China's National Carbon Market Expands to Aluminium and Steel, Tripling Coverage to 60% of Emissions

China's national emissions trading system entered a new phase on Tuesday with the formal inclusion of the aluminium and steel sectors, more than tripling the market's coverage of national carbon dioxide emissions from approximately 18 per cent to a projected 60 per cent. The Ministry of Ecology and Environment announced the expansion in a joint statement with the National Development and Reform Commission, capping a two-year preparatory phase that began in mid-2024.

Under the new rules, 1,672 facilities across the two sectors are now subject to mandatory emissions reporting, allowance allocation and trading obligations on the Shanghai Environment and Energy Exchange. Combined with the existing power-sector compliance pool of 2,257 thermal generators, the market now regulates close to 3,930 installations and approximately 8.4 billion tonnes of carbon dioxide equivalent annually.

How the expansion is structured

The aluminium sector enters the market with a benchmark-based allocation method, with free allowances calibrated to the emissions intensity of the most efficient 80th percentile of producers. Facilities exceeding the benchmark must purchase allowances on the secondary market or face penalties of up to five times the prevailing carbon price. The benchmark for primary aluminium has been set at 12.0 tonnes of carbon dioxide per tonne of metal, including indirect emissions from electricity consumption, a figure substantially below the global industry average of 16.7 tonnes.

The steel sector enters under a phased compliance schedule. The first compliance year (2026) covers blast-furnace and basic-oxygen-furnace facilities producing more than 1 million tonnes annually. Electric-arc-furnace operations, scrap-based producers and smaller integrated mills join in 2027. The benchmark for blast-furnace steel has been set at 1.92 tonnes of carbon dioxide per tonne of crude steel, with a planned tightening of 2 to 3 per cent annually through 2030.

What this means for prices

Carbon allowances on the Shanghai exchange have rallied sharply on anticipation of the expansion. The closing price for the December 2026 vintage stood at 117.4 yuan per tonne on Tuesday, up from 89 yuan at the start of 2026 and 55 yuan a year earlier. Analysts at Refinitiv and the International Energy Agency project prices reaching 150 to 180 yuan per tonne by 2027 as the market tightens and free allocation declines.

The market remains substantially below the European Union Emissions Trading System, which closed Tuesday at 78.20 euros per tonne (roughly 605 yuan), but the price gap is the narrowest it has been since the Chinese market launched in July 2021.

Sectoral implications

The aluminium and steel additions land on industries that are already under multiple environmental and trade pressures. China produced 41.2 million tonnes of primary aluminium in 2025 (about 60 per cent of global output) and 1.005 billion tonnes of crude steel (53 per cent of world production). Both sectors face the European Union's Carbon Border Adjustment Mechanism, which entered its definitive phase on 1 January 2026 and now imposes embedded-emissions levies on imports of these products into the bloc.

Chinese exporters of aluminium and steel will receive credit under CBAM for any carbon price they have paid domestically. With the national ETS now active in both sectors, exporters can deduct the prevailing Chinese carbon price from their CBAM liability, narrowing the effective levy substantially. Industry estimates suggest the deductible amount will rise from near zero in 2025 to roughly 18 to 22 euros per tonne of carbon dioxide by 2027, recovering between 25 and 30 per cent of the CBAM cost.

Producers most exposed

• China Hongqiao, the world's largest aluminium producer, with capacity of 6.5 million tonnes per year.
• Chalco (Aluminum Corporation of China), the state-controlled aluminium and alumina major.
• Baowu Steel, the world's largest steelmaker by output.
• Ansteel Group, China's second-largest integrated steel producer.
• Jianlong Group and Shagang Group, leading private steelmakers in northern China.

The transition fund and just-transition mechanics

The Ministry of Ecology and Environment confirmed the establishment of a 50 billion yuan transition fund, financed by a portion of allowance auction revenue, to support technology upgrades at facilities that will struggle to meet the tightening benchmarks. Eligible projects include hydrogen-direct-reduced-iron pilots, low-carbon aluminium electrolysis using renewable power, and carbon capture and storage demonstrations.

The fund will operate on a co-financing model, providing concessional loans at the People's Bank of China's medium-term lending facility rate minus 50 basis points, with maturities of up to 15 years. The first call for proposals opens on 1 June 2026, with allocations expected by the fourth quarter.

Compliance timeline

1. 1 May 2026: Mandatory emissions reporting begins for aluminium and large blast-furnace steel facilities.
2. 30 September 2026: First allowance allocation issued for 2026 compliance year.
3. 30 June 2027: First compliance surrender deadline for aluminium and large steel facilities.
4. 1 January 2027: Electric-arc-furnace and smaller integrated steel facilities enter the system.
5. 2028: Cement, glass and chemicals tentatively scheduled to follow.

International reaction

The European Commission, in a statement released by Climate Action Commissioner Wopke Hoekstra, welcomed the expansion as "a significant step that strengthens the integrity of global carbon pricing." The commission noted that the Chinese benchmarks for aluminium and steel are now broadly comparable in stringency to EU ETS benchmarks, although the price differential remains material.

The United States, where federal carbon pricing legislation remains stalled, did not issue a formal response, although the State Department's special envoy for climate change confirmed that bilateral consultations on carbon-market alignment will continue at the Bonn climate intersessional meetings in June.

The Asian Development Bank praised the move as supportive of regional decarbonisation goals, while flagging the need for continued progress on tightening the cap, reducing free allocation share over time, and integrating offsets only from rigorously verified domestic projects.

What still needs to happen

For the Chinese ETS to function as a genuine decarbonisation lever, three further reforms are widely seen as necessary. The first is a declining absolute cap, replacing the current intensity-based design that allows total emissions to rise with output. The second is a shrinking share of free allocation, currently at roughly 95 per cent of total allowances across all sectors, with the long-term aim of full auctioning by 2035. The third is the inclusion of indirect emissions from electricity in benchmarks across all sectors, eliminating the current double-counting risk between the power sector and downstream consumers.

Officials in Beijing have signalled that all three reforms remain under discussion as part of the 15th Five-Year Plan, which begins formal drafting in mid-2026. For now, the addition of aluminium and steel represents the most significant tightening of climate policy in China since the original ETS launch and a meaningful shift in the architecture of global carbon pricing.