China Plans Major Carbon-Market Expansion Into Petrochemicals and Chemicals

Vice Minister of Ecology and Environment Li Gao announced the planned expansion on August 13, building on a carbon market that began with the power sector in 2021. In 2025, the system regulated 3,378 key emitters, including 2,087 power companies, 962 cement producers, 232 steel companies and 97 aluminum smelters. Allowance trading volume increased 24% to 235 million tonnes, with turnover reaching 14.63 billion yuan. The average transaction price was approximately 62.4 yuan per tonne, although the market price subsequently recovered to 98.21 yuan on August 14, 2026, representing a 31.6% increase from the end of 2025. Cumulative trading volume had exceeded 930 million tonnes by the end of July.

Bringing petrochemicals and chemicals into the system will be more complicated than simply adding another group of factories. The sector contains refineries, steam crackers, fertilizer plants, coal-to-chemicals facilities and producers of ammonia, methanol, plastics and numerous specialty chemicals. Their emissions arise from different combinations of fuel combustion, industrial heat, chemical reactions and carbon-intensive feedstocks. Their overall product footprints also depend heavily on electricity, whose emissions are already priced upstream through the power sector. Regulators will therefore need detailed and credible benchmarks for different production routes. Rules that are too broad could unfairly reward inefficient plants, while excessively narrow rules would increase reporting costs and reduce market transparency.

China’s existing system largely allocates allowances free of charge using output-based benchmarks. A company receives allowances according to its production level and the emissions-efficiency standard set for its industry. Plants that perform better than the benchmark can sell surplus allowances, while less efficient facilities must buy additional units. This structure limits the immediate financial burden on manufacturers, but it does not yet impose a fixed ceiling on total emissions because allowance supply can increase when production rises. Beijing’s roadmap calls for absolute caps to begin in sectors with relatively stable emissions by 2027 and for a broader cap-and-trade system, combining free and paid allocations, to be established by 2030. The inclusion of highly diverse chemical producers will be an important test of that transition.

The expansion also has an international trade dimension. The European Union’s Carbon Border Adjustment Mechanism entered its definitive phase in January 2026, requiring importers of covered products to account for embedded emissions. Its current scope includes cement, steel, aluminum, fertilizers, hydrogen and electricity, meaning that fertilizers and hydrogen already connect parts of the chemical industry to Europe’s carbon rules. The European Commission has also examined a phased extension to organic chemicals and polymers. The EU’s published CBAM certificate price was €75.28 per tonne for the second quarter of 2026, far above China’s domestic carbon price, although the two prices are not directly comparable because the markets use different allocation and accounting rules. Verified carbon costs paid in the exporting country can be deducted from the CBAM obligation, giving Chinese producers a reason to strengthen plant-level emissions measurement even where the domestic price remains lower.

For companies, the policy should improve the economics of energy efficiency, waste-heat recovery, electrified industrial heat, renewable electricity, green hydrogen, recycled feedstocks and carbon capture. Yet many of these technologies still cost considerably more than conventional coal-, oil- or gas-based production, so the current carbon price may be insufficient to support major projects without additional subsidies, green finance or long-term purchase agreements. The expansion could nevertheless widen the cost gap between modern, efficient producers and smaller plants with outdated equipment, accelerating consolidation within an industry already affected by excess capacity and weak margins.

The central question is therefore not how much carbon the expanded market covers on paper, but how strongly it changes investment and operating decisions. Accurate emissions data, gradually tighter benchmarks, more active trading and a credible move toward absolute caps will be essential. Introducing paid allowances and a market-stability mechanism could also improve price discovery and prevent an excessive supply of allowances from weakening the incentive to cut emissions. If these reforms advance as planned, the petrochemical and chemical expansion will turn the national carbon market into a more effective industrial-policy instrument while helping China pursue its targets of peaking carbon emissions before 2030 and reaching carbon neutrality before 2060. If allocations remain generous, the system may improve reporting and compliance without producing equally substantial reductions.