China’s carbon market set to introduce absolute emissions caps by 2027

By Niu Yuhan and Lin Zi

China plans to introduce absolute emissions caps to cover major industrial sectors by 2027, according to a policy document released on 25 August by the State Council and Central Committee of the Communist Party. It will then establish a nationwide emissions trading scheme (ETS) by 2030.

While the new document does not specify the sectors that will be added by 2027, industry figures like Tang Renhu, the chair of Sino Carbon Investment, expect they will include the chemical, petrochemical, papermaking and aviation industries. 

China to merge its carbon markets

The new system will combine free and paid carbon emissions allowances (CEAs) and operate alongside a transparent, standardised voluntary carbon market aligned with international standards, the document states. 

China currently runs both a compulsory ETS for several industries and a voluntary carbon market, known as the China Certified Emission Reduction (CCER) scheme. 

The ETS, launched in July 2021 for the power sector, was officially expanded in 2025 to include steel, cement and aluminium, and covers 60% of the country’s greenhouse gas emissions.

The CCER programme, originally launched in 2012 but suspended in 2017 due to low transaction volumes and data quality issues, was relaunched in January 2024 to complement the ETS. 

How China’s carbon market works

Currently, China’s ETS is intensity-based, allocating allowances according to a company’s output and emissions efficiency. Companies exceeding their quotas must buy additional CEAs, while those emitting less can sell their surplus. While this approach avoids hurting economic growth from restricting output, it has also resulted in overgenerous quota allocations and weakened the effectiveness of the carbon market, said Zhu Keli, founding director of the China Institute of New Economy. 

Rising carbon prices due to the emissions caps will put greater compliance pressure on companies, Shi Yichen, deputy director of the International Institute of Green Finance at the Central University of Finance and Economics, told the 21st Century Business Herald.

However, it will also increase the value of carbon assets, incentivising investment in emissions-reduction measures.

The introduction of the new industries will “definitely help to spur demand” for CEAs, said Camille Wee, an analyst at BloombergNEF. “Hopefully, this means a slightly more aggressive emissions pathway for China.”

The reforms are also closely tied to international trade pressures, particularly the EU’s Carbon Border Adjustment Mechanism (CBAM), which is set to impose tariffs on carbon-intensive imports from 2026, reports Bloomberg. Accurate emissions reporting and active participation in China’s carbon market will become increasingly crucial for Chinese exporters. 

First published in Dialogue Earth.

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