Ruoxuan Li
As governments around the world confront the urgency of climate change, carbon markets have emerged as a key instrument for reducing emissions. China’s national carbon market, launched in 2021, has drawn attention as the world’s largest emissions trading scheme by coverage. Yet its significance lies not only in its scale, but also in what it reveals about state–market dynamics in China.
A carbon market — or emissions trading system (ETS) — sets a cap on emissions and issues allowances that can be traded among regulated entities. While this might seem like a shift towards market-driven policy, carbon trading in China represents a reassertion rather than a retreat of state control. The Chinese ETS functions as a policy execution tool, embedded in broader industrial planning and regulatory frameworks.
China’s carbon market exemplifies ‘administered marketisation’, where state agencies orchestrate trading to support industrial policy instead of handing over control to capital markets. Even among Asian jurisdictions favouring state-led governance, China’s carbon market is distinct, as a nominally market-based system embedded within a controlled administrative framework. While countries such as Singapore have opted for fixed-price carbon taxes to maintain price certainty, China’s model selectively deploys market instruments in a command-and-control environment.
In March 2025, the Ministry of Ecology and Environment confirmed that the national carbon market will expand to cover three high-emissions sectors — steel, cement and aluminium. This goal reflects China’s ambition to align high-emitting sectors with its ‘30–60’ decarbonisation goal of peaking emissions by 2030 and achieving carbon neutrality by 2060 while strengthening industrial modernisation and market participation. With China producing over half of the world’s steel and cement, managing production is a significant challenge both in emissions terms and in the ETS’ institutional transition from a single-sector platform to a broader control framework.
As coverage grows, new questions are surfacing about how allowances are allocated, compliance and the role market incentives might play. Though designed as a trading mechanism, the market is not ‘open’ in the conventional sense. Access is restricted to registered compliance entities, primarily large state-owned enterprises which receive quotas set by administrative benchmarks and who are guided more by bureaucratic compliance timelines than market signals. Daily trading volume averaged below 100,000 tonnes in 2023 and carbon prices remained flat around RMB 50 (US$6.86) per tonne.
These firms are required to submit verified emissions data annually and must purchase credits if their emissions exceed allocated allowances. Prices have remained stable, but they do not reflect marginal abatement costs or investor expectations and are better understood as signals within a controlled regulatory loop.
Meanwhile, financial actors have a marginal presence. Unlike in commodity or financial derivatives markets, there are no futures or options contracts available and speculative trading is discouraged by design. Carbon exchanges such as the Shanghai Environment and Energy Exchange function both as neutral trading platforms and quasi-regulatory institutions, implementing state policies, facilitating compliance and reporting outcomes to supervisory bodies. Their mandate is to ensure policy alignment, not to generate liquidity or maximise trading volumes.
The limited participation of financial actors reflects a broader strategy of policy discipline. The state has not rejected the potential of financial mechanisms — policy documents reference carbon as an environmental asset — but so far this is more a symbolic framing than an operational principle. Mechanisms such as collateralisation of permits and emissions-based financial products remain prohibited. These are not signs of market immaturity but deliberately chosen constraints to prioritise administrative stability over financial autonomy.
This approach serves multiple goals — protecting energy-intensive sectors from sudden cost shocks, ensuring macroeconomic predictability and allowing policymakers to adjust the market incrementally as experience grows. But it raises important questions about the effectiveness of the market in changing behaviour. Without price volatility, liquidity or risk-based trading, the market’s capacity to influence firm-level investment decisions is limited. Companies comply because they must, not because they are responding to changing financial incentives.
Ruoxuan Li is PhD Candidate in Development Economics at King’s College London.
Source: East Asia Forum
