In its latest move towards meeting decarbonization goals, China’s Ministry of Ecology and Environment announced last week an expansion of its national carbon market policy to include carbon emission trading for three hard-to-abate sectors – cement, steel and aluminium smelting.

Carbon trading is widely viewed as an effective, market-driven approach to cutting emissions. Companies involved in carbon trading are allocated a set number of free emission permits based on government-defined industry benchmarks. When their emissions exceed these allowances, they must purchase additional permits from other participants. The system aims to motivate companies to lower their emissions.

The policy extension, according to the MEE, will be phased-in through two stages – the initiation stage, covering 2024 to 2026, and the deepening stage, from 2027 onwards.

Specifically, companies from the three sectors will be allocated with greenhouse gas ( GHG ) emission quotas for 2024 based on their actual carbon emissions; and for that year, they will not need to purchase any additional credits. In 2025 and 2026, emission quotas will be only slightly reduced so as to avoid industry contraction. Starting 2027, the quotas will be increasingly reduced with the goal of pushing a continuous decline in carbon emissions.

Among the 36 countries that have operational carbon markets, China has the largest in terms of emission coverage. The market, launched in 2021, currently only covers the electricity generating sector, which accounts for about 40% of China’s total GHG emissions. 

In China, cement, steel and aluminium smelting are the top three carbon-intensive sectors, followed by that of coal-fired electricity generation. By including emissions from these three sectors, China’s carbon market is expected to involve an additional 1,500 companies and add 300 million tonnes of GHG emissions for trading, according to a spokesperson from the MEE, raising the market’s coverage of the country’s total GHG emissions to 60%.

However, expanding carbon trading to these industries presents significant challenges. First, the complex production processes used in these sectors make accounting for carbon emissions more difficult. Second, as traditional heavy industries, their carbon management capacity is limited due to a lack of experience and the required talent.

Finally, as these industries play a critical role in national energy security, industrial supply chains and employment, challenges can arise between the twin competing goals of boosting industrial growth and reducing carbon emissions. It is these challenges that necessitate the soft phase-in approach of the new policy.

However, China is undeterred by these challenges and remains steadfast in its decarbonization efforts. At a recent high-level conference, Lu Shize, deputy director-general of the Department of Climate Change Response at the MEE, says: “We plan to strive to bring more key industries and enterprises under the control of the national carbon emissions trading market by 2030.”

China’s carbon market, in 2024, completed 188 million tonnes of emission trading, with an annual turnover of 18 billion yuan ( US$2.48 billion ). In addition, as of March 20 2025, the accumulated volume of emission trading since the market’s inception reached 634 million tonnes, with total turnover of 43.4 billion yuan.