China to launch nationwide emissions trading system

China plans to introduce absolute emissions caps for industry and some companies. It aims to do so as part of a nationwide emissions trading system. Introducing absolute caps is new for China, which has so far used measures focused on emissions intensity, the website ESGNews reported.

The country is signaling a shift to a fully functioning nationwide carbon market, which should be operational by the end of this decade and replace fragmented provincial systems. Absolute emissions caps will be applied to selected sectors from 2027, replacing the current system based on carbon-intensity benchmarks. By 2030, an ETS based on absolute emissions-reduction targets should be fully implemented across the country, replacing the patchwork of pilot systems launched after 2021.

Under the new system, companies will continue to receive free carbon allowances, but if their emissions exceed their allocated quotas, they will have to buy allowances. If, on the other hand, they remain below their quotas, they will be able to sell allowances. The system will therefore work similarly to the EU ETS.

Analysts emphasize that the key challenge for China’s system will be the gradual reduction in the number of free allowances. The relatively generous allocation of free allowances has so far weakened Chinese companies’ incentive to implement emissions-reduction measures.

The ETS will be expanded to include more sectors in 2027. Although the exact list of sectors has not been published, it is expected to include the chemical, petrochemical, paper and domestic aviation industries. This builds on commitments made in 2023 to expand coverage beyond the power sector to the steel, cement and aluminium industries. These sectors together generate approximately 60% of China’s greenhouse gas emissions.

A key step now is opening the carbon market to banks and financial institutions, which will improve liquidity and boost trading, positively affecting the system’s overall functioning. The move signals Beijing’s intention to make the carbon market not only a regulatory tool but also a financial mechanism supporting decarbonization.

Experts consider this timeline a positive signal of China’s climate ambitions. The system should help achieve the country’s goal of carbon neutrality by 2060.