China Transitions to Absolute Emissions Cap in Carbon Trading System

China Adopts Absolute Emissions Cap for Decarbonization Push

China has announced a pivotal shift in its national carbon trading system, moving from an intensity-based approach to an absolute emissions cap. This strategic change, outlined in the 'Opinions on Promoting Green and Low-Carbon Transformation and Strengthening the Construction of the National Carbon Market' released on August 25, 2025, by the General Office of the Central Committee of the Chinese Communist Party (CCP) and the General Office of the State Council, is set to significantly bolster the nation's decarbonization efforts.

The new directive mandates the establishment of an overall total emissions cap for industries covered by China's Emissions Trading System (ETS), replacing the previous system that linked emissions allowances to output efficiency.

Transition Timeline and Scope Expansion

The implementation of absolute emissions caps will commence in selected industries starting in 2027. By 2030, China aims to have a fully established nationwide ETS operating with these absolute caps, alongside a combination of free and paid carbon emissions allowances (CEAs).

The existing ETS, which began in 2021 and initially covered only the power sector, relied on carbon intensity benchmarks that declined over time. This intensity-based method, while offering flexibility, did not enforce hard limits on total emissions, allowing companies to potentially increase overall emissions with higher production.

The ETS was expanded in 2025 to include the steel, cement, and aluminum industries, bringing approximately 1,500 new entities and an additional 3 billion tonnes of CO2e under its purview, covering about 60% of China's greenhouse gas emissions. By 2027, the ETS is expected to encompass all major industrial emitters. Analysts anticipate that sectors such as chemicals, petrochemicals, papermaking, and domestic aviation will be among the next to adopt absolute caps.

Goals and Expected Impact

This policy shift is designed to generate more meaningful carbon prices and create stronger incentives for companies to actively decarbonize. The 'Opinions' also call for a gradual increase in the share of paid allowances, moving away from predominantly free allocations. Companies will still receive a quota of free CEAs, but those exceeding their allocation will be required to purchase additional allowances, while those emitting less can sell their surplus.

The move aligns with China's broader climate objectives, which include peaking emissions before 2030 and achieving carbon neutrality by 2060. President Xi Jinping has previously pledged China's first absolute emissions reduction goal, targeting a 7-10% cut in emissions by 2035 compared to peak levels. Experts, including Xuewan Chen, a senior research analyst at LSEG, and Mai Duong, Asia-Pacific carbon markets analyst with Veyt, view this as a significant tightening of the system and a crucial tool for China's decarbonization goals. This development also brings China's carbon market closer to the frameworks seen in the European Union and is partly influenced by international trade pressures, such as the EU's Carbon Border Adjustment Mechanism (CBAM).