China is preparing to tighten the rules for its national carbon market, signaling a pivotal change in the way the country regulates greenhouse gas emissions. On 25 August, the State Council announced that from 2027, certain industries will face absolute emission caps—a significant shift from the current system, which relies on carbon intensity benchmarks rather than fixed limits.
Since its launch in 2021, China’s emissions trading system (ETS) has grown into the largest in the world, covering more than 2,000 power companies. Under the current framework, firms are allocated free allowances based on their efficiency and must buy additional credits if they exceed their quota. Companies that pollute less can sell their surplus credits, but analysts note the system’s impact has so far been constrained by the large number of free permits distributed.
From 2027, sectors with relatively stable emissions—such as chemicals, petrochemicals, papermaking, and domestic aviation—are expected to transition to strict caps. This would build on the 2024 expansion, when steel, cement, and aluminum industries, which together account for about 60% of China’s greenhouse gas emissions, were added to the market.
‘...it is no doubt that the regulator already expects the emissions in these sectors to have peaked and plateaued and even being on declining paths now. I put a high likelihood some sectors (likely these three) will face an absolute cap from 2027. But this 2027 could be a compliance year, e.g. emissions, meaning the compliance of their 2027 emissions by the end of 2028’, explained Yan Qin, Principal Analyst at ClearBlue Markets.
Despite these reforms, coal remains central to China’s energy strategy. In the first half of 2025, the country approved new coal-fired power plants at the fastest rate in nine years. The government’s latest plan allows additional coal development until at least 2027, while also pushing measures to restrict emissions and accelerate renewable energy adoption.
Experts suggest that while carbon pricing will play a role, industrial policies may have a stronger impact in the near term. As Yan Qin notes, ‘In terms of the impacts on actual emissions, I think the effects of the carbon price will be less compared with industrial policies, such as the policy to curb overcapacity. The cost-passthrough mechanism is not mature and the regulator will be cautious in setting the carbon price too high. This means the level of ETS price will be quite below abatement technologies.’
China’s evolving ETS is expected to continue expanding and strengthening until 2030, serving as a foundation for monitoring and reducing emissions across power, industry, and aviation. For global businesses and investors, the shift from intensity-based targets to hard limits signals a new chapter in environmental accountability—one where high-quality carbon credits and credible sustainability strategies will become even more essential.