China Expands Its National Carbon Emission Trading Scheme to More Industries

On March 26, 2025, China’s Ministry of Ecology and Environment (the MEE) published the “Work Plan for the National Carbon Emissions Trading Market Covering the Steel, Cement, and Aluminum Smelting Industries” (the Work Plan).See the announcement at https://www.mee.gov.cn/xxgk2018/xxgk/xxgk03/202503/W020250326367625819894.pdf. The Work Plan expands the scope of emitters (Key Covered Entities) covered under China’s national carbon emissions trading system (the National Program) from the power industry to also include the steel, cement, and aluminum smelting industries. This expansion is significant because it increases the portion of China’s total carbon emissions subject to the National Program from 40% (power sector only) to 60% (power, plus steel, cement, and aluminum).

Scope of Control and Key Covered Entities

Under the Work Plan, regulated greenhouse gases (GHGs) of China’s National Program for the cement and steel industries will include only CO₂, while the regulated GHGs for the aluminum smelting industry will also include CF₄ and C₂F₆. Initially, in 2021, the National Program covered only the power industry, which accounts for approximately 40% of China’s total GHG emissions. The recent inclusion of the steel, cement, and aluminum smelting industries will add about 1,500 new Key Covered Entities, covering an additional 3 billion tons of carbon dioxide equivalent (CO₂e) emissions. This expansion extends the scope of the National Program to cover 60% of China’s total GHG emissions for a total of 80 billion tons.See the MEE’s Q&A session at https://www.mee.gov.cn/ywdt/zbft/202503/t20250326_1104767.shtml.

The threshold for emitters to become subject to the National Program as a Key Covered Entity remains at 26,000 tons CO₂e per year. Under the Work Plan, the MEE has directed its provincial level branches, in collaboration with other governmental departments, to compile and publish a directory of all Key Covered Entities within each province.

Compliance Obligations of Key Covered Entities

According to the Work Plan, the provincial branches of the MEE, along with other governmental departments, will publish a Quantification and Distribution Plan (the Annual CEA Plan) for Carbon Emission Allowances (CEAs) annually. The Annual CEA Plan will (1) include the list of Key Covered Entities in the applicable province for the applicable compliance cycle, and (2) set out the number of CEAs that will be distributed for free to each Key Covered Entity based on its reported emissions to the MEE. In accordance with the Annual CEA Plan, each provincial branch of the MEE will then allocate CEAs to the Key Covered Entities’ registry account in the national carbon emissions registration system, and the Key Covered Entities will have to surrender a sufficient number of CEAs by the applicable deadline to satisfy compliance obligations under the National Program.

Additionally, Key Covered Entities in the power, steel, cement, and aluminum smelting industries that had previously engaged in regional pilot emission trading programs will now exit the regional programs and enter the National Program.

Unlike some other emission trading programs in which the government sets a gradually declining cap on the total quantity of GHGs that can be emitted for covered sectors, the Work Plan outlines a phased approach to managing GHG emissions of the covered sectors:

• First Compliance Cycle (2024): The MEE will allocate CEAs to Key Covered Entities for free for the first compliance cycle, which covers GHG emissions occurring in the year 2024. The compliance deadline, by which the Key Covered Entities must surrender CEAs to satisfy their compliance obligations, is set on December 31, 2025.
• Subsequent Two Compliance Cycles (2025 and 2026): The MEE will allocate CEAs based on certain carbon-intensity benchmarks, thus incentivizing companies to lower the carbon intensities of their products. In other words, the government does not intend to set a hard cap on the total quantity of GHG emissions.
• Refinement Phase (Post-2027): The MEE plans to implement a transparent and comprehensive CEA allocation methodology to cap the total quantity of GHG emissions of the covered sectors by limiting the total number of CEAs distributed in the market.

Specifically, we note that the Work Plan does not contemplate that any CEA will be sold at auctions. Thus, any transactions of CEAs will presumably involve CEAs that Key Covered Entities have received for free but do not need.

Implications

The expansion of China’s National Program to include the steel, cement, and aluminum smelting industries indicates China’s continuing focus on working toward its carbon neutrality goals.

Latham & Watkins will continue to observe these developments and provide insights into the evolving landscape of China’s carbon emissions trading market. Please refer to our prior Client Alert on this topic for more information.

The authors would like to thank Yuzheng Liang for her contribution to this article.