The launch of China’s national carbon market represents a transformative milestone in the global effort to curb greenhouse gas emissions. Officially commencing trading operations on July 16, 2021, the Chinese system has dramatically expanded the scale of global carbon pricing by doubling the volume of emissions covered. This market is not only the largest of its kind worldwide but is also poised to play a pivotal role in China’s ambitious climate targets, which include peaking carbon dioxide emissions by 2030 and achieving carbon neutrality by 2060. The significance of this development extends far beyond China’s borders, offering crucial insights into the design and implementation of market-based climate policies in the world’s most populous nation.
A recently published review article by researchers from Tsinghua University and Carnegie Mellon University, appearing in the journal Energy and Climate Management, offers an exhaustive analysis of the evolution, structure, and operational mechanisms of China’s carbon market. The research illustrates how China has adeptly combined international carbon pricing theories with its unique socio-economic context to craft a system that balances ambition with feasibility. Prominent among the features discussed is the market’s adoption of a rate-based framework rather than a traditional cap-and-trade mass-based approach, a design choice that essentially functions as a multi-sector tradable performance standard tailored to China’s industrial landscape.
China’s carbon market journey is the culmination of over two decades of evolving climate policies and regulatory reforms. Key legal foundations were laid with the Energy Conservation Law in 1997 and the Renewable Energy Law in 2005, creating a statutory backdrop for emissions reduction and clean energy promotion. The government also leveraged institutional arrangements such as integrating energy efficiency and emissions reduction benchmarks into local government performance evaluations, which ensured accountability at multiple governance levels. Together with proactive participation in the international clean development mechanism, these strategies built vital experience and capacity, setting the stage for the pilot emissions trading programs launched across seven provinces and cities starting in 2011.
The pilot programs—initiated in regions including Beijing, Shanghai, Shenzhen, and Hubei—served as vital laboratories for practical experimentation. They enabled policymakers to test different regulatory frameworks and market mechanisms, honing in on operational practices compatible with China’s economic structure and energy profile. Through regional variation and iterative learning, these pilots informed the design principles of the national carbon market and underscored the necessity of integrating China’s specific national circumstances into policy formulation. This approach contrasts with many carbon markets in Western nations that typically rely on uniform mass-based caps, highlighting the innovative nature of China’s model.
Beyond the policy groundwork, the launch of China’s national carbon market was accompanied by the release of critical regulatory frameworks, most notably the Interim Regulation issued by the country’s top administrative body. This regulation establishes a formal legal foundation for market governance and enforcement. It marks China’s first comprehensive administrative directive aimed specifically at ensuring the integrity and smooth functioning of the carbon trading platform. This legal basis is expected to enhance market transparency, bolster participant confidence, and safeguard against market manipulation or other disruptive behaviors.
China’s carbon market presently covers the power generation sector, encompassing thousands of major emitters responsible for a substantial share of the nation’s carbon dioxide output. The sectoral focus was intentionally chosen to maximize emissions coverage while maintaining manageable market complexity at this nascent stage. Within this framework, allowance allocation primarily follows a benchmarking system based on historical and industry-specific emission rates. Such rate-based allocation incentivizes facilities to improve operational efficiency and decrease emission intensity per unit of output, rather than merely focusing on absolute emission reductions.
A critical component underpinning the credibility of China’s carbon trading system is the robust monitoring, reporting, and verification (MRV) framework established to track emissions from covered entities. This system mandates rigorous data collection protocols and independent verification processes to ensure accurate emission accounting. Reliable MRV is indispensable in preventing double counting, verifying compliance, and providing data transparency critical for market confidence and policy evaluation. The commitment to MRV quality signals China’s dedication to aligning its market with international best practices and transparency requirements.
Despite its pioneering role and substantial initial achievements, the Chinese national carbon market faces notable challenges. Market liquidity and trading activity remain moderate, partially constrained by a yet-to-be-implemented phased expansion roadmap. The absence of clear transition phases for incorporating additional industries or tightening emission intensity benchmarks limits market dynamism and long-term predictability. Moreover, coordination of the carbon market with other energy and climate policies, such as renewable energy subsidies and industrial regulations, remains an area requiring enhanced integration to avoid overlapping or contradictory incentives.
Local governments represent another important dimension yet to be fully leveraged within the carbon market governance framework. While regional pilot programs demonstrated the value of localized policy experimentation, scaling these roles within a national framework poses governance complexities. Empowering local authorities to actively support the carbon market through tailored support measures or complementary policies could stimulate broader participation and compliance, promoting the overall efficacy and equity of the system.
Looking forward, the researchers emphasize the importance of phased and deliberate development of China’s carbon market aligned closely with national climate goals and socio-economic conditions. Incremental expansions in sectoral coverage and tighter benchmarking standards should be designed to foster a vibrant, effective, and influential carbon pricing ecosystem. The balance between market flexibility and regulatory certainty will be essential in maintaining participant confidence and catalyzing sustained emission reductions.
The knowledge shared in this research not only enhances transparency but also serves as a valuable resource for the international community of scholars, policymakers, and stakeholders invested in carbon pricing as a tool for climate mitigation. China’s unique approach—particularly its innovative rate-based system embedded within a framework sensitive to national development priorities—offers lessons and considerations for other economies contemplating similar market-based climate instruments.
In the broader context of global climate governance, the success or shortcomings of China’s carbon market will have far-reaching implications. Given China’s status as the world’s largest emitter, effective carbon pricing within its borders is critical to global decarbonization efforts. As such, ongoing research, monitoring, and international dialogue remain paramount to ensure China’s market not only matures internally but also contributes constructively to the evolving architecture of international climate policy.
This groundbreaking study, supported by China’s National Natural Science Foundation, was authored by Xiliang Zhang and Runxin Yu from the Institute of Energy, Environment, and Economy at Tsinghua University, alongside Valerie J. Karplus from Carnegie Mellon University’s Department of Engineering and Public Policy. Their interdisciplinary collaboration underscores the fusion of rigorous scientific analysis and practical policymaking vital for addressing one of this century’s most urgent challenges.
Subject of Research:
The development, design, and operational characteristics of China’s national carbon market and its role in achieving China’s climate targets.
Article Title:
The development of China’s national carbon market: An overview
News Publication Date:
25-Apr-2025
Web References:
Available via Energy and Climate Management journal and SciOpen platform
References:
DOI: 10.26599/ECM.2025.9400015
Image Credits:
Energy and Climate Management, Tsinghua University Press
Keywords:
China, carbon market, emissions trading system, carbon pricing, climate policy, carbon neutrality, carbon emissions reduction, rate-based system, market-based mechanisms, MRV, energy efficiency, clean development mechanism
