Why China’s Carbon Market Record Masks a Stubborn Pricing Problem

China’s carbon market has traded 961 million tonnes of CO2 equivalent since it opened in July 2021, and the one-billion-tonne threshold is now within touching distance. That is a genuine milestone for the world’s largest carbon market by emissions covered.

It is also a provocation. A market this close to a billion tonnes of cumulative volume still prices carbon at roughly one-fifth of what the International Monetary Fund (IMF) says is needed to drive structural change. That gap is worth interrogating.

The 2025 record of 235 million tonnes, up 24.36% year on year, arrived in the same year the market absorbed steel, cement, and aluminium for the first time, lifting coverage from around 40% to more than 60% of China’s total CO2 emissions. This is not routine growth. The market is changing shape in volume, in sectoral scope, and in geopolitical relevance all at once.

The question you are probably already asking is the right one: does bigger mean more effective? Here is what the record actually tells you, read against the specific data rather than the headline numbers alone.

How a record-breaking year unfolded in China’s carbon market

The 2025 figures set a clear factual baseline before any interpretation is layered on top. According to data presented at the China Carbon Market Conference 2026 in Wuhan and reported by Xinhua, the national scheme moved 235 million tonnes of CO2 equivalent across 243 trading days, generating transaction value of RMB 14.63 billion. Volume rose 24.36% on the prior year.

That growth sits inside a longer arc. Since the market launched in July 2021, cumulative volume has reached 961 million tonnes of CO2 equivalent, with total transaction value of RMB 65.7 billion (approximately US$9.71 billion).

Here are the core numbers at a glance:

• 2025 trading volume: 235 million tonnes CO2e, up 24.36% year on year
• 2025 trading days: 243
• 2025 transaction value: RMB 14.63 billion
• Cumulative volume to end-August 2026: 961 million tonnes CO2e
• Cumulative transaction value: RMB 65.7 billion (approximately US$9.71 billion)

Approaching a milestone With 961 million tonnes traded since inception, China’s carbon market is closing in on its first billion tonnes of cumulative volume. The symbolic weight is real. The analytical weight is a separate question.

What matters is that 2025’s volume growth outpaced the market’s earlier years. That acceleration warrants an explanation rather than a shrug toward maturity.

Here is the trap to avoid. Record trading does not automatically signal a more effective market. Volume can be driven by compliance mechanics and regulatory shocks just as easily as by genuine price discovery. For anyone tracking China’s decarbonisation trajectory, distinguishing between those two drivers changes the thesis entirely, because a volume record built on regulatory disruption tells you something very different from one built on market depth.

What the 2025 expansion changed, and what it deferred

The structural ambition of the 2025 expansion is hard to overstate. In March 2025, the State Council approved bringing steel, cement, and aluminium smelting into the national emissions trading scheme (ETS), and on 26 March the Ministry of Ecology and Environment (MEE) issued its work plan (document 环气候〔2025〕23号) to implement it. The move added roughly 1,500 entities to the 2,200 power firms already regulated and pulled in approximately 3 billion tonnes of additional CO2e coverage.

The metals and cement ETS inclusion moved faster than many industry observers anticipated, with the State Council approval in March 2025 representing the most significant structural change to the scheme since its 2021 launch.

That took the national system, combined with pilot schemes, to around 8 billion tonnes of CO2 coverage, roughly 20% of global CO2 emissions, according to the Institute for Energy Economics and Financial Analysis (IEEFA). Coverage of China’s own emissions climbed from about 40% to more than 60%.

China Carbon Market Conference 2026 data released in Wuhan confirms that 3,680 key emitters now cover around 8.3 billion tonnes of CO2, or more than 65% of national emissions, a figure that supersedes the 60% coverage estimate cited at earlier stages of the expansion.

Then comes the fine print, and it is where the near-term impact narrows. Under the allocation plan MEE released on 17 November 2025, 2024 quotas for the new sectors were set equal to verified emissions. In plain terms, that means no net obligation to buy allowances in the first compliance cycle. This first-cycle design has been noted by Latham and Watkins, S&P Global Commodity Insights, and the International Carbon Action Partnership (ICAP).

The 2026 Allocation Rule (Guohuan Gui Qihou [2026] No. 1) became the first concrete cap-and-allocation instrument for the enlarged market, covering power generation for both 2025 and 2026 and treating steel, cement, and aluminium as full-year national ETS participants for the first time. Allowances continue to be handed out free, using an emissions-intensity benchmark.

The compliance timeline for the new sectors runs in three steps:

1. 2024 serves as the first controlled year, with quotas equal to verified emissions.
2. Allowance surrender for that cycle falls due by end-2025.
3. 2025 quotas are pre-allocated in the first half of 2026, with compliance due by end-2026.

So the expansion is architecturally significant but deliberately soft in the near term. Companies in steel, cement, and aluminium face monitoring, reporting, and verification (MRV) obligations now, but real financial pressure from allowance shortfalls is pushed into later cycles. If you are exposed to Chinese heavy industry, the first cycle is essentially a data-gathering exercise. Your cost exposure escalates from the second cycle onward, and that is the timeline to plan around.

The price signal problem: why volume growth does not resolve the effectiveness debate

Scale and price are telling two different stories, and holding both at once is uncomfortable.

The price data shows genuine appreciation

Prices have risen. Data from the MEE Environmental Planning Institute, reported by Sina Finance on 16 September 2026, put the January to August 2026 average at 83.86 yuan per tonne, ranging between 72.5 and 99.69 yuan. That is up 14.41% on the 2025 average of 73.3 yuan per tonne.

The path there was not smooth. From 2026, only 2025-vintage allowances could be used freely for compliance, with older vintages convertible only in limited amounts. That rule forced firms to dump surplus older allowances, and ClearBlue Markets documented prices falling to near an all-time low of roughly 52 yuan per tonne in April 2026 before regulatory intervention, expanded banking quotas and high-level government opinions, restored confidence and lifted prices back to 80-81 yuan.

That episode is instructive. It shows how much of China’s carbon price is a function of regulatory design rather than supply-and-demand fundamentals.

The benchmark gap A Center for Strategic and International Studies (CSIS) analysis cites IMF estimates that China would need around US$50 per tonne to drive structural emissions cuts. Current prices imply roughly US$10-12 per tonne. The market has appreciated meaningfully and still sits at about one-fifth of the threshold.

The core criticisms of the current price regime cluster into three:

• Over-allocation in the first compliance cycle
• Free allowance design for the expansion sectors through the initial cycle
• Price volatility driven by regulatory rule changes rather than fundamentals

What this tells you is uncomfortable but clear. The market is currently functioning as a compliance instrument rather than a deep decarbonisation driver, and the timeline for genuine cost pressure on heavy emitters is measured in compliance cycles, not quarters.

What compliance rates reveal about real-world abatement

There is a difference between formal compliance, surrendering enough allowances, and genuine abatement, actually cutting emissions. The first cycle exposes the gap.

Oxford Energy found the first national ETS compliance cycle hit a compliance rate of roughly 99.5% yet had at most a negligible impact on CO2 emissions. The reason sits in the numbers: an estimated 9.01 billion allowances were issued against 8.68 billion tonnes of verified emissions. When plants hold more allowances than they need, high formal compliance means very little.

Where the ETS does drive abatement, a Cell Reports Sustainability study found it works through energy efficiency gains, fuel quality upgrades, and retirement of outdated units, not through large-scale fuel switching or capacity retirement.

World Bank case studies add a further crack. Some coal and gas producers did not surrender sufficient allowances, pointing to penalties too weak to compel full participation at the margin. For an investor, the read is that the market is growing faster than any comparable scheme while its price signal remains too weak to force structural change in the short run. Both are true simultaneously.

Global implications for commodity markets and cross-border carbon rules

What happens inside China’s ETS does not stay there. The moment steel, cement, and aluminium entered the scheme, the market’s design choices acquired direct consequences for global trade.

China produces over half of the world’s aluminium, steel, and cement. That means even marginal cost shifts in its ETS carry global commodity price implications, and it links China’s domestic carbon pricing directly to the European Union’s Carbon Border Adjustment Mechanism (CBAM), which levies charges on the carbon embedded in imported goods.

CBAM implementation in 2026 has shifted the stakes for Chinese exporters considerably, because the carbon price embedded in domestic allowances now feeds directly into the levy calculation at the EU border, compressing the margin between Chinese and European producers as domestic ETS costs rise.

S&P Global Commodity Insights projects that China could export approximately 868.94 million tonnes of CBAM-covered commodities between 2026 and 2040, of which 42% would be iron and steel, 8% cement, and 6% aluminium. That figure remains an S&P Global projection rather than confirmed fact, and it should be read as directional.

The cross-border implications fall into three:

• CBAM alignment, as domestic carbon costs now interact with the carbon price embedded in CBAM charges
• Layered compliance obligations for multinationals, combining domestic allowance management with CBAM-linked reporting
• Commodity price pass-through risk, given China’s dominant share of global output

For investors in global steel, cement, and aluminium supply chains, this is no longer a distant regulatory development. It is a direct input into competitive cost modelling. The direction of allowance tightening over the next two to three compliance cycles will determine whether Chinese producers face a meaningful cost disadvantage relative to producers in higher carbon-price jurisdictions, and the interaction with CBAM turns the offset mechanics into a live variable for trade route and sourcing decisions.

What the next two compliance cycles will determine

The market’s next two years are not a continuation of current trends. They are a fork, and the direction becomes legible through three variables rather than through the headline volume figure.

China’s 2030 climate commitments, anchored in its peak-emissions pledge, create a hard deadline against which the ETS must demonstrate material abatement impact, and that deadline is what makes the next two compliance cycles structurally more important than the record volume figures alone.

Watch these:

1. Allowance tightening pace in steel, cement, and aluminium from the second compliance cycle onward, which reveals Beijing’s actual appetite for imposing real costs.
2. Carbon price trajectory toward or away from the IMF’s US$50 benchmark, against the current implied US$10-12 and the 14.41% year-on-year appreciation seen in January to August 2026.
3. Enforcement credibility, measured by penalty structures and non-compliance outcomes across the 2025 and 2026 compliance years.

The approaching one-billion-tonne cumulative milestone is symbolically important but analytically secondary. Allocation design is where the real signal sits. The 2025 quotas for the new sectors are pre-allocated in the first half of 2026 under the 2026 Allocation Rule (Guohuan Gui Qihou [2026] No. 1), with compliance due by end-2026, and how tightly those caps are drawn will say more than any volume record.

The next structural test comes with refining, petrochemicals, and civil aviation, targeted for inclusion by 2030 according to S&P Global Commodity Insights. That will show whether the market keeps expanding coverage while deferring cost pressure, or whether it starts pairing expansion with genuine caps.

For investors, policymakers, and corporate compliance teams, that leaves a defined window to reposition before compliance costs escalate. The signals to watch are the allocation decisions landing in the first half of 2026 and the 2026 price close relative to the January to August average.

This article is for informational purposes only and should not be considered financial advice. Investors should conduct their own research and consult with financial professionals before making investment decisions. Past performance does not guarantee future results, and financial projections are subject to market conditions and various risk factors. Forward-looking statements are speculative and subject to change based on policy and market developments.

A market approaching a billion tonnes, still proving what it can do

The achievements are genuine. This is the world’s largest carbon market by emissions covered, at roughly 8 billion tonnes of CO2 and around 20% of global emissions when the national system and pilots are counted together. It set record volumes in 2025, its price has appreciated 14.41% year on year, and its expansion brought more than 60% of China’s emissions under a compliance framework for the first time.

Hold those against what remains. Prices still sit at roughly one-fifth of the IMF’s structural-impact threshold. The first cycle over-allocated, issuing 9.01 billion allowances against 8.68 billion tonnes of verified emissions. New sectors receive free allowances through the first cycle, and World Bank case studies document enforcement gaps that a 99.5% formal compliance rate quietly papers over.

The question the record poses is not whether China’s ETS is the world’s biggest carbon market. It is. The open question is whether it becomes the world’s most consequential one.

That answer is not yet written. It is the most important carbon pricing experiment running anywhere, and its success remains genuinely uncertain. The next two compliance cycles will tell you which way it breaks.