China’s National ETS Eyes Financial Institution Entry in 2026 as Industrial Expansion Targets 26% Abatement Cost Cut

China’s emissions trading system is navigating a critical transition: with three energy-intensive industries completing their first compliance year, the government has announced it will aim to admit financial institutions to the national carbon market before the year is out — a combination of changes that a leading Tsinghua University researcher argues could transform both the market’s efficiency and its social cost of abatement.

According to an interview published by 碳交易网 (TanJiaoYi.com), originally conducted by China Environment News (中国环境), 2026 marks both the opening year of China’s 15th Five-Year Plan and the first compliance year for steel, cement, and aluminium smelting under the national carbon market. Zhang Xiliang, Director of the Institute of Energy, Environment and Economy at Tsinghua University and Chair of the Carbon Emissions Trading Professional Committee of the Chinese Society for Environmental Sciences, provided a comprehensive assessment of the market’s current trajectory and medium-term direction.

The most consequential near-term development Zhang flagged concerns financial institution access. At this year’s Fifth Climate Investment and Finance International Symposium, a senior Ministry of Ecology and Environment (MEE) official stated that authorities would “strive”to introduce the first cohort of financial institutions to the national carbon market within the year. Zhang characterised the prospective entry as “an important milestone in carbon market development.”

He identified two principal benefits he anticipates from opening the market to financial players. First, a more diverse participant base would strengthen price discovery: under the current structure dominated by compliance entities, trading clusters around annual settlement deadlines, producing volatile prices that Zhang said inadequately reflect the economy-wide marginal cost of cutting emissions. Financial participants, unconstrained by compliance cycles, would trade more continuously and help generate a more stable, representative price signal. Second, properly regulated financial institutions could function as a market-based stabilising mechanism, moderating price swings without requiring administrative intervention. Zhang was equally emphatic about the hazards, specifically naming excessive speculation and market concentration as threats requiring pre-emptive regulatory guardrails. He called for dedicated management rules covering entry qualifications, position limits, and disclosure requirements — alongside a cross-departmental supervisory structure — to be in place before admissions proceed.

On the significance of this year’s sectoral expansion, Zhang argued the gains are principally economic rather than symbolic. Adding steel, cement, and aluminium lifts the share of national emissions covered by the ETS to approximately 60%, encompassing, in his assessment, essentially all of China’s major high-emitting industrial domains. Based on calculations by his Tsinghua research team, expanding from a power-sector-only scheme to the current four-sector arrangement reduces the total social cost of achieving an equivalent national abatement outcome by 26%. Extension to the chemical and petrochemical sectors could yield a further 15% cost reduction on top of that. Zhang also offered a decomposition of the carbon market’s contribution to the 15th Five-Year Plan’s 17% carbon-intensity reduction target: while the four covered sectors deliver only about 16% of the required total reduction in direct terms, comprehensive effects — including the market’s dampening of fossil-fuel power output and the headroom it creates for renewable energy — lift the combined contribution to an estimated 71%.

Zhang assessed the current carbon price of approximately 80 yuan per tonneas consistent with the requirements implied by China’s present climate targets, and anticipated a long-run upward trajectory as targets tighten and allowance scarcity increases.

Background

Prior to this year’s expansion, China’s national carbon market covered only the power generation sector. With the addition of steel, cement, and aluminium in 2026, the scheme now spans four sectors — the first widening in the market’s history and the first time enterprises outside power generation face mandatory allowance surrender. The expansion is also the system’s first practical test of multi-sector MRV (monitoring, reporting, and verification) coordination within a single national registry.

Zhang framed the ETS as a structural pathfinder for a broader governance transition: China’s shift from energy-consumption-based “dual controls” — constraining energy intensity and total energy volume — toward carbon-emission-based controls that target carbon intensity, total carbon output, and emissions performance standards. He argued that the carbon market has already completed this transition internally (moving from energy efficiency metrics to carbon benchmarks, and from energy accounting to MRV), and that the institutional experience, technical standards, and management architecture accumulated in the ETS could serve as a replicable template when dual-carbon controls are applied to the wider economy. He projected that the market could eventually cover more than 6,000 key emitting enterprises responsible for 80% of national emissions.

On the voluntary side, Zhang highlighted the CCER (China Certified Emission Reduction) mechanism as a complementary instrument enabling projects outside the mandatory scheme to realise economic value from their emission reductions. He noted that methodological development in agriculture, forestry, and related sectors is progressively expanding CCER’s scope, and indicated that a future pathway for individual citizens — natural persons — to trade CCER credits is under consideration, a step that would significantly broaden public engagement with carbon markets beyond institutional actors.

Why It Matters

For industrial compliance entities entering the mandatory scheme for the first time — particularly in steel, cement, and aluminium — Zhang’s advocacy for a “start loose, tighten gradually” policy approach provides a practical orientation. His recommendation is that initial allowance allocations remain relatively generous, with paid (auctioned) allowances beginning at a low proportion of total issuance, to cushion transition costs. The implication for companies entering the market now is that the initial lenient phase is a finite adaptation window, not a settled operating environment: the trajectory Zhang described is explicitly one of progressive benchmark tightening and rising paid-allocation ratios. Those that build dedicated carbon governance structures and internal expertise during this window will be structurally better positioned when those constraints increase in severity.

For potential financial participants and credit buyers, the conditions Zhang outlined suggest the entry framework will be tightly scoped. The stated design objective — using financial institutions to improve liquidity and price discovery, not to enable unrestricted position-taking — signals a prescriptive regime likely to limit the scale and type of permissible activity, at least initially. Zhang’s explicit call for position limits and cross-agency oversight is a clear indicator that authorities intend to constrain the very behaviour that would be most attractive to unconstrained financial actors. Calibrating expectations to a tightly bounded initial framework, rather than open commodity-style access, is the prudent starting position.

For policymakers and market analysts, the 26% cost-reduction estimate for multi-sector integration provides a quantified argument — from a research team closely associated with Chinese climate policy design — for the economic superiority of broad-based carbon pricing over fragmented sectoral controls. A market limited to one sector leaves abatement cost savings on the table that cross-sector trading captures by allowing emission reductions to flow toward entities with the lowest marginal costs. The additional 15% reduction projected from further sectoral expansion reinforces the economic logic for continued widening. Meanwhile, the analytical decomposition of the market’s contribution to the intensity target — from 16% direct to 71% comprehensive — offers a methodology for assessing ETS impact that extends well beyond headline allowance surrender figures, and may inform how other Asian jurisdictions report on and evaluate their own trading schemes.