How to Navigate China’s Carbon Emissions Trading Scheme: 2026 Guide for Foreign Companies

How to Navigate China’s Carbon Emissions Trading Scheme: 2026 Guide for Foreign Companies

China’s national carbon emissions trading scheme (ETS) now covers over 5 billion tonnes of CO2 annually, making it the largest carbon market in the world by volume. Since its national expansion in 2021 and the significant 2025–2026 reforms, the ETS has expanded from the power generation sector to include seven additional industrial sectors: petrochemicals, chemicals, building materials, iron and steel, non-ferrous metals, paper manufacturing, and aviation. For foreign-invested enterprises (FIEs) operating in China, understanding and complying with ETS obligations is no longer optional — it is a mandatory compliance requirement that directly impacts operational costs, reporting obligations, and corporate reputation.

The Evolution of China’s Carbon ETS: From Pilot Programs to National Framework

China’s carbon trading journey began with seven regional pilot programs in 2013 (Beijing, Shanghai, Tianjin, Shenzhen, Guangdong, Hubei, and Chongqing), followed by the Fujian pilot in 2016. These pilots covered approximately 3,000 enterprises across multiple sectors and established the operational foundation for the national scheme. The national ETS, formally launched in February 2021 under the Ministry of Ecology and Environment (MEE), initially covered only the power generation sector — approximately 2,162 enterprises accounting for roughly 4.5 billion tonnes of CO2 emissions.

The 2025–2026 expansion represents the most significant regulatory development in China’s carbon market history. Effective January 1, 2026, the expanded ETS covers approximately 8,500 enterprises with annual emissions above 26,000 tonnes of CO2 equivalent. The MEE has indicated that by 2028, coverage will extend to enterprises with emissions above 13,000 tonnes, which would bring an estimated 15,000 enterprises into the scheme. Foreign companies should note that participation is based on emissions thresholds at the legal entity level, not the consolidated group level — meaning each separately registered Chinese subsidiary or joint venture is evaluated independently.

Step 1: Determine Whether Your Enterprise Is Covered by the ETS

The first compliance step is determining whether your FIE falls within the ETS emissions threshold. The MEE publishes an annual list of covered enterprises based on the previous year’s verified emissions data. For the 2026 compliance cycle, the threshold is set at 26,000 tonnes of CO2 equivalent per year, calculated from direct Scope 1 emissions (fuel combustion, industrial processes) and indirect Scope 2 emissions from purchased electricity. Foreign companies with energy-intensive manufacturing operations, chemical processing facilities, or large-scale industrial plants are very likely to meet this threshold.

Important nuance for FIEs: The emissions threshold applies at the level of each individually registered legal entity in China, not at the consolidated group level. A foreign company with multiple WFOEs or JVs in China will need to evaluate each entity separately. In a 2025 survey by the American Chamber of Commerce in China, 34% of respondent FIEs initially underestimated their emissions and were later added to the covered list, facing retroactive compliance obligations and penalties for the missed reporting period. Proactive self-assessment using the MEE’s Carbon Emissions Accounting Guidelines (GB/T 32150-2025) is strongly advised, even if you believe your operations fall below the threshold.

Step 2: Register in the National Carbon Emissions Registration and Trading Systems

Once confirmed as a covered enterprise, you must register in two complementary systems: the National Carbon Emissions Registration System (for compliance account management and allowance holding records) and the National Carbon Emissions Trading System (for executing trades on the Shanghai Environment and Energy Exchange). Registration requires submission of: the enterprise business license, the emissions verification report from an MEE-accredited verification body, the legal representative identification, and the authorized trader designation form.

The registration process typically takes 15–20 working days from submission of complete documentation. The MEE introduced an accelerated registration pathway in January 2026 for enterprises newly entering the scheme, with a target processing time of 10 working days. During registration, each enterprise receives a unique compliance account number, which is used for all allowance allocation, holding, transfer, and surrender activities. Foreign companies should designate at least two authorized account representatives to ensure continuity of access — system downtime due to personnel changes has been a significant operational risk for FIEs, with some reporting trading delays of 30–45 days when a sole representative left the company.

1. Engage an MEE-accredited third-party verification body (list published at mee.gov.cn/verifiers) to conduct baseline emissions verification
2. Submit the verification report along with registration application through the Hubei Carbon Emissions Registration Center portal
3. Complete the online training module for authorized representatives (mandatory, ~4 hours)
4. Receive compliance account credentials and system access certificates (typically within 15 working days)
5. Designate settlement bank accounts for trading margin deposits through the China Carbon Market clearing system

Step 3: Understand Allowance Allocation Methods for Your Sector

China’s ETS allocates emissions allowances through a hybrid system combining free allocation and auctioning. For the 2026 compliance cycle, approximately 90% of allowances are allocated free of charge based on sector-specific emissions benchmarks, with the remaining 10% auctioned. The free allocation methodology differs by sector: power generation uses a product-based benchmark approach (tonnes of CO2 per MWh of electricity generated), while the seven new industrial sectors use an output-based intensity approach (tonnes of CO2 per tonne of product output).

Foreign companies should pay particular attention to the sector-specific benchmark values published by the MEE. These benchmarks are set based on the average emissions intensity of the top 10% most efficient enterprises in each sector, meaning that enterprises with emissions intensity above this level will receive fewer free allowances than their actual emissions, creating a compliance shortfall. In the power sector, the benchmark for coal-fired units in 2026 is 0.8706 tonnes CO2/MWh, compared to the sector average of approximately 0.95 tonnes CO2/MWh. This gap means approximately 60% of coal-fired power enterprises will need to purchase supplementary allowances on the open market.

Step 4: Execute Emissions Monitoring, Reporting, and Verification (MRV)

The MRV process is the operational backbone of ETS compliance. Covered enterprises must: monitor emissions continuously using MEE-approved monitoring methodologies, submit quarterly emissions reports through the national MRV platform within 45 days of each quarter-end, and engage an accredited verification body to produce an annual verified emissions report by March 31 of the following year. The MEE has standardized monitoring methodologies across all eight covered sectors, with sector-specific guidelines published in the “Guidelines for Accounting and Reporting of Greenhouse Gas Emissions” series (24 separate documents as of 2026).

Non-compliance with MRV obligations carries significant penalties. Failure to submit quarterly reports on time results in a fine of RMB 10,000–50,000 per occurrence, plus a daily penalty of RMB 500 for each day of delay beyond the deadline. Submission of inaccurate emissions data — even if unintentional — can result in fines of RMB 50,000–200,000 and mandatory corrective action within 30 days. The MEE conducts random audits of approximately 10% of covered enterprises annually, with foreign-invested enterprises selected at a slightly higher rate of 12–15% in the 2025 audit cycle. Repeat violations can result in the enterprise being added to the public environmental credit blacklist, which affects access to bank financing, government procurement contracts, and preferential tax treatment.

Step 5: Manage Compliance Trading and Allowance Surrender

By December 31 of each compliance year, covered enterprises must surrender allowances equal to their verified annual emissions. Enterprises with a shortfall (emissions exceeding allowances held) must purchase supplementary allowances on the ETS trading platform or through negotiated bilateral transactions. Enterprises with a surplus can sell excess allowances or bank them for future compliance cycles (banking is permitted for up to 3 years under current rules). The trading platform operates Monday through Friday, 9:30 AM to 3:00 PM Beijing time, with price fluctuation limits set at ±10% from the previous trading day’s settlement price.

Foreign companies should develop a year-round trading strategy rather than leaving allowance procurement to the compliance deadline. Historical data shows that carbon prices in China’s ETS demonstrate significant seasonal volatility, with prices typically rising 15–25% in the final 60 days before the compliance deadline as enterprises scramble to cover shortfalls. A phased purchase strategy — acquiring allowances quarterly based on verified emissions data — can reduce average procurement costs by 8–12% compared to a lump-sum year-end purchase. Many FIEs working through Chinese banks have established carbon credit lines that allow them to purchase allowances on margin, spreading the cash flow impact across the compliance year.

• China Certified Emission Reductions (CCERs): Covered enterprises may use CCERs from voluntary emissions reduction projects to offset up to 5% of their compliance obligation. CCERs typically trade at a discount of 10–20% compared to standard ETS allowances.
• Cross-sector trading: Since the 2026 expansion, allowances are theoretically transferable across sectors, but in practice, most trading occurs within the same sector due to information asymmetry and differing benchmark methodologies.
• Compliance reserves: The MEE maintains a strategic reserve of approximately 5% of total annual allowances, which can be injected into the market at the regulator’s discretion to prevent price spikes above RMB 150/tonne.

Where to Go From Here

China’s carbon ETS is evolving rapidly, with new sectors, stricter benchmarks, and higher carbon prices projected through 2030. Foreign companies that invest early in robust MRV systems and trading capabilities will be best positioned to manage compliance costs and capitalize on allowance trading opportunities.

• Ready to act? Read a step-by-step guide to completing ETS registration and MRV setup for FIEs
• Still comparing? See a side-by-side comparison of carbon compliance strategies for manufacturing FIEs
• Need numbers? Try an interactive carbon compliance cost calculator for your specific sector

How to Navigate China’s Carbon Emissions Trading Scheme: 2026 Guide for Foreign Companies — first published on China Gateway 360. Last updated: July 2026.