China will implement carbon market-wide absolute emissions caps by 2027

By 2027, China intends to implement absolute carbon emissions limitations and extend its trading mechanism to additional significant industries.

China’s State Council said Monday night that it will make a major change to its climate policy by tightening its carbon trading system by imposing absolute emissions restrictions in a few industries starting in 2027.

According to the strategy, which was outlined in a government opinion, the caps will first be imposed on sectors of the economy that have comparatively steady carbon emissions. China plans to implement a national emissions trading mechanism (ETS) with absolute caps by 2030, backed by a combination of paid and free carbon emissions allowances (CEAs).

Currently, rather than regulating overall emissions, China’s carbon market is based on carbon intensity benchmarks, which gradually decrease over time. Businesses are given free CEAs, and those that emit more must buy more on the market, while those that emit less can sell what they have left over.

By 2027, the ETS would be extended to encompass significant emitting industries under the updated framework, however the State Council did not say which industries would be covered. However, analysts anticipate the addition of domestic aviation, petrochemicals, chemicals, and papermaking.

Approximately 60% of China’s greenhouse gas emissions come from the steel, cement, and aluminum industries, which China decided to include in the ETS in September 2024. However, because of the large distribution of free allowances, observers have observed that the system’s influence has been limited thus far.

At first, the ETS only covered the power industry when it was introduced in July 2021. Beijing’s intention to fortify market mechanisms as part of its long-term strategy to peak carbon emissions before 2030 is indicated by the most recent measures.