China's Ministry of Ecology and Environment has published its Progress Report of China's National Carbon Market (2026), setting out the state of the national emissions trading scheme after its expansion to steel, cement and aluminium smelting. The report follows the ministry's allocation plan, published in July, covering the power sector for 2025 and 2026 and the three industrial sectors for 2026.
Under the plan, steel, cement and aluminium producers continue to receive free allowances based on emissions intensity, using the same allocation method as in 2025, according to the ministry documents and market reports. The 2025 compliance year, the first for the industrial sectors, gave each company allowances equal to its verified emissions, so there was no compliance cost. For 2026, allocation is broadly balanced at sector level, but each company's surplus or shortfall is capped at plus or minus 3%. That means some firms will need to buy China Emission Allowances to cover their emissions.
Prices
The national carbon price stood at about CNY94.40 per tonne on 4 September 2026, according to a report by OPIS. LSEG, in its China ETS supply and demand forecast, projected an average price of CNY86.70 per tonne for 2026. The power sector benchmarks were tightened for 2025 and 2026, while the industrial allocation methodology was held steady, OPIS reported.
How the market works
China's national ETS launched in 2021 covering coal and gas-fired power plants, which account for a large share of the country's carbon dioxide emissions. It is the world's largest carbon market by covered emissions. Unlike the EU ETS, which sets an absolute cap that declines each year, China's system allocates allowances based on emissions intensity, meaning the amount of carbon dioxide per unit of output, such as a megawatt-hour of electricity or a tonne of steel. Companies that are more efficient than the benchmark have a surplus to sell, and less efficient ones must buy.
Because allocation is tied to output, total emissions under the scheme can rise if production rises, even as intensity falls. The ministry's 2025 roadmap set out a plan to move gradually toward absolute caps for some sectors by 2027 and to introduce paid auctioning over time.
Expansion to industry
The ministry added steel, cement and aluminium smelting in March 2025. Together with power, the expansion was expected to bring about 1,500 industrial enterprises into a market that already covered more than 2,200 power companies, with total covered emissions of about 8 billion tonnes a year, according to ministry statements and Reuters reporting at the time. The ministry said the market would then cover more than 60% of China's carbon dioxide emissions. The industrial sectors began with a lenient first year, in which allowances matched verified emissions, to allow companies to build monitoring and reporting systems.
The 3% cap on surpluses and shortfalls for 2026 introduces a modest financial incentive. Companies with emissions above their allocation must buy, and those below can sell. The size of the cap limits how much any company can gain or lose, which keeps costs manageable while creating a price signal.
Interaction with CBAM
China's steel and aluminium exports to the EU are covered by the EU's carbon border adjustment mechanism, whose definitive period began in January 2026. Importers will need to buy CBAM certificates for embedded emissions, with sales starting in February 2027. The CBAM rules allow a deduction for carbon prices effectively paid in the country of origin. China's carbon price, applied through free intensity-based allocation, is much lower than the EU price and the effective cost per tonne after free allocation is smaller still, so the deduction for Chinese producers is expected to be limited. Expanding the national market and moving toward paid allocation would increase the carbon price Chinese exporters pay at home.
Power sector context
China's power sector emissions have been affected by rapid growth in wind and solar capacity, which has outpaced demand growth in some periods. Coal generation remains dominant, and new coal plants continue to be approved for reliability reasons. The tightened power benchmarks for 2025 and 2026 increase pressure on less efficient coal plants. Hydropower output, which varies with rainfall, also affects how much coal generation is needed in a given year.
China's climate targets
China submitted a new nationally determined contribution in September 2025, pledging to cut net greenhouse gas emissions by 7% to 10% from peak levels by 2035. It has a goal of peaking carbon dioxide emissions before 2030 and reaching carbon neutrality before 2060. The national carbon market is one of the main policy tools for meeting these targets, alongside renewable energy targets and efficiency standards.
Data quality
Data quality has been a recurring issue in China's carbon market. In its early years, the ministry found and penalised cases of falsified emissions data at some power companies and verification agencies. Reliable measurement is especially demanding in steel, cement and aluminium, where emissions come from a mix of fuel combustion and industrial processes. The lenient first compliance year for these sectors was designed partly to allow monitoring, reporting and verification systems to mature before companies faced financial exposure. The progress report is the ministry's main public account of how those systems are developing.
Market liquidity
Trading in China's carbon market has historically been concentrated around compliance deadlines, with low liquidity at other times. The expansion to industrial sectors and the introduction of the 3% cap are expected to broaden participation. The ministry has also said it will consider allowing more financial institutions and investors to participate over time, and the voluntary China Certified Emission Reduction scheme, relaunched in 2024, allows companies to use offset credits for a limited share of compliance.
Regional pilots
Before the national market, China ran regional pilot carbon markets in cities and provinces including Beijing, Shanghai, Guangdong, Shenzhen and Hubei. Several pilots continue to operate for sectors and companies not yet covered nationally, and their experience informed the design of the national scheme.
What to watch
Key items include the 2026 compliance deadline for industrial sectors, any moves toward absolute caps or auctioning, the addition of further sectors such as chemicals, petrochemicals and aviation, and the effect of carbon prices on coal plant economics. The interaction with the EU CBAM will be watched closely by exporters.