Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / How Chinas Carbon Market Is Becoming a Global Price Setter
Transcript
- Lucas: China's national carbon market just got a lot bigger. As of April this year, the government expanded the emissions trading system, or ETS, from power generation to include cement and aluminium production. That's roughly another one and a half billion tonnes of carbon dioxide per year coming under a carbon price for the first time. Luna: That is a massive jump. The power sector alone was already covering about four and a half billion tonnes. Adding cement and aluminium takes China's ETS past the European Union's system in terms of total covered emissions. Lucas: Exactly. China is now the world's largest carbon market by volume, and it's not close. The EU's ETS covers about one point five billion tonnes. China's is now over six billion. But the more interesting question is whether China's carbon price is starting to influence global trade — especially for goods like steel, aluminium, and solar panels. Luna: And that's the angle. Because you've got the EU's Carbon Border Adjustment Mechanism — the CBAM — which is supposed to level the playing field for European producers facing a high carbon price. But if China's own carbon price rises enough, Chinese exporters could get a credit against the CBAM levy. Lucas: Right. The CBAM essentially requires importers to buy certificates corresponding to the carbon price that would have been paid if the goods were produced under EU rules. But if the exporting country already has a carbon price, you can deduct that. So China's ETS price becomes a strategic variable. Luna: What's the current price per tonne in China's market? Lucas: It's been trading around sixty to sixty-five yuan per tonne — roughly eight to nine dollars. The EU price is around seventy euros, so about seventy-five dollars. There's still a massive gap, but China's price has been trending upward. In 2021, when the market launched, it was below fifty yuan. Now it's broken sixty. Luna: And the expansion to cement and aluminium will increase demand for allowances, which should push the price higher. Cement is one of the hardest sectors to decarbonize because half the emissions come from the chemical process of calcination, not just from burning fuel. Lucas: That's the key point. Cement plants can't just switch to renewable electricity to eliminate their carbon footprint. They need alternative materials or carbon capture. So the cost of compliance for Chinese cement producers is going to be significant. And China is the world's largest cement producer — about fifty-five percent of global output. Luna: So that feeds directly into the cost of construction, infrastructure, and real estate. And we already know the property sector is under stress. Higher carbon costs could squeeze margins even further. Lucas: But there's a twist. The Chinese government has been generous with free allowances during the pilot phase. The ETS initially gave out nearly all allowances for free based on historical emissions. That's changing. Starting in 2026, a larger share of allowances is being auctioned, especially for the newly included sectors. Luna: Auctioning means companies actually have to pay for a portion of their emissions upfront. That creates a real cost signal. It also generates revenue for the government, which Beijing has said it will use for green technology subsidies and just transition programs. Lucas: There's another dimension here that ties back to the yuan. Most international carbon credit trades are settled in dollars or euros. But China has been pushing for yuan settlement in its carbon market, especially for the voluntary carbon credit trading platform that launched alongside the ETS. Luna: So it's not just about emissions. It's about establishing the yuan as a currency for carbon finance. If foreign companies want to buy Chinese carbon credits to offset their own emissions — or to comply with CBAM — they may need to hold yuan. Lucas: And that's exactly what Beijing wants. We saw the yuan holding steady at 6.80 per dollar recently. A stable yuan makes it more attractive for international players to participate in China's carbon market without worrying about currency volatility eating into their returns. Luna: Let's talk about the solar industry specifically. China dominates solar manufacturing — about eighty percent of global polysilicon production, seventy percent of solar panels. Those panels have an embedded carbon footprint from the energy-intensive manufacturing process. If China's carbon price rises, does that make Chinese panels less competitive? Lucas: Short term, it raises costs. But Chinese solar manufacturers are already some of the cheapest in the world, and they're also investing heavily in clean energy for their own factories. Many have signed corporate renewable power purchase agreements. So the net carbon intensity per panel is dropping faster than the carbon price is rising. Luna: And on the flip side, European and American solar manufacturers that face much higher carbon prices — or implicit carbon costs via regulations — don't see the same cost advantage erode. Actually, the gap might narrow. Lucas: But there's a more immediate trade impact. The EU is already imposing tariffs on Chinese electric vehicles, as we've discussed in past episodes. Now imagine the EU starts using CBAM to apply carbon tariffs on Chinese steel and aluminium. If China's carbon price is only nine dollars per tonne versus the EU's seventy-five, the CBAM surcharge could be significant. Luna: Unless China raises its carbon price to narrow the gap. That would be a policy choice. Beijing could decide that a higher carbon price is worth it to maintain market access for its exporters, even if it squeezes domestic industry. Lucas: And that's the strategic calculus. China's dual carbon goals — peak emissions by 2030 and carbon neutrality by 2060 — already require a rising carbon price. The ETS is the main policy tool to achieve that. So the trajectory is clear: the price will go up. The question is how fast and how that interacts with global trade. Luna: We should also mention that China has launched a national greenhouse gas emissions monitoring system that uses satellite data and ground sensors to verify reported emissions. That's a big step for credibility. If companies cheat on their emissions, they can be caught. Lucas: That's a crucial piece. A carbon market is only as good as its measurement, reporting, and verification. China has had issues with data quality in the past. But the new monitoring system, combined with stiffer penalties — we're talking fines of up to three million yuan for falsifying data — is designed to build trust. Luna: And trust matters for international linkage. There's been talk of linking China's ETS with other carbon markets, like the EU's or South Korea's. But for that to happen, the EU needs to be confident that China's emissions reductions are real and that the carbon price reflects actual abatement costs. Lucas: We're probably years away from a formal linkage. But China is already engaging in bilateral cooperation on carbon markets with countries like Singapore and New Zealand. And the voluntary carbon credit market — the China Certified Emission Reductions program — is seeing growing international participation. Luna: One more data point that connects to the broader picture. China's exports of goods and services hit three point five trillion dollars in the first quarter of 2026, up from three point three five trillion a year earlier. So the export machine is still running strong. But the composition is shifting toward higher-value products like EVs, batteries, and solar — all of which are energy-intensive and carbon-intensive in their supply chains. Lucas: Right. So the carbon price isn't just an environmental policy. It's a trade policy, a currency policy, and an industrial policy all rolled into one. And as China's ETS expands and matures, it will increasingly set the global benchmark for carbon pricing in manufacturing. Luna: And that's something our listeners can really use. If you're following supply chains, commodity prices, or trade tensions, the carbon price in China is now a variable you need to watch. It's not just a niche climate topic anymore. Lucas: Absolutely. And if today's episode helped make that connection clearer for you — if walking through the economics of China's carbon market has made something click — the way we keep this show ad-free and independent is through listener support. You can buy us a coffee at buy me a coffee dot com slash fexingo. We don't have sponsors, and that's by design. So if you find value here, that link is how you keep it going. Luna: Yeah, it really does help. Even a small contribution adds up. We're grateful for everyone who's chipped in. Lucas: Alright, let's get back to the numbers. One of the most striking things about China's carbon market expansion is the timeline. The cement and aluminium sectors had a compliance deadline of June thirtieth — just last week. So we're now in the first reporting cycle under the new rules. Early data suggests that allowance prices have held steady around sixty-three yuan, which is a good sign for market stability. Luna: And the trading volume? Has it picked up? Lucas: Significantly. Average daily volume in the second quarter of 2026 was about forty percent higher than the first quarter. The inclusion of new sectors brought in dozens of new participants, including some of the largest state-owned enterprises in cement and aluminium. That liquidity makes the price more meaningful. Luna: It also makes the market more attractive for financial players. We've seen banks and asset managers starting to offer carbon-linked financial products — carbon funds, futures contracts, even structured notes tied to the ETS price. Lucas: China's carbon futures are set to launch on the Guangzhou Futures Exchange later this year. That will give companies a way to hedge their carbon costs and give speculators a way to express a view on the direction of the price. It's another step toward carbon as a genuine asset class. Luna: And from a policy perspective, the government has been careful to avoid the volatility that plagued the European ETS in its early years — when prices crashed to near zero. China has price stabilization mechanisms, like a reserve of allowances that can be released if prices spike. Lucas: They also set a floor price through the auction reserve price. In the latest auction, the minimum bid was fifty yuan per tonne. So the government is signaling that it wants the price to stay above a certain level to incentivize abatement. Luna: Let's zoom out for a second. If China's carbon price continues to rise to, say, one hundred yuan per tonne by 2030 — which is within the range of many forecasts — what does that mean for the competitive landscape? Lucas: It would fundamentally alter the cost structure for energy-intensive industries. Steel, cement, aluminium, petrochemicals — these are the backbone of China's industrial economy. A carbon cost of one hundred yuan per tonne, which is about fourteen dollars, would add roughly ten to fifteen percent to the production cost of cement, for example. That's not trivial. Luna: Especially when you consider that China's steel exports have been facing anti-dumping duties from other countries. A rising carbon cost could make Chinese steel less competitive on price, but it could also be used as a justification for trade measures — claiming that Chinese producers are subsidized by low carbon costs. Lucas: That's the CBAM argument in reverse. The EU is essentially saying, 'You're not pricing carbon high enough, so we'll apply a tariff to make up the difference.' If China raises its carbon price, it reduces the justification for CBAM, but it also hurts its own producers. So it's a balancing act. Luna: And meanwhile, the US does not have a federal carbon price. So if China's carbon price rises, US exporters could face a competitive disadvantage in China's market, since they don't pay a carbon price at home but may face one on exports to China? Actually, China's carbon price applies to domestic production, not imports. Lucas: That's right. The ETS covers domestic facilities only. So imports into China are not subject to a carbon charge. That's a key difference from the EU's CBAM, which applies to imports. China has not yet imposed a carbon border adjustment, but there are discussions in academic and policy circles about the need for one. Luna: But if China did impose a carbon border adjustment, it would be a major escalation in climate trade policy. Suddenly, the US, the EU, and China would all have some form of carbon pricing at the border. That could reshape global trade flows. Lucas: It's a plausible scenario, especially if the EU expands CBAM to more sectors and China wants to protect its domestic carbon price from being undercut by imports from countries with no carbon price. But for now, Beijing is focused on building the domestic market. Luna: So the key takeaway for today: China's carbon market is no longer a pilot. It's a real, expanding market that covers over six billion tonnes of CO2, and its price trajectory will have direct implications for global trade, corporate costs, and the competitiveness of Chinese industry. Lucas: And it's a story we'll keep following. There's a lot more to unpack — the role of carbon capture, the impact on China's renewable energy buildout, and how the ETS interacts with other policies like the green electricity certificate system. But for now, we'll leave it there. Thanks for listening, and we'll catch you next time.