When China’s national Emissions Trading System (ETS) went live in July 2021, it immediately became the world’s largest carbon market by covered emissions — surpassing the EU ETS overnight. Five years on, the China ETS is undergoing its most consequential expansion: new industrial sectors are being drawn in, carbon prices are rising, and the system is converging with international standards in ways that affect every company trading with or competing against Chinese firms.
For foreign businesses, understanding the China ETS is no longer optional. It shapes supply chain cost modeling, cross-border investment due diligence, and green procurement commitments. This guide explains where the system stands in 2026, which sectors are entering next, how carbon pricing affects Chinese manufacturers’ cost structures, and what practical steps foreign companies should take now.
From Pilots to National System: Architecture Overview
China’s carbon market did not appear overnight. Between 2013 and 2021, seven regional pilot programs operated in Beijing, Shanghai, Tianjin, Chongqing, Hubei, Guangdong, and Shenzhen — covering roughly 3,000 enterprises and serving as laboratories for allowance allocation, monitoring, and price discovery.
The national ETS, administered by the Ministry of Ecology and Environment (MEE), launched in 2021 covering approximately 2,200 coal and gas power plants responsible for around 4.5 billion tonnes of CO2 equivalent annually — roughly 40 percent of China’s total reported CO2 emissions, larger by volume than the entire EU ETS.
The allocation method was intensity-based benchmarking rather than absolute caps: power plants received free allowances proportional to electricity output multiplied by sector benchmarks, rewarding efficiency without imposing hard output limits — a deliberate choice to cushion economic disruption while verification systems matured.
2026: The Expansion Phase Begins in Earnest
The most significant development in 2026 is the formal inclusion of additional high-emitting sectors. China’s roadmap has long identified eight priority industries beyond power: steel, cement, aluminum, chemicals, paper and pulp, building materials, aviation, and non-ferrous metals. The phased integration of these sectors is now underway.
Steel: The Sector That Changes Everything
China produces approximately 1 billion tonnes of crude steel annually — more than half of global output. The China Iron and Steel Association (CISA) estimates steelmaking accounts for roughly 15 percent of China’s total CO2 emissions. Bringing steel into the ETS reshapes the cost structure of companies like Baowu Steel Group (the world’s largest steelmaker at over 130 million tonnes annually), HBIS Group, and Ansteel Group.
Early MEE modeling suggests a carbon price sustained above 100 RMB per tonne begins to affect the economics of blast-furnace versus electric arc furnace production decisions. For US and European steel importers, this has a counterintuitive implication: Chinese carbon costs narrow the price gap between domestically produced steel in carbon-regulated markets and imported Chinese steel. Procurement teams need to model how ETS expansion affects that calculus over a 3-to-5-year horizon.
Cement and Aviation
China’s cement industry — dominated by CNBM and Anhui Conch Cement, the world’s largest cement producer by capacity at roughly 2.3 billion tonnes annually — faces ETS compliance costs that cannot be fully offset through operational efficiency alone, since calcination of limestone releases CO2 regardless of energy source. This creates strategic openings for suppliers of supplementary cementitious materials and international low-carbon process technology providers.
For aviation, including domestic flights in the national ETS raises a direct question for foreign carriers: how will China’s system interact with ICAO’s CORSIA scheme? The MEE has confirmed domestic aviation enters the compliance framework in this cycle, with international routes addressed through a separate track consistent with China’s CORSIA commitments.
Carbon Pricing Dynamics: Where the Market Stands
China’s national ETS carbon price has risen substantially since launch. Early phases saw prices between 40-60 RMB per tonne. By 2024, increased enforcement and anticipation of sector expansion pushed prices above 90 RMB. In 2026, prices have consolidated in the 95-130 RMB range (approximately $13-18 per tonne) — still below EU ETS levels of €50-80 per tonne, but trending upward for several structural reasons.
First, each new compliance cycle tightens the intensity benchmarks, reducing total free allowances. Second, a 2022 scandal involving data falsification by verification companies triggered an overhaul of the MRV (Measurement, Reporting, and Verification) system, reducing over-allocated allowances in circulation. Third — and most commercially significant — the EU’s Carbon Border Adjustment Mechanism (CBAM) creates a direct incentive for Chinese exporters to document domestic carbon costs: under CBAM rules, verified carbon payments made in the country of production can be deducted from the CBAM liability on EU exports. A credible China ETS directly reduces CBAM exposure for Chinese steel, cement, and aluminum exporters, giving Chinese industry a strong commercial reason to support ETS market integrity.
Green Finance: The Capital Market Layer
The ETS does not operate in isolation. China has simultaneously built one of the world’s largest green finance frameworks — issuing approximately $85 billion in green bonds in 2023, second only to the United States. The People’s Bank of China (PBOC) introduced a Carbon Emission Reduction Facility (CERF) providing low-cost relending funds to banks extending preferential loans to clean energy projects; by 2026, the CERF has channeled over 500 billion RMB into the clean economy.
Companies with strong ETS compliance records access green finance instruments on better terms, while those carrying large ETS liabilities face carbon risk questions from institutional lenders — now standard in Chinese domestic M&A and IPO due diligence, and increasingly relevant to cross-border transactions. International banks including HSBC, Standard Chartered, and Citi have developed China-facing green finance practices bridging the PBOC’s green taxonomy with international Climate Bonds Initiative frameworks.
What Foreign Companies Must Do Practically
Map Your ETS Exposure in the Supply Chain
Any company sourcing steel, cement, aluminum, paper, or chemicals from China should conduct a carbon exposure audit: identify which Chinese suppliers operate in newly regulated sectors, request copies of their ETS compliance records and allowance positions, and build ETS cost pass-through scenarios into procurement models. The question is not whether carbon costs will flow through Chinese supply chains — they will — but at what pace and through which price transmission mechanisms.
Engage the CBAM-ETS Arbitrage Window
The EU CBAM creates a concrete collaboration opportunity: joint documentation work establishing the Chinese producer’s ETS carbon cost record reduces the EU buyer’s CBAM liability — a shared commercial interest driving new forms of cross-border ESG partnership. US companies without direct CBAM exposure should still understand this dynamic, as it is shaping Chinese suppliers’ ESG reporting expectations of all major buyers.
Explore the CCER Voluntary Market
China relaunched its CCER (China Certified Emission Reduction) voluntary carbon market in 2024. CCER credits from forestry, methane capture, and renewable energy projects can offset a portion of ETS obligations. International project developers with experience in China’s forestry sector, distributed renewable energy, or agricultural methane management are well positioned to develop CCER-eligible projects in partnership with Chinese landowners and enterprises — a channel for green revenue that connects directly to the ETS compliance demand.
The Bigger Picture: Carbon Policy as a Trade Variable
As of 2026, over 70 national or subnational carbon pricing instruments are in operation worldwide, covering approximately 23 percent of global greenhouse gas emissions, according to the World Bank’s Carbon Pricing Dashboard. China’s system, once fully expanded across all eight target sectors, would alone cover roughly 70 percent of China’s emissions.
The US does not currently operate a federal carbon price, which creates an asymmetry: as Chinese industrial producers absorb rising ETS compliance costs, and as the EU CBAM raises the bar for carbon-unpriced imports, the competitive dynamics between US and Chinese manufacturers in third markets will increasingly be shaped by carbon policy divergence. The US EPA’s greenhouse gas emissions data and monitoring frameworks remain a key reference point for American businesses benchmarking their own carbon exposure against Chinese competitors.
For companies navigating US-China business relationships, the ETS expansion is a structural shift in Chinese industrial economics — rewarding efficient, low-carbon producers and gradually aligning Chinese export industries with the carbon pricing expectations of their largest markets. Businesses that understand this dynamic now will be far better positioned than those who wait for the effects to arrive in their cost lines.
For more on China’s clean energy industries, see our analysis of China’s green hydrogen push and how LONGi, Tongwei, and JA Solar dominate global solar manufacturing. For the broader investment and finance picture, read our guide to China’s private equity and venture capital industry and the Digital Yuan’s role in cross-border finance.