China’s national carbon market is undergoing significant changes. [para. 1] In January, certified carbon emission reductions (CCERs) were reintroduced and the voluntary market is set to expand beyond power plants to include key manufacturing industries. [para. 2][para. 3] Recently, the Ministry of Ecology and Environment (MEE) proposed draft regulations tightening carbon allowances for the National Emissions Trading System (ETS). This aims to stimulate market activity and promote the green transition of power generators. [para. 3]
These changes coincide with the European Union’s plan to implement a carbon tax on imports by 2026 under the Carbon Cap Adjustment Mechanism (CBAM). [para. 4] CBAM seeks to level the playing field by ensuring that imported goods include the costs of carbon pollution. Zhang Xiliang, head of the technical expert group for China’s national emissions trading scheme, explained that the extension allows Chinese companies to have a basis for dialogue with the EU, demonstrating that they have already paid carbon costs within China. [para. 5]
Domestically, companies have been hoarding carbon permits in anticipation of tighter allocations, which has led to low market liquidity. [para. 6] In 2023, while China’s carbon market covered 5.1 billion tons of CO2 (40% of national emissions), only 212 million tons were traded, a stark contrast to the EU market. [para. 6][para. 7] Experts suggest that an expanded market will increase trading volume by attracting more participants and improving the allocation of resources. [para. 8]
China’s carbon prices historically rose more than 30% after the 2024 Spring Festival, with prices doubling since their inception in July 2021. [para. 11] The recent rise in prices is influenced not only by compliance requirements, but also by companies rushing to meet emissions targets and concerns about missing quotas. [para. 12] The “Temporary Regulation on the Management of Carbon Emissions Trading”, in force since May, introduced heavy penalties for non-compliance, leading to companies holding on to quotas for higher prices in the future.[para. 13]
The MEE draft rules now require annual rather than biennial compliance reporting. [para. 19] Restrictions will be placed on carryover of unused permits and borrowing of future permits to stimulate market activity. [para. 20] A shift from free to partially paid quota allocations is also on the horizon, putting additional pressure on quotas. [para. 23] According to Zhang, director of the Institute of Energy, Environment and Economics at Tsinghua University, even an initial payout ratio of 1% could be significant and is expected to start soon. [para. 24]
The carbon market will expand to industries outside of power generation. By 2025, the electrolytic aluminum, cement and steel industries are expected to join, followed by chemicals and civil aviation by 2026, and petrochemicals and paper by 2030. [para. 28][para. 29] In March and April, MEE asked for public opinion on the greenhouse gas emissions accounted for by aluminum smelters and cement manufacturers, indicating the government’s intention to expand the market. [para. 33]
Challenges remain for the inclusion of the steel industry due to complex production processes that make it difficult to calculate emissions. [para. 36] From the second half of 2024, steel companies will have to submit data for monthly, baseline certification of annual carbon emissions. [para. 37] Major steel companies are already gearing up for carbon trading, making significant purchases of alternative energy. [para. 42]
Despite their ability to pass on compliance costs to consumers, industries such as steel and cement may face these costs amid weak demand and overcapacity caused by a real estate downturn. [para. 45] Financially strong firms may benefit from their carbon reduction initiatives, while smaller firms may struggle. [para. 46] Observers predict that the carbon market could lead to mergers and restructuring in high-emitting industries. [para. 51]
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