On 26 March 2025 China's Ministry of Ecology and Environment published its work plan for including the steel, cement and aluminium smelting sectors in the national carbon emissions trading market. It is the first expansion of the national market since it began trading in July 2021, when it covered only power generation.
According to the ministry, the three sectors emit about 3 billion tonnes of carbon dioxide equivalent a year, more than 20% of China's total carbon dioxide emissions. The expansion is expected to add about 1,500 enterprises to the market. Ministry spokesman Pei Xiaofei said the national market would then cover more than 60% of China's carbon dioxide emissions. Reuters reported that total covered emissions would reach about 8 billion tonnes, up from about 5 billion tonnes from more than 2,200 power companies.
How the expansion works
The plan sets out two stages. The years 2024 to 2026 form a start-up implementation stage, and the period from 2027 onward a stage of deepening and improvement. The State Council approved the inclusion of the three sectors in March. Enterprises in the three industries with annual greenhouse gas emissions of at least 26,000 tonnes of carbon dioxide equivalent are defined as key emitting entities and will be included.
For steel and cement, the market will cover direct carbon dioxide emissions from fossil fuel combustion and industrial processes. For aluminium smelting, it will also cover two perfluorocarbons, tetrafluoromethane and hexafluoroethane, which are released during smelting and have very high global warming potentials. This is the first time the national market covers gases other than carbon dioxide.
The first compliance cycle for the new sectors covers 2024 emissions, with allowances to be surrendered by the end of 2025. In the start-up stage, allowances will be allocated free based on intensity benchmarks, meaning firms receive allowances in proportion to their output rather than against an absolute cap.
An intensity-based system
The intensity-based design is the most important difference between China's market and the EU emissions trading system. In the EU, a fixed and declining cap sets the total number of allowances, and the price adjusts to keep emissions within it. In China, allowances are allocated per unit of output, so total allocation rises if output rises. The market therefore drives improvements in efficiency per tonne of steel or cement or per megawatt-hour, but does not by itself cap total emissions.
China has said it intends to move toward absolute caps for some sectors over time, and the 2027 start of the work plan's second stage is the point at which officials have indicated the design will be refined. How fast that transition happens will be a key factor in whether the market drives absolute emissions reductions.
Power sector experience so far
The ministry said that carbon emissions intensity in power generation has fallen by 8.78% since the market began in 2021. That figure reflects both market incentives and other policies, including the rapid build-out of wind and solar and efficiency standards for coal plants. Allowance prices in the national market have risen over the period, though they remain well below those in the EU system.
Trading activity in the national market has been concentrated around compliance deadlines, with relatively low liquidity at other times. Adding three new sectors with different cost structures should increase the diversity of participants, which analysts expect to support trading volumes.
Implications for steel and aluminium
China produces roughly half of the world's steel and more than half of its primary aluminium. Both industries are heavily dependent on coal: most Chinese steel is made in coal-based blast furnaces, and most aluminium smelting capacity draws power from coal-heavy grids, particularly in Xinjiang, Inner Mongolia and Shandong. Some capacity has moved toward Yunnan to use hydropower, though drought there has periodically forced curtailment.
Under an intensity-based system, the most efficient plants in each sector will have surplus allowances to sell, and the least efficient will need to buy. That creates a cost advantage for electric arc furnace steel made from scrap and for aluminium smelted with lower-carbon power. Over time, it may influence where new capacity is built and how quickly older plants close.
The CBAM connection
The timing is notable. The EU carbon border adjustment mechanism enters its definitive phase in January 2026, covering imports of steel, aluminium, cement, fertilisers, hydrogen and electricity. CBAM regulation allows a deduction for carbon prices effectively paid in the country of origin. A national carbon price in China's steel and aluminium sectors could, in principle, reduce CBAM payments on Chinese exports to the EU, though the deduction depends on how the effective price paid is calculated after free allocation.
Chinese officials have framed the expansion primarily in terms of domestic climate goals, including the pledge to peak carbon dioxide emissions before 2030 and reach carbon neutrality before 2060. The overlap with CBAM gives Chinese exporters an additional reason to build monitoring, reporting and verification systems that meet international standards.
Data and verification
Monitoring, reporting and verification have been a challenge in the national market. In 2022 and 2023, authorities identified cases of data falsification by consultancies working for power companies. The ministry has since tightened rules, including requirements for monthly reporting of key parameters. The work plan for the three new sectors includes monthly deposit of key parameters and verification of emissions reports.
The quality of data from the new sectors will matter for the credibility of the market. Steel and cement emissions depend on process details that are harder to measure than fuel consumption at a power plant.
What it means for energy markets
For coal markets, the direct effect is modest in the near term. Free allocation based on benchmarks means the carbon cost faced by most firms will be small at first, and coal remains the backbone of Chinese heavy industry. The longer-term significance lies in the shift toward pricing carbon across a much larger share of the Chinese economy and the planned move to absolute caps.
What to watch
The milestones for 2025 are the publication of the list of covered entities in each province, the issuance of 2024 allowances to the new sectors, and the first compliance deadline at the end of the year. Allowance price movements around that deadline, and any announcement on the timing of absolute caps, will be the clearest signals of how the expanded market will work.