China has taken a significant step forward in its carbon reduction efforts by extending its carbon trading market to three major industrial sectors: steel, cement, and aluminum smelting. The Ministry of Ecology and Environment announced the expansion on earlier this week, marking the first sectoral growth of the market since its inception in 2021.
The plan unveilved by the Ministry outlines two stages for rollout in the next years. The 2024-2026 stage, already under way, is considered an initial one allowing both companies and government time to adapt and adjust. 2027 is set as the starting year for a broader expansion of the market’s coverage and a more serious reduction in carbon intensity.
China Carbon Market Expands Beyond Power Generation
Since its launch in July 2021, China’s carbon trading system has primarily focused on power generation. The initiative has already yielded results, with carbon emissions intensity in electricity generation dropping by 8.78% over the past few years, according to the ministry.
With the addition of these heavy industries, approximately 1,500 new enterprises will join the market. The steel, cement, and aluminum sectors collectively emit around 3 billion tonnes of carbon dioxide equivalent annually—more than 20% of China’s total carbon emissions.
Watered down?
Even though the announcement is about an extension of market coverage, carbon market analyst Mai Duong from Veyt questions its impact, especially because it doesn’t mandate an emission reduction from the new sectors for the year of 2024.
“The official plan further clarifies that there will be no 2024 compliance obligations for newly-added entities, the benchmark approach will be directly adopted from the subsequent compliance period and absolute cap on emissions is not yet on vision. We expect this latest update to have a slight bearish impact on prices of carbon allowances in the national ETS,” she says.
Duong also points out that although China initially planned to gradually integrate multiple industries into its emissions trading system (ETS), the expansion faced repeated delays. The postponements stemmed from concerns over data accuracy and fears that issues of oversupply, which previously affected the power sector, could arise in other industries.
A Key Strategy for Emissions Reduction
Despite the delays and challenges the expansion aligns with the country’s broader climate goals, reinforcing efforts to achieve peak carbon emissions before 2030 and carbon neutrality by 2060.
Combined with Europe’s Carbon Border Adjustment Mechanism (CBAM) these are two of the driving forces behind the market’s continnued development. The EU’s new carbon tariff system could create trade disadvantages for Chinese exporters, making the inclusion of additional industries in the ETS a strategic move to align with global carbon pricing mechanisms.
Since the launch of the carbon market in 2021, trading activity has increased, though prices remain lower than in Europe, limiting its impact on major polluters. Prices reached a record high of $14.57 (105.65 yuan) per ton in November 2024 but have since declined. This new phase in the market’s development could improve both liquidity and help it achieve its ultimate goal of reducing emissions.
Read more: China’s Carbon Market Sees Off Successful 2024 But Challenges Persist
