China’s Emissions Trading System: Expansion Progresses, but Enforcement and Price Setting Remain Critical
CBAM Weekly – Issue 69
Introduction: China is making progress, but full ETS compatibility is still in the future
China has taken important steps to expand its national emissions trading system. The system was launched in 2021 with the power sector. In 2024, it was extended to the steel, cement and aluminium sectors. As a result, the emissions trading system now covers around 60 percent of national emissions. This expansion represents a significant step forward. At the same time, key reforms are still missing, such as absolute emissions caps, clear reduction pathways, and an effective CO₂ price. These are not expected to be introduced until 2027.
Sectoral expansion strengthens system relevance
With the inclusion of more than 1,300 additional industrial installations in 2024, the Chinese ETS now captures central emission sources. In addition, fluorinated greenhouse gases were regulated for the first time in the aluminium sector. These steps show that China is further developing its climate policy and responding to external requirements. The European CBAM system, in particular, increases the pressure for effective CO₂ pricing. Absolute emissions caps planned from 2027 So far, the Chinese ETS has been based on emissions intensity. This means that total emissions may rise as output increases. This model is now planned to be gradually replaced with absolute emissions caps starting in 2027. Full implementation is scheduled by 2030. Absolute caps or a baseline scenario are considered prerequisites for international recognition of an emissions trading system. They create clear framework conditions and strengthen long-term confidence in target achievement. For the European CBAM, however, this shift comes too late, since emissions will already be priced at the border starting next year.
Weak enforcement and lack of price signals
Despite its growing scope, the system lacks enforcement power. All emissions allowances are currently allocated for free. This creates almost no direct cost incentives for emission reductions. Only in cases where companies exceed their free allocation are they required to purchase additional allowances. Experts are calling on China to introduce a binding reduction pathway for the annual volume of allowances. Such an instrument would provide planning certainty for companies and support price development. The system also currently lacks a market stability mechanism. In the EU, a Market Stability Reserve ensures that the supply of allowances is adjusted flexibly. In China, authorities intervene only on a case-by-case basis, unlike in South Korea. This practice makes forward-looking market management more difficult.
CO₂ prices are not sufficient
Current CO₂ prices in China are far below international levels. In 2025, the average price was around 11 US dollars per tonne. In the EU, the price in the same period was around 80 US dollars. Studies show that prices between 50 and 100 US dollars per tonne are needed to achieve climate targets. In particularly emissions-intensive sectors, abatement costs can reach up to 800 US dollars per tonne.
CBAM creates reform pressure
Starting in January 2026, the EU will impose CO₂ costs on imports of energy-intensive goods. For Chinese exports in the steel and aluminium sectors, this could result in additional annual costs of up to 2.8 billion RMB. Without adjustments, this money will flow to the EU. With a functioning domestic ETS, China could retain these revenues and use them for the transformation of its own industry.
Conclusion
China’s emissions trading system is at a turning point. The expansion into key industrial sectors is a step forward. But without absolute caps, effective price mechanisms and clear enforcement, the system will hardly stand internationally. For CBAM recognition from 2026, the reforms come too late. There is now little time left to build transparency, credibility and regulatory reliability. The next twelve months will be decisive.
Support
If your company operates in China or exports from there, we are happy to support you in assessing the impact of CBAM and the latest developments in the Chinese ETS. Contact us directly at helge@kolum.earth.