National carbon market to include cement, iron and steel, and electrolytic aluminum

The national emissions trading scheme (ETS) is finally expanding.

On Monday, the Ministry of Ecology and Environment (MEE) released a draft plan to add the cement, iron and steel, and electrolytic aluminum industries to the national ETS.

Some context: China’s national ETS began trading in 2021 and currently only covers the power generation industry.

• Entities that trade on the ETS must surrender enough allowances to account for their emissions.
• The MEE has been planning to expand the ETS since 2021, but issues with emissions accounting have caused delays.
• The State Council addressed the emissions accounting issue by introducing stricter penalties for fraudulent emissions accounting earlier this year.

The expanded ETS will cover ~60% of China’s carbon emissions, up from ~40% (MEE 1, MEE 2).

• The number of entities covered will increase to ~3,700 from 2,257.

More types of emissions will be covered too.

• CO2 emissions from all industries will be included, along with carbon tetrafluoride and hexafluoroethane emissions from the electrolytic aluminum industry.

The expansion will be gradual.

• The first compliance cycle for the three industries ends in 2025, covering their 2024 emissions.
• The MEE will focus on familiarizing the new participants with the system and ensuring data quality, providing plenty of free allowances before tightening the supply of allowances in 2027.

Get smart: The MEE retains a cautious approach to developing the ETS, focusing on improving functionality before putting pressure on emitters to reduce emissions.

• It will take years before meaningful emissions reductions happen.