New Carbon Era

China's national carbon emissions market opened for trading on July 16, 2021.　

The number of companies covered grew from an initial 2,162 power plants with a combined 4.5 billion tons of CO2 emissions to over 3,370 industrial plants in the power, steel, cement and aluminum sectors in the past five years. By July 2026, cumulative trading volume had reached 924 million tons, with total transaction value exceeding 62.2 billion yuan (US$9.29b).　

"The carbon market has become a core tool for China to attain its carbon peaking and neutrality goals, with growing trading volume and liquidity," noted Ding Ying, an expert in climate finance and carbon markets, although she added that the market is still developing.　

"It's still in a phase of institutional maturation and sectoral expansion in comparison with advanced markets like the EU's. There are challenges ahead, both in supervision and in balancing emissions reduction with industrial development," Ding said.

After exploring the mechanism in 2009, China launched carbon trading pilots in seven provinces and cities in 2011, including Beijing, Shanghai and Guangdong Province, to test different models.　

"These pilots helped regulators work through the nitty-gritty of emissions accounting, quota allocation and compliance enforcement, accumulating invaluable localized experience for the national carbon market," Ding said.　

Since its launch, the carbon market's legal framework has evolved.　

In 2024, the State Council issued the first administrative regulations on carbon trading, establishing clear rules on quota allocation, emissions verification, compliance and enforcement. They provided the first comprehensive legal framework, raising penalties and turning allowances from administrative quotas into enforceable assets, and giving companies the needed certainty to invest in long-term decarbonization while laying the groundwork for international alignment.　

The same year, China launched a national voluntary greenhouse gas emissions reduction trading market, commonly known as the CCER (China Certified Emission Reductions) market. It serves as a complementary mechanism to the mandatory carbon market to cover sectors beyond the biggest emitters.　

In 2025, the government released a guideline with a clear expansion timeline, roadmap and action plan for the carbon market, elevating it from a departmental task to a strategic national priority and setting the overarching direction for the decade ahead.　

In 2026, the Ecological Environment Code, which was published in March and came into force in August, enshrines China's carbon trading system into national law for the first time, upgrading its legal status from an administrative regulation to formal legislation. These provide a top-level policy framework to support the carbon market.　

China's climate change plan for the 15th Five-Year Plan (2026-2030) released in July states that CO2 emissions per unit of GDP will be reduced by 17 percent by 2030 compared with the 2025 level, while CO2 emissions per unit of production in sectors covered by the carbon market will drop by 3 percent over 2025 to achieve the country's carbon peaking target and fully meet China's 2030 Nationally Determined Contributions according to pledges made under the 2015 Paris Agreement.　

Zhang Xiliang, director of the Institute of Energy, Environment and Economy at Tsinghua University in Beijing, noted that besides the carbon market, there are other administrative ways to pass down carbon reduction targets to lower-level authorities in provinces and cities and to individual emitting enterprises. "It was the main method used since the start of 11th Five-Year Plan (2006-2010) when the carbon market was still being built. But starting from the 15th Five- Year Plan, the carbon market will play a bigger role. The two approaches will work in tandem in the next five years," Zhang told NewsChina.　

"The carbon market, the most important market mechanism for emissions reduction, is basically turning the environmental cost caused by carbons emission into a tangible business cost, ensuring that emitting carbon comes at a price, while reducing it brings financial rewards," Ding said. She added that trading carbon credits allows companies to meet their compliance obligations without having to shut factories or restrict production.

After steel, cement and aluminum were included in the carbon market in 2025, 60 percent of China's industrial CO2 emissions were incorporated into the scheme.

　

As a direct result, in the first six months of 2026, the national carbon market registered an allowance trading volume of 52.96 million tons, representing a year-on-year increase of nearly 37 percent.　

In an interview with people.cn in 2025, Zhang Xiliang said that businesses now understand that emitting carbon carries a cost, while reducing emissions brings tangible benefits.　

That is what Ding has observed. When the market began, many regulated companies treated carbon as just another compliance burden. Their primary concern was to avoid fines, but they paid little attention to the value of their credits. But as the market expanded and enforcement tightened, most companies now treat carbon accounting and compliance as routine, she said.　

"Many large firms have dedicated carbon managers to weigh the costs, such as whether to retrofit or buy allowances, and they treat quotas as a factor of production. A few industry leaders are also using CCER offsets, building carbon-neutral supply chains and securing green export certifications," Ding said.　

Wuhan Iron and Steel, a key production base of China Baowu and headquartered in Wuhan, Central China's Hubei Province, has built a smart carbon data management platform that enables real-time monitoring and traceability of carbon emissions across its production process. Through years of sustained investment in low-carbon technology retrofits, its carbon emissions intensity has dropped by more than 14 percent. This has not only eased pressure from allowance shortfalls and reduced compliance costs, but in some years it generates revenue by selling surplus allowances.　

Ding said the trade rules in overseas markets, such as the EU Carbon Border Adjustment Mechanism (CBAM), are forcing Chinese companies to take improving carbon management seriously. Additionally, China's top-level policies are signaling that the quota policy will be tightened in future reforms, and this pushes companies to take action.　

Meanwhile, low-carbon purchase requirements from downstream clients are playing a role too. But Ding added there are big differences in carbon management between firms. Big companies are more proactive in managing their carbon assets while a lot of small- and medium-sized companies (SMEs) are still in the phase of "meeting compliance."

China's carbon market has strong compliance performance, and companies meet their obligations at remarkably high rates every year, with prices and trading dynamics largely driven by policy signals rather than market demand and supply, Ding noted.　

The EU ETS has operated for over 20 years with active daily trading across spot and futures markets. By contrast, China's market sees little activity for most of the year, with volumes surging only as the compliance deadline approaches. This is a typical compliance-driven pattern, even though the situation is improving gradually, Ding said, adding that "there's space for improvement in terms of market activity."　

Policies are the core factor affecting carbon prices and fluidity. Previously, because allowances could be carried over indefinitely, many companies hoarded surplus credits to hedge for future uncertainties, resulting in extremely low market liquidity and forcing trading to become concentrated around compliance deadlines, undermining the carbon price signal. In 2024, the MEE released a guideline that said key emitters can carry over no more than 60 percent of their surplus 2024 allowances to the next compliance cycle, and the remaining 40 percent, if not transferred within the required period, will be withdrawn and canceled, making it effectively worthless.　

"The policy makes it clear that carbon allowances are assets with a defined lifespan. This forces companies to reassess their carbon holdings and stop hoarding allowances, which increases market liquidity and allows carbon prices to more accurately reflect supply and demand," Ding said.　

After the policy, many companies started to sell their credits in advance and trading volume increased noticeably. "The policy was meant to break hoarding and push surplus allowances into the market. It did boost volumes in the short run, but the supply glut also weighed on prices," Ding said.　

The carbon market started out at 48 yuan (US$7) per ton emitted in 2021. Over the past five years, the carbon price has remained relatively low, with only a brief spike in 2024 when it reached over 100 yuan (US$15) a ton. The average carbon price was 62.4 yuan (US$9.3) per ton in 2025, a 37 percent drop from 2024, according to the center for energy and environment policy research at Beijing Institute of Technology. Since January the price has been hovering around 80 yuan (US$11.9) before it started to climb to around 90 yuan (US$13.5) a ton in July.　

Zhang told NewsChina that carbon prices should reflect the scarcity of allowances and the marginal abatement cost, which is how much it takes to reduce one additional metric ton of CO2 pollution. "The carbon price is key to determining whether some industries can make low-carbon investments," Zhang said, adding that companies investing in a green transition will only be financially rewarded if the carbon price is sufficient to cover their costs.　

By 2030, China's carbon market is expected to operate largely on an absolute cap, with a mix of free and paid allowance allocations, according to the national carbon market guideline released in 2025.　

Zhang said one focus of the market reform is to change the current free allowance to a mix of free and paid allowances, moving a portion of the allowances from free allocation to auctions, and raising that share over time, thus effectively raising prices. "This should be assisted with innovative financial tools. For example, banks can support low-carbon technology investment with low-interest loans, or issuing products like low-carbon bonds or insurance," Zhang said.���

Since adjusting regulations regarding allowance carryover and cancelation often disturbs short-term supply and demand and prices, Ding suggested the government conduct industry-wide assessments of policy impacts and provide a transition period for markets and companies to adjust, as well as setting price bands and diversifying market players and financial products. "If the price is too high, it will squeeze businesses' viability. If it's too low, it won't effectively constrain emissions. The level needs to be aligned with the actual tolerance of China's industrial transition," she said.　

Ding noted that China's national carbon market has moved beyond its pilot phase and entered a critical growth period characterized by institutional consolidation, sectoral expansion and functional upgrading. It now underpins the entire low-carbon industrial chain, from heavy industry transformation to carbon consulting, verification, finance and green supply chains. Given this, raising professional standards among verification institutions will be a key priority after the market expands again.　

Moreover, as China has a vast energy-intensive industrial base, many firms are still early in their transition. Ding warned that tighter quotas would lift carbon costs and risk carbon leakage offshoring industries to other regions with weaker emission constraints or lower carbon costs.

In May 2026, China, the EU and Brazil co-founded the Open Coalition on Compliance Carbon Markets in Florence, Italy. It serves as a voluntary multilateral platform to boost transparency, integrity and effectiveness of global compliance-based carbon markets in support of the Paris Agreement. Centering on MRV systems, carbon accounting methodologies and high-integrity carbon offsets, the Open Coalition facilitates policy dialogue, experience exchange and capacity building among participants, bridging developed and developing economies on carbon pricing governance.　

China is accelerating the construction of a more effective, dynamic and internationally influential carbon market, and is willing to share its practices in green and low-carbon development and carbon market construction with the international community, said Li Gao, vice minister of China's MEE, when he attended the first high-level meeting of the Open Coalition in Florence in May.　

Ding believes it is a good example to show China's active engagement in multi-lateral discussions, and that it is evolving from being a rule-taker into a rule co-builder.　

"Around the world, geopolitical frictions, energy shocks and a faltering global economy have added to the burden of the low-carbon transition. Climate diplomacy has made sluggish progress, and public attention to climate change has cooled somewhat. Yet China has neither wavered nor retreated and its climate policy remains serious, pragmatic and consistent," Ding said.　

The MEE disclosed in January that formulating cross-border emission trading rules is one of its major tasks this year.　

"More talks can be held around carbon border mechanisms like the CBAM to promote mutual recognition of accounting and verification standards, ease the dual-compliance burden on Chinese exporters and help shape fairer global rules," Ding said.