How the Two Markets Interact

The ETS and CCER markets are designed to be complementary rather than competing mechanisms:

ETS forms the compliance backbone. The mandatory ETS establishes a declining cap on emissions from China’s heaviest-emitting industrial sectors. Covered entities receive free allowances (declining year-on-year) and must purchase additional allowances if their actual emissions exceed their allocation. The ETS creates the primary carbon price signal in China’s carbon market.

CCER provides offset flexibility and broader sector engagement. ETS-covered entities can use CCER credits to offset up to 5% of their compliance obligation, creating demand-side pull for voluntary credits. Additionally, the CCER mechanism enables emission reduction projects in sectors not covered by the ETS (forestry, renewable energy, methane capture, etc.) to generate revenue from carbon credit sales, expanding the reach of carbon pricing beyond the ETS-covered sectors.

The 5% offset limit creates a price ceiling effect. Because ETS-covered entities have limited demand for CCER credits (max 5% of compliance), and because CCER credits are generally cheaper than ETS allowances, the CCER price tends to track the ETS price at a 20–40% discount. In mid-2026, with ETS allowances at CNY 120–130/tonne, CCER credits trade at approximately CNY 75–95/tonne.

When Should Foreign Firms Participate in Each Market?

ETS Participation: Mandatory

Foreign firms in ETS-covered sectors have no choice about participation — it is a legal obligation. However, the nature of ETS participation can be managed strategically:

• Passive compliance: Simply purchase allowances at the prevailing market price to cover any shortfall. This is the simplest approach but the most expensive over time as allowance prices rise.
• Active reduction: Invest in emission reduction projects, energy efficiency, fuel switching, or renewable energy to reduce actual emissions below allocated allowances, creating surplus allowances that can be sold. This turns compliance from a cost center into a revenue source.
• Trading optimization: Build in-house carbon trading capability to optimize the timing of allowance purchases, reduce transaction costs, and potentially profit from market timing. This requires dedicated expertise and exchange membership.

CCER Participation: Opportunity-Driven

Foreign firms should consider CCER participation when one of the following applies:

• Your factory has emission reduction project potential: If your China operations can implement qualifying emission reduction projects — such as rooftop solar installation, waste heat recovery, methane capture from anaerobic treatment, or fuel switching from coal to natural gas — the CCER mechanism enables monetization of those reductions.
• Your factory is an ETS-covered entity seeking cheaper offsets: If you are in an ETS sector, buying CCER credits at CNY 75–95/tonne instead of ETS allowances at CNY 120–130/tonne reduces compliance costs by 25–35% before the 5% offset limit is reached.
• Your global parent company has voluntary carbon neutrality commitments: Many multinational corporations have made net-zero or carbon-neutrality commitments that include China operations. CCER credits provide a China-specific, regulator-approved mechanism for offsetting residual emissions in the China portfolio.

Key Developments in 2024–2026

Several developments in recent years have reshaped both markets:

ETS Developments

• Expansion to new sectors (2025–2026): The long-anticipated expansion of the ETS from power generation (covering ~5 billion tonnes CO2) to cement (~1.3 billion tonnes), electrolytic aluminum (~200 million tonnes), and steel (~2 billion tonnes) has tripled the market’s coverage. Foreign-invested steel and aluminum processors are now directly affected.
• Stricter allowance allocation: The 2025 allocation benchmark for power generation was tightened by approximately 4.5% compared to the 2021–2024 benchmark, increasing the proportion of entities with allowance shortfalls and driving prices higher.
• Futures market introduction: The Guangzhou Futures Exchange has obtained regulatory approval to launch carbon emissions allowance futures, expected to begin trading in 2026–2027. This will enable hedging and more sophisticated risk management for ETS participants.

CCER Developments

• CCER program relaunch (January 2024): After a 7-year suspension of new CCER project registrations (2017–2024), the MEE relaunched the program with stricter quality standards, updated methodologies, and enhanced verification requirements.
• New methodology approvals: The relaunch initially approved four methodologies: onshore wind, grid-connected solar photovoltaic, methane from agricultural waste, and forestry carbon sinks. Additional methodologies for offshore wind, concentrated solar power, green hydrogen, and methane from coal mine gas are under development.
• Supply constraints supporting prices: Because CCER issuance was frozen for 7 years, the stock of available credits is limited, supporting prices in the CNY 75–95/tonne range despite the broader economic context.
• Linkage with international carbon markets: China is exploring mutual recognition arrangements with international carbon markets, particularly under Article 6 of the Paris Agreement. Foreign firms with China operations should monitor these developments as they may enable CCER credits to be used for international offset obligations.

Practical Implementation Guide

For Foreign Firms with ETS-Covered Operations

1. Verify your ETS inclusion status: Confirm with the provincial Ecology and Environment Bureau whether your facility’s sector and emission threshold trigger ETS participation. Inclusion is not optional — but many facilities remain unclear about their status.
2. Establish carbon monitoring and reporting infrastructure: Install continuous emission monitoring (CEMS) where required by ETS rules, implement regular emission calculations following MEE-approved methodologies, and contract with a qualified third-party verification body for annual emission verification.
3. Register on the national ETS trading platform: Open an account with the Shanghai Environment and Energy Exchange. This requires corporate registration documents, legal representative identification, and appointment of authorized traders.
4. Develop a carbon allowance strategy: Model your facility’s emission trajectory against projected free allowance allocation (which declines annually). Determine whether you will be a net buyer or seller and plan procurement/hedging accordingly.
5. Evaluate CCER offset use: Assess whether purchasing CCER credits (at 25–35% discount to ETS allowances) for the 5% offset quota reduces compliance costs. Contract with a CCER broker or exchange member for procurement.

For Foreign Firms Exploring CCER Projects

1. Conduct a CCER project feasibility assessment: Identify emission reduction opportunities at your China operations that match approved CCER methodologies. The most common off-the-shelf opportunities are rooftop solar installations and energy efficiency improvements with clear, measurable emission reductions.
2. Prepare a Project Design Document (PDD): Engage a qualified CCER consulting firm (such as SGS, TÜV Rheinland, or China-licensed consultants) to prepare the PDD following MEE-approved methodology templates.
3. Validation by an accredited verification body: Contract with an MEE-accredited validation body to validate the project design and additionality claims.
4. Project registration: Submit the validated PDD to the MEE’s CCER registration platform for formal registration.
5. Monitoring and verification: Implement monitoring systems as specified in the PDD, collect data throughout the monitoring period (typically 1–3 years), and engage a verification body to verify emission reductions.
6. CCER credit issuance and trading: Once verified, CCER credits are issued to the project developer’s account on the national CCER registry and can be sold through any of the nine carbon exchanges.

Strategic Recommendations by Firm Type

Large MNC Manufacturer (e.g., chemical, automotive, electronics OEM, with China factories)

Likely affected by both ETS (direct participation or supply chain pressure) and potential CCER developer. Recommended strategy: (1) establish a centralized China carbon management function with dedicated ETS compliance and CCER project development teams, (2) optimize across ETS and CCER for lowest-cost compliance, (3) monetize emission reduction projects through CCER, and (4) align China carbon management with global net-zero strategy.

Medium-Sized Foreign-Owned Factory (e.g., food processing, plastics molding, metal fabrication)

May or may not be directly in ETS, but likely affected by energy costs indirectly passed through from ETS-covered power generation. Recommended strategy: (1) baseline your carbon footprint, (2) implement low-cost energy efficiency measures, (3) evaluate rooftop solar for both energy savings and potential CCER revenue, and (4) if ETS-covered, appoint a carbon compliance manager.

Foreign Trading Company or Distributor with China Warehousing

Not directly in ETS, minimal CCER development opportunity. Recommended strategy: (1) monitor carbon market developments as they may affect logistics costs through fuel pricing, (2) consider voluntary CCER purchases for corporate social responsibility reporting, and (3) prepare for potential supply chain carbon footprint reporting requirements from customers.