China will tighten its carbon trading market by introducing absolute emissions caps in some industries for the first time starting by 2027, the cabinet said.
The caps will be implemented first in industries with relatively stable carbon emissions by 2027, according to a statement by the State Council and Central Committee of the Communist Party. By 2030, China’s nationwide carbon market or emissions trading scheme (ETS) will be basically established.
The national carbon market, which would replace the current system of eight pilot markets launched in 2021, would have absolute emissions caps and a combination of free and paid carbon emissions allowances (CEAs), the statement said.
Currently, CEAs are based on carbon intensity benchmarks that are reduced over time, rather than absolute emissions caps.
Firms are granted a quota of free CEAs and if actual emissions exceed a company’s quota during a given compliance period, it must buy more allowances from the market to cover the gap. If its emissions are lower, it can sell its surplus CEAs.
The new Chinese cabinet document is providing much-needed clarity on the development of the country’s carbon markets, showing that China considers them a key tool for achieving its decarbonization goals.
The document states that the Emissions Trading Scheme (ETS) will expand by 2027 to cover all major carbon-emitting industries, though specific sectors were not named. Analysts expect that this expansion will include chemicals, petrochemicals, papermaking, and domestic aviation. The new regulations will also allow banks and financial institutions to participate, which is expected to increase market liquidity.
While China previously announced plans to expand its carbon market to include steel, cement, and aluminum, a significant number of free allowances has limited the market’s impact on carbon emissions. The clear timeline for expansion is a positive step, but it remains to be seen whether it will be effective in significantly reducing the country’s massive emissions.
