelling shortcut worth challenging in a review.

The third, and the one with the least settled answer, is how to treat CCCs sitting on the balance sheet at all. There is no India-specific Ind AS pronouncement that resolves whether a banked CCC is inventory, an intangible asset, or something closer to a government-issued credit instrument, and international practice under the equivalent IAS 38 framework has been genuinely inconsistent — inconsistent enough that international standard-setters are still actively working through exposure drafts on the question. A valuer who picks a classification without disclosing that the choice is a judgment call, rather than a settled rule, is overstating the certainty of that line item.

The Practical Read for CFOs and Founders Structuring Around This

None of this means carbon exposure should dominate a valuation that has other, larger drivers. It does mean that for any entity in a CCTS-obligated sector with material EU exposure, a valuation built without separating the two regimes — and without testing the assumption that domestic compliance cost offsets export-side CBAM cost — is working from an assumption the European Commission has explicitly not endorsed for India as things currently stand. That status can change; the recognised-jurisdiction list is a live policy instrument, not a fixed one, and India’s eventual inclusion would meaningfully alter the calculus for every exporter currently absorbing both costs.

Until that happens, the discipline worth applying is straightforward: price the domestic CCTS position on its own tightening trajectory, price CBAM exposure on its own rising payable-share schedule, disclose the balance-sheet treatment of any banked CCCs as a judgment rather than a certainty, and resist the temptation to let one regime’s number quietly absorb the other’s. Carbon pricing has moved from a disclosure exercise to a cash flow input faster than the accounting and valuation frameworks built to handle it, and the gap between those two speeds is exactly where a forward-looking valuation can go wrong if it is not addressed deliberately.