China will tighten its carbon trading system by introducing absolute emissions caps in selected industries from 2027, marking a significant shift in its climate policy, the State Council announced on Monday evening.
The plan, detailed in a government opinion, states that the caps will initially apply to industries with relatively stable carbon emissions. By 2030, China aims to fully establish a nationwide emissions trading scheme (ETS) with absolute caps in place, supported by a mix of free and paid carbon emissions allowances (CEAs).
Currently, China’s carbon market relies on carbon intensity benchmarks, which gradually decline over time, rather than capping total emissions. Companies are allocated free CEAs, and those exceeding their quota must purchase additional allowances on the market, while firms emitting less can sell their surplus.
Under the revised framework, the ETS will expand by 2027 to cover major emitting industries, though the State Council did not specify which sectors would be included. Analysts, however, expect chemicals, petrochemicals, papermaking, and domestic aviation to join.
This follows China’s September 2024 decision to broaden the ETS to steel, cement, and aluminium — sectors responsible for about 60% of the country’s greenhouse gas emissions. However, analysts have noted that the system’s impact has been limited so far due to the generous allocation of free allowances.
Launched in July 2021, the ETS initially covered only the power sector. The latest reforms signal Beijing’s intent to strengthen market mechanisms as part of its long-term strategy to peak carbon emissions before 2030.
Melissa Enoch
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