China's Green Transition: Milestones Reached in 2024 and Objectives for 2025

Power plant, Industry, Chimney image. © Benita Welter. Pixabay Content License  / pixabay

Introduction

As one of the world’s largest economies and the highest emitter of greenhouse gases, China’s progress toward a green transition is critical not only for its own future but also for the global fight against climate change. In 2024, the country achieved significant milestones on its path to decarbonization while setting ambitious objectives for 2025. This article explores these achievements and outlines China's goals for the near future, focusing on the Emission Trading Scheme (ETS). 

China’s ETS was first launched in 2021, with the goal of establishing a carbon market that enables emitters to trade emission credits. This mechanism supports China’s “dual climate” objectives of reaching peak carbon emissions by 2030 and achieving carbon neutrality by 2060 (Climate Action Tracker, 2024).  The National ETS began with the power sector, but as reported by the Progress Report of China’s National Carbon Market, as of July 2024 it includes 2,257 key emitting entities, covering more than 40% of total CO2 emissions. The year 2024 has been remarkable for the development of this scheme, as its coverage was broadened to include the sectors of steel and petrochemicals, hence covering more than five billion tons of annual CO2 emissions (Ministry of Ecology and Environment, 2024). 

Revenue from carbon credit trading has been directed towards renewable energy initiatives and the development of green technologies (Carbon Brief, 2024a). The ETS has become a key element of China’s climate strategy, encouraging industries to transition to cleaner practices and technologies. China’s Green Transition has achieved pivotal milestones during the last year: in January, a new policy instrument was introduced to support the “dual carbon” goals: the National Voluntary Greenhouse Gas Emission Reduction Trading Market (Ministry of Ecology and Environment, 2024). The “dual carbon” goals refer to the commitment undertaken by China to peak carbon dioxide emissions before 2030 and achieve carbon neutrality before 2060. This initiative underscores the country’s dedication to transitioning towards a green and low-carbon economy (World Economic Forum, 2023). To this end, the National Voluntary Market expands the commitment of the compliance market by promoting broader societal participation. According to the text of the regulation, voluntary greenhouse gas emission reduction projects must meet four broad criteria, namely authenticity, additionality, uniqueness, and conservativeness. (Ministry of Ecology and Environment, 2024).

The two markets function separately but are linked by an offset mechanism that ensures an overall decrease of China’s Carbon Emission Allowances (CEAs). Collectively, they constitute China’s National Carbon Market. The foundation for the well functioning of China’s National Carbon Market is a strong digital infrastructure, which allows for the integrated management of all business processes, centralized data collection throughout the entire process, and a comprehensive scientific decision-making process (Ministry of Ecology and Environment, 2024).  

Another milestone in China's Green Transition was reached on January 25, when the State Council issued the Interim Regulations for the Management of Carbon Emission Trading, the country’s first dedicated legislation aimed at tackling climate change. Effective from May 1, the regulations outlined key aspects of carbon trading market activities and established the legal responsibilities of participating entities. By enhancing legal oversight and enforcement, the regulations introduced stringent penalties for violations, emphasizing the principle of employing  strict measures and robust legal frameworks to safeguard the ecological environment. According to the text of the document, the managing and overseeing of carbon emission rights trading is the responsibility of the Ecological Department of the State Council (Ecological Department of the State Council, 2024). 

On April 24, 2024, the National ETS closing price surpassed 100 yuan per ton for the first time. This milestone reflects the growing recognition of the green finance potential of CEAs among financial institutions, as their prices are increasingly viewed as benchmarks for climate-related investments, carbon asset management, and allowance pledges. These developments spurred investments in green and low-carbon projects, leading to significant enhancements in energy efficiency within the thermal power sector, supporting adjustments in the energy mix, and fostering sustainable, low-carbon development. This demonstrates the market's critical role in allocating resources for carbon reduction and motivating businesses to embrace green transitions (Xinhua, 2025). 

In September, the Ministry of Ecology and Environment (MEE) announced plans to expand the ETS beyond the power sector to include steel, aluminum, and cement industries. This expansion is expected to increase the market's coverage of national carbon dioxide emissions from 40% to 60%, as noted by the MEE (Ministry of Ecology and Environment, 2024). China's expansion of its ETS has the potential to advance its carbon reduction goals, but experts highlight limitations in its current design. Unlike other carbon markets that cap total emissions, China's ETS is based on carbon intensity—the emissions per unit of output—rather than absolute emissions (Climate Action Tracker, 2024). 

To have a clearer understanding of the scheme and its limitations, it is possible to compare it with the European Union’s Emission Trading Scheme. China’s ETS remains in its early stages relative to the European system, which has been in place since 2005 and whose coverage expands to a variety of sectors, including maritime and domestic aviation (International Carbon Action Partnership, n.d.). Despite being recently implemented nationwide, China’s ETS already covers more greenhouse gas emissions than the entire EU. However, it has yet to realize its full potential in driving a greener society. Unlike the EU’s cap-and-trade system, which gradually reduces the supply of carbon allowances to ensure emissions decline, China’s ETS operates under a ‘flexible cap.’ This approach relies on an intensity-based formula that factors in total power generation, fuel type, and other variables to determine carbon allowances. Beyond emission reductions, cap-and-trade systems offer better control over allowance supply and enhance market predictability—both essential for the long-term advancement of the ETS ecosystem (Kings Equity Research Group, 2021).

China’s bottom-up method for setting emission caps allows for the distribution of allowances to all covered companies free of charge. These allocations are determined through a national benchmarking system, which assesses the average carbon intensity of key sectors and products before comparing it to individual emitters. Since each emitter receives allowances equal to its verified emissions, the system does not impose a fixed cap on total emissions. The intensity-based allocation primarily encourages efficiency improvements within the coal sector, rather than creating a direct incentive to shift from coal to renewable energy: the system allows more efficient coal plants to take the place of less efficient ones, ensuring that the same amount of electricity continues to be produced from coal but with lower emissions due to improved efficiency. In contrast, a system based on an absolute cap, like that of the European Union, would apply financial penalties to emissions exceeding the set limit, creating a stronger incentive for companies to invest in renewable energy (Roldao, 2022). 

Lauri Myllyvirta, a senior fellow at the Asia Society Policy Institute’s China Climate Hub, identifies this as a fundamental issue. He notes that carbon-intensive enterprises face only a minimal carbon price relative to the actual cost of emission allowances. In some cases, companies could even profit from increasing their output as long as their emissions intensity stays below government-set industry benchmarks. Myllyvirta has suggested that a shift to a total emissions cap could help address these issues, given that the cap is stringent enough to elevate carbon prices and meaningfully drive emissions reductions (Carbon Brief, 2024b). He also points to the inclusion of steel in the ETS as a potential opportunity to improve the benchmarking system: with the increasing adoption of Electric Arc Furnaces (EAFs)—a steelmaking technology that significantly lowers emissions—there is an opportunity to standardize benchmarks for both EAFs and traditional Blast Furnace-Basic Oxygen Furnaces (BF-BOFs) (Carbon Brief, 2024c). Such standardization, Myllyvirta explains, could encourage greater utilization of EAFs, aligning with China’s targets for expanding EAF steel production. 

What to Expect in 2025?

This year marks a critical juncture for China’s green transition, particularly in the advancement of its ETS. As the concluding year of the 14th Five-Year Plan, it will test whether China can realign its trajectory to meet existing energy and carbon intensity reduction targets (The State Council of the People's Republic of China, 2025). This year also brings significant global climate expectations, with countries required to submit their updated Nationally Determined Contributions under the Paris Agreement by February 2025. China’s forthcoming climate plan for the next decade will not only set the stage for its domestic sustainability efforts but will also signal its commitment to global climate leadership (Carbon Brief, 2024c). 

The Chinese ETS is anticipated to see several transformative developments in 2025: one major step is the planned expansion to include other high-emitting sectors.  These industries, which contribute significantly to China’s carbon footprint, will be officially integrated into the system, marking a substantial increase in the scheme’s coverage to cover approximately 65% of all greenhouse gas emitted in the country, accelerating China’s pace for peaking CO2 emissions by 2030 and reaching carbon neutrality by 2060 (Velev, 2025). This enlargement of China's emissions trading scheme will force around 1,500 industrial enterprises to buy CEAs to cover CO2 generated by fossil fuel consumption, giving them an incentive to decarbonise. However, as analysts highlight, the oversupply of free allowances will limit the effectiveness of the expansion. Initially, companies are granted free allowances to familiarise with market rules and improve data collection, with only less efficient firms needing to buy extra credits. The government is adopting a "trial and error" approach to integrating new sectors, and stricter incentives, including reduced free allocations and tougher targets, which are expected after 2026 and which will be aimed at raising carbon prices (Stanway, 2024).

Another critical development is the initiation of China Certified Emissions Reduction (CCER) certificates within the voluntary carbon market. These certificates will provide entities with a flexible tool to meet compliance obligations, encouraging participation in emission reductions while fostering market activity. This measure underscores China’s intent to enhance the flexibility and scalability of its carbon markets (Ministry of Ecology and Environment, 2024). 

Additionally, policymakers are considering addressing the issues related to the current intensity-based cap, and transforming it into an absolute cap on emissions measured in total tons of CO2. If successful, this shift would represent a significant evolution in China’s carbon market structure, aligning it with global best practices and enabling more stringent emissions control. Policymakers have also proposed allowing traders and investors to participate in China Emission Allowances trading within the national ETS, which could boost liquidity and efficiency in the market (Climate Action Tracker, 2024).

While the inclusion of new sectors and the rollout of CCER certificates are confirmed for 2025, the realization of the latter two measures—transitioning to an absolute cap and enabling broader market participation—hinge on the establishment of clear timelines and regulatory frameworks. As Zhibin Chen, Senior Manager for Carbon Markets and Pricing at Adelphi, notes, these steps are vital for the long-term success of China’s carbon market and its broader climate objectives (Carbon Brief, 2024c). China’s advancements in emissions trading in 2025 will play a crucial role in shaping its progress toward carbon neutrality. By aligning domestic policy with global climate goals, these efforts position China as a significant contributor to global sustainability and a leader in carbon market innovation.

In conclusion, while 2024 demonstrated the system’s potential through legislative progress, market expansion, and financial milestones, key challenges remain. he ETS’s reliance on a carbon intensity-based cap rather than an absolute emissions limit means overall emissions can still rise, limiting its effectiveness in achieving deep decarbonization. The inclusion of high-emitting industries like steel and petrochemicals has strengthened the market’s influence, but without stricter caps and benchmarks, its full potential remains untapped. Looking ahead to 2025, China has the opportunity to enhance its ETS by expanding sectoral coverage, introducing China Certified Emissions Reduction certificates, and improving market efficiency. A major shift under consideration is transitioning to an absolute emissions cap, aligning with global best practices to ensure real emissions reductions. Additionally, allowing broader market participation could boost liquidity and investment in low-carbon technologies. As the final year of the 14th Five-Year Plan, 2025 will be a crucial test of China’s ability to meet its energy and emissions targets. With global climate commitments on the horizon, China’s next steps in ETS reform will not only shape its domestic sustainability efforts but also solidify its position as a key player in global climate leadership.

This article does not necessarily reflect the opinions of European Guanxi, its leadership, members, partners, or stakeholders, nor of those of its editors or staff. They have been formulated by the author in their full capacity, and shall not be used for any other purposes other than those they are intended for. European Guanxi assumes no liability or responsibility deriving from the improper use of the contents of this report. Any false facts, errors, and controversial opinions contained in the articles are proper and exclusive of the authors. European Guanxi or its staff and collaborators cannot be held responsible or legally liable for the use of any and all information contained in this document.

ABOUT THE AUTHOR

Francesca Metsovitis is a writer at European Guanxi and a student in the Double Degree in Global Management and Politics at NOVA School of Business and Economics in Lisbon. She holds a Bachelor’s degree in Politics, Philosophy, and Economics from LUISS Guido Carli, where she wrote her thesis in European Law on "Chinese FDI in the European Union: Legal Framework and the Belt and Road Initiative." During her Erasmus+ experience, she earned the Certificate of European Studies from Sciences Po Strasbourg, further deepening her understanding of European affairs. Her main areas of interest include the EU’s diplomatic action, international trade, and investment law.

This article was edited by Agnes Monti and Marina Ferrero.

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