China, the world’s largest greenhouse gas emitter, has taken a significant step toward climate action with the launch of its National Emissions Trading System (ETS).
Officially operational since 2021, China’s ETS is now the largest carbon market in the world by volume of emissions covered, initially targeting over 2,000 power sector entities responsible for more than 4 billion tonnes of CO₂ annually. While still in its early stages, the system is a foundational pillar of China’s long-term climate strategy, and signals the country’s growing role in shaping global carbon pricing mechanisms.
China’s ETS differs from more mature systems like the EU ETS in several key ways. Rather than a fixed cap on total emissions, the system currently operates on an intensity-based approach, setting emissions benchmarks per unit of output (e.g., tonnes of CO₂ per MWh of electricity). This reflects China’s emphasis on economic efficiency and development parity, while still incentivizing lower-carbon production.
The system began with the power sector, which is both the largest emitter and one with relatively reliable data. Other sectors, such as cement, steel, aluminum, and petrochemicals, are expected to be gradually integrated, which would significantly expand the market’s scope and impact.
Key Features
While the system remains under development, several structural elements highlight China’s intent to build a robust national carbon market:
- Coverage of major emitters: The system currently includes firms emitting more than 26,000 tonnes of CO₂ per year, covering roughly 40% of China’s total emissions.
- Allowance allocation based on benchmarks, not absolute caps, providing flexibility for economic growth while promoting efficiency.
- Real-time emissions data reporting, supported by a national registry and verification system, though concerns around data accuracy persist.
- Plans for a trading platform that will allow for greater price discovery and liquidity as the system matures.
Recent policy documents suggest that future iterations of the ETS will transition to absolute caps, introduce auctioning of allowances, and eventually enable trading of offsets and removals, particularly from nature-based solutions (NbS). This NbS integration into China’s ETS could create a significant demand signal for ecosystem restoration, afforestation, and soil carbon projects. It also opens a pathway to scale domestic carbon sinks and align land-use policy with national climate targets, while contributing co-benefits for biodiversity, water, and rural livelihoods.
Potential to Lead the Global Carbon Market Landscape
Despite its differences from Western carbon markets, China’s ETS has the potential to become a global benchmark, not just because of its scale, but due to its integration within a broader national policy framework. China’s dual carbon goals, peaking emissions before 2030 and achieving carbon neutrality by 2060, are central to the country’s economic planning, and the ETS is seen as a critical tool to support those targets.
China’s ETS also has implications for carbon-intensive global supply chains, especially as Europe implements the Carbon Border Adjustment Mechanism (CBAM). By developing a credible, transparent carbon pricing system, China can protect its trade position, while also aligning with international climate norms.
The Environment Consultant 