China will not impose significant carbon costs on aluminium, steel sectors in 2025

In 2025, the amount of compliance emission allowances issued to individual aluminum, steel, and cement producers will be equivalent to their verified 2024 emissions, which means they will not need to buy any CEA for the compliance period ended December 2025, the Ministry of Ecology and Environment said March 26.

The MEE released on March 26 an overarching work plan about the implementation of the national compliance Emission Trading Scheme, or ETS, in three newly onboarded sectors -- aluminum, steel, and cement.

The work plan provided a critical and clear signal to these sectors that have very limited experience in carbon trading and worry about the ETS' financial impacts on their businesses. However, the relatively loose ETS regulation could also impede investments in decarbonization solutions in these hard-to-abate sectors.

From 2021 to 2024, China's compliance ETS only included the power sector, which covered over 2,000 companies and around 40% of the country's greenhouse gas emissions. In 2024, MEE announced the expansion of the ETS to the aluminum, steel, and cement sectors, asking companies with annual emissions above 26,000 mtCO2e to start paying for their 2024 emissions by the end of 2025.

According to the latest work plan, the expansion means that from 2025 onwards, another approximately 1,500 companies, jointly accounting for about 3 billion mtCO2e of greenhouse gas emissions, will start trading in the ETS market. After the expansion, China's ETS now accounts for over 60% of the country's total GHG emissions, MEE's data showed.

In 2026 and 2027, companies in the new sectors need to pay retrospectively for their emissions incurred in 2025 and 2026, respectively. Notably, for these two years, CEAs will be allocated to the companies based on industry-wide carbon intensity benchmarks, like the power sector.

The carbon intensity benchmark defines the number of free CEAs allocated to individual producers for each ton of cement, steel, or aluminum production.

According to the work plan, in 2026 and 2027, companies emitting below the carbon intensity benchmark will be able to sell surplus CEAs to companies emitting above the benchmark. Although some companies will have CEA surpluses and some will have deficits, MEE said the total annual CEA supplies in these sectors will be close to these sectors' total annual emissions in these two compliance cycles.

MEE has not specified the carbon intensity benchmarks set for the new sectors or a timeline for releasing the benchmarks in the work plan.

MEE said that the carbon intensity benchmarks will be gradually tightened from 2028 onwards as companies in these sectors become more familiar with carbon trading and carbon asset management.

Another important clarification in this work plan is that only direct emissions will be covered under the ETS. Hence, for aluminum producers, indirect emissions from electricity use, which account for over 80% of the sector's total emissions, will not be considered liable under the ETS.

"Even though cement, steel, and aluminum producers will not have to buy CEAs in the first year, their compliance costs are not 'zero.' The companies need to invest in resources and manpower to do the emission accounting and reporting. For lots of small and medium-sized players, they need to learn these concepts and build their carbon teams from scratch," an industry participant with assets in all three new sectors said.

Responses from steel producers

Steel producers said at least for 2025-2026, the free CEAs, namely the free emission quota, will not deviate much from their actual emissions, so the ETS will not impose much pressure on their production costs.

However, some mill sources expected that, from 2027 onwards, the carbon trading market will gradually become the main mechanism to curb steel production and force the withdrawal of low-efficient production capacity.

China's steel industry has been beleaguered by overcapacity since 2022, when the property sector, the most crucial steel demand driver, ended its two-decade boom and entered a long structural downward trend.

With the slumping property sector, China's domestic steel consumption in 2024 hit a six-year low, down 10.2% from 2021 to 892.87 million mt, leading to the exports of semi-finished and finished steel in 2024 hitting an all-time high, data from Chinese Customs and Platts showed.

"Strong exports cannot be sustained for long amid rising trade conflicts... and in the backdrop of declining domestic demand, the steel industry will have to trim its capacity sooner or later," said a mill source.

According to several steel mill sources, around 1.7-1.9 mt of CO2 emissions will be incurred for producing a ton of steel product.

China's emissions allowance price was at Yuan 85.75/mtCO2e ($11.8/mtCO2e) on March 26. However, due to poor construction steel demand, most long steel producers' profit margins are currently less than Yuan 100/mt.

"Once mills need to buy emissions allowances for part of their production, the additional cost could be unbearable for some less efficient producers, so hopefully the gradual implementation of carbon quota trading will assist the withdrawal of excessive capacity in the coming years," said a mill source.