China is preparing to overhaul its national carbon market by introducing absolute emission caps in selected industries starting in 2027. The move, announced by the State Council on 25 August, represents a major departure from the current system, which regulates pollution based on carbon intensity rather than fixed limits.
Close-up of China Zun in Beijing at sunrise, supertall skyscraper in the Central Business District of Beijing, China. Ai generated picture.
Since its launch in 2021, the world’s largest emissions trading system (ETS) has operated on benchmarks. Companies receive a set number of allowances, with additional credits purchased if they surpass their quota. Those that emit less can trade unused permits. While this framework has established trading infrastructure, experts say its effectiveness has been limited by the high volume of free allocations.
Beginning in 2027, industries with relatively stable emissions profiles will be subject to hard ceilings. By 2030, China plans to expand coverage to most major polluters, using a combination of free and paid allowances. Analysts expect chemicals, petrochemicals, papermaking, and domestic aviation to join the programme, building on the 2024 expansion that brought steel, cement, and aluminium into the market. These three industries alone account for around 60% of the country’s greenhouse gas emissions.
‘...it is no doubt that the regulator already expects the emissions in these sectors to have peaked and plateaued and even being on declining paths now. I put a high likelihood some sectors (likely these three) will face an absolute cap from 2027. But this 2027 could be a compliance year, eg emissions, meaning the compliance of their 2027 emissions by the end of 2028’, said Yan Qin, Principal Analyst at ClearBlue Markets.
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China’s industrial policy still places coal at the centre of its energy mix. Coal-fired power plant approvals hit a nine-year high in the first half of 2025, and the government’s latest action plan allows continued coal development until at least 2027. However, the plan also includes provisions aimed at limiting emissions and accelerating renewable deployment.
Questions remain over whether carbon pricing will drive real emission cuts. ‘In terms of the impacts on actual emissions, I think the effects of the carbon price will be less compared with industrial policies, such as the policy to curb overcapacity. The cost-passthrough mechanism is not mature and the regulator will be cautious in setting the carbon price too high. This means the level of ETS price will be quite below abatement technologies. My view is that China ETS is still in the phase of expansion and enhancement until 2030, and its main role is to establish a robust MRV system for power, industry, aviation sectors’ major emitters’, explained Yan Qin.
As the system evolves, investors and businesses will be watching how China balances its industrial expansion with stricter environmental targets, and whether the ETS becomes a driver of real emission reductions by the next decade.
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China’s decision to introduce absolute caps in its carbon market underscores a global trend: Emissions are moving from flexible targets to binding limits. As more governments and industries adopt stricter frameworks, the need for verifiable, high-quality carbon credits will only intensify. This is where DGB Group plays a pivotal role. As a publicly listed company on Euronext, we deliver large-scale restoration projects that generate trusted carbon units while restoring biodiversity and uplifting local communities. The shift is accelerating—make sure your business is ready to benefit from it with us.
