Chinese National Carbon Market
Establishment of the National ETS
China launched its national emissions trading scheme (ETS; quánguó páifàng quán jiāoyì tǐxì) on 16 July 2021, creating the world’s largest carbon market by covered emissions. The ETS was established under the Interim Regulations on the Administration of Carbon Emissions Trading (2021) and is administered by the Ministry of Ecology and Environment (MEE). The scheme operates as a cap-and-trade system, covering approximately 5 billion tonnes of CO₂ emissions annually across its initial phase.
The development of the national ETS followed seven regional pilot schemes operating since 2013 in Beijing, Shanghai, Tianjin, Shenzhen, Chongqing, Hubei, and Guangdong. The pilots informed the design of the national system, including rules for allowance allocation, monitoring, reporting, and verification (MRV), and compliance enforcement.
Carbon Allowances and Allocation
Covered enterprises receive carbon emission allowances (páifàng quán) allocated primarily through a benchmarking methodology. In the power sector, allowances are allocated based on output-weighted emissions intensity benchmarks for different generation technologies (coal, gas, and renewables). Benchmarks are set with reference to the 70th percentile of emissions intensity within each technology category, creating incentives for efficiency improvements.
Allowances are currently allocated free of charge during the first compliance phase. The MEE has announced plans to introduce auctioning of a proportion of allowances in future phases, consistent with the long-term trajectory toward tighter caps and reduced free allocation. Allowances are tradeable on the Shanghai Environment and Energy Exchange, which serves as the national trading platform.
MRV Requirements
The monitoring, reporting, and verification (MRV) framework is a cornerstone of the ETS. Covered enterprises must develop and implement a monitoring plan approved by the provincial MEE authority. Annual emissions reports must be prepared in accordance with the Guidelines for Accounting and Reporting of Greenhouse Gas Emissions and verified by accredited third-party verification bodies (héshí jīgòu).
Verification bodies must be registered with the MEE and are subject to quality assurance audits and sanctions for inaccurate verification. The MRV regulations impose deadlines for emissions reporting (31 March annually) and verification (30 April annually), with the compliance cycle aligned with the calendar year.
Covered Sectors
The ETS initially covers the power generation sector, including coal-fired, gas-fired, and renewable energy power plants with annual emissions exceeding 26,000 tonnes of CO₂ equivalent. Approximately 2,160 power generation enterprises participate in the first compliance phase.
The MEE has announced the phased expansion of sectoral coverage. The cement and steel sectors are scheduled to enter the ETS by 2025–2026, followed by aluminium, petrochemical, chemical, paper, and aviation sectors. The expansion will triple the number of covered enterprises and increase total covered emissions to over 8 billion tonnes, strengthening the carbon price signal and market liquidity.
Trading Rules
Trading on the national ETS operates through the listed trading platform and bilateral negotiations. The Measures for the Administration of Carbon Emissions Trading (Trial) establish trading rules including: minimum trading volume of 10,000 tonnes for listed trading; price limits of 10% above or below the previous day’s closing price for listed trading; and settlement through the Shanghai Environment and Energy Exchange clearing system.
Market participants include covered enterprises and, in future phases, institutional investors. The MEE has indicated that futures trading on carbon allowances will be introduced under regulation by the China Securities Regulatory Commission, with the Guangzhou Futures Exchange expected to host the carbon futures market.
Penalties for Non-Compliance
The Interim Regulations impose administrative penalties for non-compliance. Enterprises that fail to surrender sufficient allowances to cover their verified emissions are subject to: (1) an order to make up the shortfall within a specified period; (2) a fine of between ¥50,000 and ¥200,000; and (3) a deduction of the shortfall amount from the following year’s allowance allocation. In cases of serious non-compliance, the MEE may impose restrictions on government procurement eligibility and investment project approvals.
False reporting or manipulation of emissions data attracts fines of ¥100,000 to ¥300,000 and potential exclusion from the ETS for the responsible verification body. The MEE has published enforcement cases involving both enterprises and verification bodies.
CCER Voluntary Offsets
The Certified Chinese Emissions Reduction (CCER; zhōngguó hézhèng zìyuàn jiǎn pái liàng) programme provides a voluntary offset mechanism that complements the mandatory ETS. CCER credits are generated by emission reduction projects in sectors not covered by the ETS, including renewable energy, forestry carbon sinks, methane capture, and energy efficiency. The CCER programme was relaunched in 2023 after a six-year suspension, with updated methodologies and registration procedures.
Covered enterprises may use CCER credits to offset up to 5% of their compliance obligation. The CCER market is administered by the National Climate Change Strategy and International Cooperation Centre and trades on nine designated exchanges. The programme is expected to play an important role in mobilising private capital for climate mitigation and supporting China’s carbon neutrality target by 2060.