COMMODITIES 2025: China’s carbon markets to cover new segments, test new system design

This is part of the COMMODITIES 2025 series where our reporters bring to you key themes that will drive commodities markets in 2025.

China's national compliance and voluntary carbon markets will expand in 2025, covering new sectors and launching new carbon crediting methodologies, respectively. Meanwhile, the overarching carbon policies are likely to be upgraded to improve efficacy and link with international markets.

The country's carbon market development has been sluggish in the past few years, but 2025 is expected to witness some significant progress.

The national compliance emission trading scheme has only covered the power sector since its launch in 2021, but from 2025, it will expand to steel, cement and aluminum sectors.

Meanwhile, the domestic voluntary market, namely the China Certified Emission Reduction market, had halted project registration since 2017 to refine regulatory frameworks. After a six-year pause, the first set of CCER 2.0 carbon crediting methodologies was launched in October 2023. In 2025, CCER credits issued from these methodologies will be delivered, and new methodologies will be released.

In 2025, another critical agenda for China is to submit its Nationally Determined Contributions or NDCs. During this year's UN Climate Change Conference (COP29), China committed that its new NDCs would include climate targets till 2035, covering all sectors of its economy.

Policy analysts told S&P Global Commodity Insights that a comprehensive set of NDCs will enable the country to upgrade its current carbon policies, adding that the government can start planning for an absolute emission cap for the ETS, and a guidance for leveraging the newly landed Article 6 markets to meet the NDCs.

New compliance sectors

Instead of progressing at its own pace, China's ETS expansion is driven by an external push – the EU's Carbon Border Adjustment Mechanism, which will impose a carbon price on steel, cement and aluminum exported to the EU from 2026. Having these sectors covered in the domestic ETS can help China waive some costs under CBAM.

Since 2013, China has launched several provincial carbon exchanges to test emission trading in these sectors; however, most steel, cement and aluminum producers are in provinces that do not have such pilot exchanges, notably Shandong, Hebei and Jiangsu. Hence, many companies in these sectors still lack relevant experiences, sources said.

Sources also expressed concerns over whether the ETS will become an extra burden on their financial health, given that these sectors have already faced oversupply and thin profit margins, impacted by weak demand due to the domestic property sector's problems and trade frictions with importing countries.

Considering these difficulties, the Ministry of Ecology and Environment (MEE) announced that, for the first compliance period ended on Dec. 31, 2025, the key purpose is for these new sectors to familiarize with emission reporting, carbon trading as well as carbon asset management.

The MEE said the sector-specific emission allowance allocation plans, to be released later, would not impose significant financial burdens on the newly enrolled companies.

"Companies can choose to reduce exports to the EU to circumvent CBAM, but there's no way to circumvent this domestic price," a Beijing-based carbon trader told Commodity Insights.

"Realistically speaking, it is impossible for China to set a high carbon price in year one. These sectors are pillars of the country's economy. The important thing is to press the 'start' button and get these sectors onboarded," the trader said.

System upgrades

In 2025, China's carbon markets are not expected to see significant changes in demand or price, a recent Commodity Insights report showed. However, the government does have some important "start" buttons to press.

One is to kick off the transition to a cap-and-trade ETS.

The transition is essential as China's current ETS design has been challenged for low cost-effectiveness and great uncertainties in emission reductions, Duan Maosheng, a professor at Tsinghua University, pointed out in a recent study. Duan is one of China's carbon policy advisors and has represented the country in Article 6 negotiations at several COPs.

China's current ETS sets intensity caps for power generation units. For instance, for each megawatt-hour of electricity generated, a coal-fired generation unit can only emit a certain amount of CO2 for free. However, such a design cannot control the sector's total power outputs and emission volume.

Duan proposed to initiate a hybrid system in 2026, with both carbon intensity caps and an absolute control cap that constrains total emissions under the ETS. Such a transition will require policy guidance to be released in 2025.

Another agenda is to start guiding the local carbon industry to participate in Article 6 markets.

Chinese stakeholders have expressed interest in buying Article 6 credits because domestic CCER supply remains limited and they need a bigger pool of supply to meet NDCs and corporate-level targets, Dirk Forrester, president of IETA, told Commodity Insights during COP29.

The Commodity Insights report also highlighted the shortage of CCER supplies. The report said legacy CCERs issued before 2017 were nearly exhausted, and carbon crediting processes for new CCERs have become slower.

"If the Chinese government comes up with a plan for buying Article 6 credits, it will be a very strong demand signal. Even if actual demand may only grow significantly after 2030, that announcement itself could still be encouraging to Article 6 market participants," the Beijing-based trader said.