China’s Carbon Emissions Trading Market: Current Situation, Impact Assessment, Challenges, and Suggestions

Abstract

As the world’s largest developing and carbon-emitting country, China is accelerating its greenhouse gas (GHG) emission reduction process, and it is of vital importance in achieving the goals set out in the Paris Agreement. This paper examines the historical development and current operation of China’s carbon emissions trading market (CETM). The current progress of research on the implementation of carbon emissions trading policy (CETP) is described in four dimensions: environment, economy, innovation, and society. The results show that CETP generates clear environmental and social benefits but exhibits mixed economic and innovation effects. Furthermore, this paper analyses the challenges of China’s carbon market, including the green paradox, the low carbon price, the imperfections in cap setting and allocation of allowances, the small scope of coverage, and the weakness of the legal supervision system. Ultimately, this paper proposes recommendations for fostering China’s CETM with the anticipation of offering a comprehensive outlook for future research.

1. Introduction

Global climate change has become one of the major challenges to long-term human development [1]. The IPCC calls for quick action on climate change [2]. To address environmental challenges, governments around the world have established a series of international agreements, including the Kyoto Protocol and the Paris Agreement, with the aim of promoting global sustainable development [3]. For now, more than 100 countries have committed to reaching carbon neutrality targets by the middle of the century [4], marking a critical turning point in global carbon reduction [5]. The UN Climate Change Conference (COP29) in November 2024 conveyed the enthusiasm of the world’s countries to participate in action against climate change and that the mitigation of global warming is imminent.

China stands as one of the world’s largest carbon emitters, with its greenhouse gas (GHG) emissions having increased by 311.3% between 1990 and 2023, while accounting for 33.98% of global CO₂ emissions during this period [6]. As the largest developing economy, China plays a pivotal role in global climate governance [7]. In 2020, China announced a ‘dual carbon’ goal of achieving a carbon peak by 2030 and carbon neutrality by 2060 [8]. To accelerate decarbonisation efforts, China approved the implementation of its CETP in 2011 [9]. As of 2024, there are 36 operational carbon trading markets globally [10], which cover more than 18% of global greenhouse gas (GHG) emissions, with China’s carbon market contributing more than half of this total [11].

The idea of carbon trading was formally introduced as early as 1997 in the Kyoto Protocol [12]. The carbon emission trading policy (CETP) is based on the Coase theorem, which provides incentives for enterprises to internalise the external costs of emissions by clarifying the property rights of carbon emissions and allowing the market to achieve a Pareto-optimal allocation of carbon emissions to realise the unity of interests between enterprises and society [13,14]. This policy is widely recognised as an effective way to reduce emissions and combat climate change [14]. The CETP is a market-driven environmental regulatory instrument, the core of which lies in the market mechanism used to achieve total control of carbon emissions [15]. It usually involves the government allocating initial carbon emission allowances to market participants, which represent the total amount of carbon dioxide that a firm is allowed to emit over a specific period. Firms whose actual emissions are lower than their allowances can sell the remaining allowances on the market; conversely, they need to purchase additional allowances on the market to meet compliance requirements [16]. In 2005, the European Union (EU) launched the world’s first carbon emissions trading system (EU ETS) [16], followed by the New Zealand Emissions Trading System (NZ ETS), which began operating in 2008 [1].

Currently, China’s carbon emissions trading market (CETM) has moved from the pilot stage to the national stage. Numerous studies have examined the effects of China’s CETM, but there is an overall scarcity of review studies related to the current research status and summary of the latest research progress of the current national CETM. Furthermore, the assessment of the impact of CETP only starts from a single level and lacks multi-dimensional analysis and summary. This paper summarises the current risks faced by the CETM and makes recommendations by reviewing the history, current status, and impact assessment of the CETM. This paper is structured as follows: Section 2 is the article screening process. Section 3 compiles the history of the development of the CETM in China and describes the current operational status of the CETM. Section 4 reviews the recent research advances in the impact assessment of the CETM, mostly from the past decade. Section 5 further analyses the major problems. Section 6 explores feasible suggestions for future development, expecting to provide a clearer perspective on CETM research in China.

2. Methods

The Web of Science (https://apps.webofknowledge.com, accessed on 23 June 2025) and ScienceDirect (https://www.sciencedirect.com/, accessed on 23 June 2025) search engines were utilised to explore the existing body of literature, with the former serving as the primary database and the latter as a complementary source. The key search terms used in this review include the core terms in the fields of “carbon market” and “carbon trading”. China’s first batch of pilot carbon markets had been launched in 2014, and the number of related thematic literature publications began to increase from that year; thus, the time span for literature retrieval was chosen to be from 2014 to 2024.

Based on the search strategies, the initial selection criterion was to focus on studies conducted in China, and all the selected literature exclusively comprises peer-reviewed articles published in academic journals. A preliminary screening was performed to filter relevant studies. Next, the abstracts of the retrieved articles were reviewed to confirm their relevance. Additionally, throughout the writing process, supplementary articles were incorporated through citation tracking, reference lists, and complementary research networks. Ultimately, a total of 383 articles were selected for review (Figure 1).

3. Development and Current Situation of the CETM

3.1. Development of the CETM

To mitigate the extent of global warming and implement its commitment to reduce emissions, China has formulated a series of relevant policies and targets (Figure 2) to gradually implement its CETP. The history of CETM development in China can be divided into three stages [17] including initial exploration phase, pilot test phase, and national carbon market opening phase, which are further explained in Figure 2:

Initial exploration phase (2002–2011): China began reducing carbon emissions through the Clean Development Mechanism (CDM) under the Kyoto Protocol, partnering with developed nations on projects that advanced sustainable development and helped both sides meet climate goals. This phase laid the foundation for China’s climate policies.

Pilot test phase (2011–2021): China first proposed the establishment of a carbon trading centre in 2008 [18], approved seven cities as carbon trading pilots in 2011 [19], and then explicitly proposed the gradual expansion of the scope of the pilots [20]. The actual operation of China’s CETM began on 8 June 2013, and with the launch of the Shenzhen trading market, China took an important step in the field of carbon emissions trading [21]. Subsequently, the Beijing, Shanghai, Guangdong, and Tianjin carbon markets officially started operating; Hubei and Chongqing began operating in 2014; and the Fujian pilot was officially launched in 2016 [17]. The selection of CETM pilots included major urban centres and important provincial areas in Eastern, Central, and Western China, which can provide diverse data and empirical results for subsequent policy advancement analysis. The CETMs in the pilot regions consisted of seven main aspects: the legal system, the regulated coverage, the cap on total amount of carbon allowances, the methodology for allocating carbon allowances, the carbon emission monitoring reporting and verification (MRV), the offset mechanism, and the trading management [13]. Shanghai, Hubei, and Guangdong adopted the baseline method for allowance allocation; Beijing and Tianjin used the historical intensity method; and Chongqing adopted the self-declaration method [22].

National Carbon Market Opening Phase (After 2021): In 2017, China’s National Development and Reform Commission (NDRC) indicated that the power sector would take the initiative to launch a national CETM [22], with a unified national carbon emissions trading system (ETS) taking shape [23]. On 16 July 2021, the national carbon market online trading was officially launched, incorporating more than 2000 electric power industries and covering approximately 4.5 billion tonnes of CO₂ emissions, which is the largest CO₂ emissions trading market in the world [24]. The opening of the national CETM meant that the development of China’s CETM was steadily improving, making great contributions to global emission reduction.

3.2. Current Situation of the CETM

The national CETM covers 2257 key emitting enterprises by 2024 with annual CO₂ emissions of approximately 5.1 billion tonnes, accounting for more than 40% of the total domestic emissions [11].

The operation of the national CETM mainly includes carbon emission data accounting, reporting, and verification; allowance allocation and surrender; and market trading supervision (Figure 3). The allocation of allowances is based on the industry benchmark method of free allocation. The ecological and environmental authorities of each province review the annual preallocated allowance volume, transmit and inform key emission units of the allowance data through the national carbon emission trading market information management platform [25], and verify the compliance of the key emission units in the previous year. Enterprises can carry forward unused annual emission allowances to future compliance periods, allowing flexible management of carbon quotas over time.

Since 2021, the national carbon market has completed two compliance cycles (regulated entities must complete the mandatory compliance cycle comprising emissions monitoring, reporting, verification, and final allowance surrender within statutory timelines [26]) [27,28]. The first compliance cycle had a cumulative volume of 179 million tonnes of carbon allowances, a cumulative amount of CNY 7.661 billion, a carbon price that fluctuated between 40–60 CNY/tonne, and an allowance compliance rate of 99.5%. Starting from the second compliance cycle, the time interval for the national carbon market has changed from one year to two years, with improvements in all aspects. The carbon allowance volume is 263 million tonnes, with a turnover of CNY 17.258 billion. The carbon price fluctuates between 50 and 82 CNY/tonne, and the compliance degree of allowances has been further improved. In 2023, the carbon intensity of national thermal power and the carbon intensity of electric power decreased by 2.38% and 8.78%, respectively, compared with that in 2018, and the emission reduction effect of the carbon market will be gradually reflected [27]. At the moment, the third compliance cycle of the national CETM’s allowance surrender work has been initiated, and the arrangement of the fourth compliance cycle’s allowance allocation and surrender work has also been determined in advance [29].

China’s CETM is divided into two main parts: the compliance CETM and the voluntary CETM [21,30]. The compliance market and the voluntary market operate independently of each other and are interconnected through the allowance surrender and offsetting mechanism, which together constitute the national carbon market system. The market trading process is shown in Figure 4. In October 2023, the release of the Measures for the Administration of Voluntary Greenhouse Gas Emission Reduction Trading [31] clarified the general idea, process, and rights and responsibilities of the participating entities in the establishment of China’s voluntary CETM and further standardised the operational framework of the market. In January 2024, the national voluntary greenhouse gas emission reduction trading market was formally launched [27], and China restarted its six-year suspension of the China Certified Carbon Emission Reduction (CCER) program. The Ministry of Ecology and Environment (MEE) issued a methodology for four voluntary GHG emission reduction projects [32], and the development of the national voluntary carbon market was standardised.

The construction of the national CETM builds on the successful experience of the eight CETM pilot projects, with the pilot market coexisting with the national market and covering companies not yet included in the national market. The eight pilots are currently operating well (Figure 5), and Taiwan’s carbon market is under consideration.

To actively promote the construction of the CETM, provinces and cities have also issued policy documents to regulate the operation of the CETM. Zhejiang has adopted a demerit point system for verification organisations and incorporated it into environmental credit evaluation [33]. Heilongjiang and Guangxi have proactively driven the development of forestry carbon trading [34,35]. Shenyang introduced a paid allowance allocation mechanism and gradually increased the proportion of paid allocation [36]. Jilin graded the compliance risk of controlled enterprises and practised graded control [37]. The Chinese government continues to strengthen the national CETM and pilot CETMs to make greater contributions to addressing global climate change.

4. Recent Research on CETM Impact Assessment

Evaluating the effectiveness of carbon emissions trading policies is critical for informing policy adjustments. Extensive research has analysed the impacts of China’s carbon trading system, categorising outcomes into four key areas: environmental, economic, innovation, and social, as illustrated in Figure 6. Figure 7 further shows the link between the year of the study and the different impacts.

4.1. Environmental Effects

The CETP has a synergistic effect on reducing pollution and carbon emissions. It plays an important role in reducing carbon emissions [38,39,40]. Dong et al. [41] found that carbon emissions at the implementation site were reduced by 18.2%, and the emission reduction effect gradually increased over time. Similar results have been reported in other studies [42,43,44], with the reduction effect being more pronounced in the economically developed eastern region [45]. Li and Niu [22] observed a significant reduction in carbon emissions from the power sector in the pilot provinces. Tan and Lin [46] discovered that the CETP was able to significantly reduce the carbon emissions of energy-intensive industries, but the effect on the total value of industrial output was not obvious. Peng et al. [47] reported that the CETP can reduce the carbon intensity of the covered targets by improving energy efficiency. Yu et al. [23] demonstrated that the CETP can improve carbon efficiency through the emission reduction effect. Liu and Yin [48] showed that the effectiveness of the CETM relies on the integrity of the policy, the flexibility of the market, and a high degree of compliance to be fully exploited. Gao et al. [49] analysed spatial spillovers and reported that the CETP promotes carbon emission reduction in non-pilot regions, which has a positive spatial spillover effect [50].

The CETP can synergistically reduce the discharge of wastewater, solid waste, and wastewater. Cheng et al. [51] concluded that the CETP has a synergistic effect on carbon reduction and pollution abatement and can effectively inhibit the emission of air pollutants (SO₂, PM2.5). Liu et al. [52] revealed that the abatement effect of the CETP on PM2.5 is the strongest in the summer because of the cyclonic activities. Almond and Zhang [53] confirmed that the implementation of the CETP can significantly improve air quality. Further exploration revealed that the larger the daily carbon trading volume is, the more obvious the reduction in air pollution [54]. Many studies have shown that the implementation of the CETP can effectively curb corporate wastewater, dust (SO₂, NO_x, CO), and particulate matter emissions [13,52,55], with the positive impact on pollution control being more pronounced in the northern cities, in resource-exhausted cities (refers to an urban area experiencing economic decline due to prolonged over-reliance on exploitation of specific natural resources [56]), and in large cities [3]. Fu [57] found that the impact of the CETP on wastewater pollution (COD, ammonia-nitrogen) was not significant. The reasons for the differences in the results may be related to the different indicators selected for the measurements, the time of the study, and the regional scope. The coverage of the CETM will be further expanded in the future, which may simultaneously enhance the synergistic management effect on wastewater abatement. Xian et al. [55] discovered that the CETP is more effective than carbon abatement in controlling air pollution, which is related to China’s comprehensive pollution emission control policy system, while further analyses found that the industrial structure, technological advancement, and foreign investment play intermediary roles [52,58].

Shao et al. [59] showed that the CETP had a positive spatial spillover effect on PM2.5, but there was a negative spillover effect on SO₂, which may have been caused by the upgrading of the industrial structure and the outwards migration of the secondary industry. The spatial spillover effect will gradually decrease with increasing distance from the pilot area [52]. It is recommended that economic penalty measures be taken for regions with negative spillover effects to avoid negative spillover effects affecting the overall implementation effect of the policy. Some studies have revealed that carbon emission trading policies can have unfavourable side effects on local air pollution, and firms may achieve emission and cost reductions by reducing pollution control equipment or reducing their operation [60]. We suggest that subsidies should be used to incentivise companies to actively reduce pollution, that local environmental regulation should be strengthened, and that attention should be given to the effects of the interactions between policies with different environmental objectives when formulating policies to maximise the effect of synergistic policy governance.

Carbon emissions contribute to the increase in global temperature, yet the environmental health impacts of the accompanying co-pollutant emissions are usually localised [61]. Currently, the level of air pollution in China is more serious [52], and the synergistic emission reduction benefits of the CETP on environmental pollutants need to be emphasised to achieve the goal [54] of reducing the PM2.5 concentrations.

4.2. Economic Effects

There is debate about the impact of the CETP on the overall economic development of a country [16]. Some people believe that it inhibits the overall development of the economy, whereas others believe that there is a positive impact.

Some scholars have argued that the implementation of the CETP leads to a loss of gross domestic product (GDP) and welfare [62] and that the degree of negative impact on the economy is related to the price of carbon [63]. Although environmental regulations can quickly promote environmental protection, they may also incur additional production costs and limit the production and business decisions of enterprises [64]. From this perspective, implementation of environmental regulations may harm the economy. Lin and Jia [43] found through a scenario analysis that in the case where only the power sector participates in the CETM, there will be a negative effect on GDP ranging from 0.19% to 1.44% [47]. On this basis, the Carbon Generalised System of Preferences (CGSP) can be considered for incorporation into the Chinese carbon market to compensate for the negative economic impacts of the CETP [65], such as Shanxi’s ‘Sanjin Green Life Carbon Inclusion Promotion Platform’ [66].

Some scholars have discovered that the CETP has a positive effect on economic growth [67]. Zhang et al. [68] demonstrated that carbon trading has a positive effect on economic output in the industrial sector and has potential benefits with time. The CETP can mitigate the economic losses and adverse employment impacts of firms under the emission reduction target [69,70]. Xian et al. [71] reported that the CETP has great market potential in terms of emission reduction and economic growth. Huang et al. [72] argued that building a CETM would have a positive effect on the development of a country’s overall economy and promote the development of a low-carbon economy. Dong et al. [41] further reported that the promotion of regional economic output and health expenditures by the CETP could effectively reduce the average per capita health expenditures of residents and improve their health level. The CETP can also significantly promote green total factor productivity (GTFP) in pilot regions [73]. The carbon trading pilot policy exacerbates economic volatility in the short term but promotes high-quality economic development in the long term [74]. Some studies have shown that the CETP does not has generate economic dividends in the short term, and its long-term implementation will achieve both environmental and economic dividends [12,75]. Gao [76] found that a carbon trading policy significantly improves the quality of a county’s low-carbon economy. Moreover, the implementation of the CETP does not affect GDP, possibly because the surplus of allowances reduces the effectiveness of the policy [77].

The influence of the CETP on the economy is associated with market vitality, and enhancing market vitality can decrease the impact of the policy on the production and operation of enterprises and the possible negative impact on a country’s economic development. The low carbon price, the small coverage, and the small number of participating may all lead to a lack of market vitality. The problems of the CETM are described in detail in Section 5 of this paper.

4.3. Innovation Effects

Innovation is a critical factor in driving economic growth and addressing environmental challenges [21]. Porter’s hypothesis suggests that reasonable environmental regulations internalise the external costs of environmental pollution for firms, thus stimulating technological innovation [12]. The compliance cost hypothesis assumes that environmental regulations increase firms’ production costs and thus inhibit innovation [78,79]. There is no consensus on the impact of the CETP on technological innovation. Three views exist: facilitating effects, inhibiting effects, and undetermined relationships [57,80].

Yang et al. [7] concluded that the CETP can increase the level of technological innovation in pilot provinces and cities. Liu and Liu [79] found that large enterprises, state-owned enterprises, and the three traditional industries are more obviously affected. Jia et al. [81] reached the same conclusion via heterogeneity analyses. Liu and Li [82] revealed that large firms and firms with a high degree of external attention were more significantly affected by green innovation. On this basis, the government can actively promote carbon trading policies to the public and use public monitoring to urge enterprises to actively achieve carbon emission reduction through technological innovation. Liu et al. [83] showed that state-owned enterprises tend to develop high-quality green invention patents. Bai et al. [84] reported that the CETP plays an important role in the development of green innovation through the intermediary effects of the industrial structure, energy structure, human capital, and foreign direct investment. Zhang et al. [85] found that the CETP promotes green innovation through the improvement of human capital as well as the strengthening of the government. Appropriate coverage, emission control targets, and active trading markets are also important paths for promoting green innovation [86]. Liu and Sun [87] reported that the degree of marketisation, industrial structure upgrading, and the concept of green consumption can positively regulate the impact of CETP on low-carbon technological innovation. The CETP tends to promote technological innovation in state-owned, large firms, whereas there may be a disincentive for smaller, non-state-owned firms. The industrial structure, energy structure, and human capital usually play a mediating role. Therefore, it is necessary to strengthen the support for the technological innovation of small and non-state companies, which can be accomplished through technological innovation subsidies to stimulate innovative R&D, promote knowledge-sharing cooperation and exchange among enterprises, and maximise the promotion of technological innovation by the CETP.

Chen et al. [64] reported that the CETP inhibits firms’ green innovation activities, especially the invention of green patents, and that this inhibitory effect is more pronounced in manufacturing firms, small firms, and non-state-owned firms. Zhang et al. [88] revealed that the CETM inhibits green innovation in the short term and that the inhibitory effect diminishes over time. Other scholars have argued that CETP inhibit firms’ innovative activities [89] or have not been found to promote firms’ innovation [90]. The policy effects are generally two-sided. The behaviour of some firms by purchasing carbon emission trading allowances can depress the incentive to engage in technological innovation. Local government subsidy policies can also influence firms’ innovation activities. Nevertheless, the ability of CETP to promote technological innovation cannot be denied. Hence, it is necessary to supervise and guide the implementation of the policies to give full play to their favourable impact.

Overall, the innovation effect of the CETP has obvious heterogeneity. At the same time, attention should be paid to the innovation spillover effects of CETP [91,92,93]. Only by constructing a carbon trading system that is compatible with the local economic and cultural context can we effectively incentivise green innovation behaviour [83].

4.4. Social Effects

The implementation of the CETP can alleviate some social problems. In terms of social inequality, Huang et al. [72] showed that the government can redistribute income from the CETP to low-income families or affected enterprises to mitigate the problem of social inequality. The CETP can reduce social inequality by preventing corporate executives from pursuing excessive compensation [94]. The CETP can successfully alleviate the spatial inequality problem arising from the imbalance in the supply and demand of energy and the disparity in land resources between regions [95].

In terms of employment, Yang et al. [7] reported that the CETP is able to increase the scale of employment. Cong et al. [96] found that the CETP can increase the overall employment level of a region, although unemployment rates increase in some industries. Yu and Li [15] found that CETP had a positive spatial spillover effect on neighbouring areas, improving the employment situation in adjacent areas. Enhancing employment can alleviate the contradiction between environmental protection and economic development to a certain extent.

In terms of air pollution and population health, Hao et al. [97] showed that the CETM can mitigate the positive correlation between temperature and infectious diseases, which was more pronounced in summer and autumn. This maps to the finding in Section 4.1 that the CETM mitigates human health problems caused by excess CO₂ emissions. Jia and Lin [98] reported that CETP improves population health by reducing environmental pollution. The health benefits of the CETP are 1/3 of the health benefits of atmospheric control policies, and the benefits of combining carbon and air pollution policies are even greater [52]. One study revealed that the CETP can cause health damage in some provinces that purchase allowances [99]. To avoid the occurrence of health damage, limiting the eligibility of enterprises to purchase carbon allowances is recommended, and enterprises located in areas with poor air quality themselves should be restricted from purchasing or the purchase price should increase appropriately. The market trading process can be strictly regulated to prevent distribution of air pollution emissions from being overly concentrated, leading to increased regional inequality.

In addition, the CETP affects the behaviour of local governments. The CETP will lead to the Hawthorne effect (the high priority to environmental objectives will lead to a crowding-out on the investment of resources in other objectives), which may affect the final implementation of the policy [100]. Therefore, monitoring the policy implementation of local governments and conducting performance appraisals of local governments are needed to avoid excessive policy incentives with empty slogans.

5. Challenges

Many studies have been conducted to prove the effectiveness of China’s CETM in terms of environment, economy, innovation, and society, but there are still some risks that have attracted the attention of many scholars, such as the green paradox, imperfections of the carbon allowance allocation methodology, and the low carbon price.

5.1. Green Paradox

Shortcomings in the policymaking can lead to a worsening of the situation, a phenomenon known as the ‘green paradox’ [101]. The green paradox can lead to time lag effects of policies on the time scale and carbon leakage effects on the spatial scale [102].

Ge et al. [101] found that the CETP is more effective in reducing emissions during the announcement period than during the implementation period. The time lag effect affects the abatement potential during the policy implementation period, whereas non-pilot regions in the national CETP will avoid future losses by increasing emissions during the announcement period.

The existence of the spatial scale green paradox (carbon leakage) can undermine the overall effectiveness of policy implementation [103]. Jiang et al. [104] demonstrated that the CETP led to a reduction in carbon emissions in the pilot areas but an increase in carbon emissions in neighbouring cities and that carbon leakage may have occurred due to the relocation of carbon-intensive firms from the pilot areas to neighbouring non-pilot areas. Possible pathways of carbon leakage include electricity transport, investment, competitiveness changes, and enterprise relocation, resulting in carbon emissions shifting to areas that are difficult to cover by local regulations [105]. Pan and Yu [106] found that the CETP induces enterprises to relocate by increasing negative attention and social capital investment. A similar phenomenon of carbon displacement was noted in other studies [107], with further analyses of the significant contribution of government intervention to the extent of carbon leakage [108]. In addition, some studies have detected reverse carbon leakage in the carbon market in some regions, which may be attributed to the low dynamics of the pilot market at that time; when the participation level increases, the direction of the leakage will change from negative to positive [103]. One study failed to find carbon leakage [109], possibly because the sample size of the study was too narrow.

5.2. Low Carbon Prices

Carbon price is one of the major factors affecting the effectiveness of the CETP, and many researchers have focused on studying the carbon price in China, including the mechanism affecting the carbon price [110,111], the prediction of the carbon price [112,113,114,115,116], the positioning of the carbon price range [117], and the fluctuation of the price [118,119].

In recent years, China’s carbon price has been in a fluctuating and rising state (Figure 8), and the carbon price is excessively low in comparison with that of other countries [11] (Figure 9). The oversupply of allowances, imperfect market mechanisms, and improper government regulation can lead to low carbon prices [120,121].

A low carbon price can cause a series of problems: First, it can trigger the rebound effect (CETP promotes technological advancement, which reduces the cost of power generation, increases the total power generation capacity, and leads to an increase in carbon emissions). Li et al. [122] found that there is a strong negative correlation between the carbon price and the rebound effect. A low carbon price affects the synergistic environmental pollution management effects of the CETM, especially on the air pollution [52]. The carbon price influences the innovation capacity of pilot regions: a higher carbon price promotes low-carbon technological innovation [123], but too high a carbon price leads to crowding-out effects [124]. A low carbon price inhibits innovation, so the carbon price should be set higher such that firms are motivated to achieve carbon reductions through technological innovations rather than purchasing carbon allowances [125]. Wu and Wang [126] showed that an increase in the carbon price is conducive to improving firms’ total factor productivity. Cong et al. [127] argued that an increase in the carbon price is conducive to the promotion of low consumption of high-carbon energy. Munnings et al. [128] reported that the increase in the price of carbon is passed on to the price of electricity, which causes consumers to reduce the excessive use of electricity. Yi et al. [129] reported that an improved price of carbon is favourable for the conservation of forest biodiversity and the enhancement of carbon stocks. Ke et al. [130] found that higher carbon prices promote increased carbon offset rates and forest carbon sinks.

5.3. Cap Setting and Quota Allocation

Setting a cap on the total amount of carbon emissions directly affects the emission reduction effect of the carbon ETS [131]. Cap setting includes absolute and relative caps. Absolute caps are used in many international agreements, whereas relative caps are more widely used domestically [132]. Top-down explicit emission caps have been implemented in some pilot regions [133]. Currently, China does not have an absolute cap on total carbon emissions [133,134], and the total amount of carbon emissions is the sum of the total bottom-up allocation of allowances by the covered entities, which varies according to the actual level of production [29]. This implies that the total amount of carbon emissions is constantly changing and fluctuating with economic development [11], and whether an absolute cap is needed in the future to prevent CO₂ emissions from constantly fluctuating and rising is an issue that needs to be addressed.

Carbon emission allowance allocation is the key and prerequisite for the operation of carbon emission trading market, and many scholars have investigated how to achieve a more effective methodology for allocation of allowance [135,136], mainly considering the two principles of equity and efficiency [137,138,139]. According to the ICAP report [140], allowance allocation includes free allocation and auction sales. The free allocation method includes the grandfathering method (free allowances on the basis of historical emissions or historical emission intensity) and the baseline method (free allocation on the basis of a fixed industry baseline). Both the EU ETS and RGGI primarily allocate allowances through auctions while implementing absolute emissions caps that are progressively reduced over time [141,142,143]. New Zealand and California adopt a hybrid approach, distributing allowances through a combination of free allocation and auctions, with a gradual reduction in the proportion of free allowances over time [144,145,146,147].

Currently, China’s national carbon market is based on free allowance allocation, and some pilot regions have implemented auction sales [11,148]. Shi et al. [19] found that a larger trading volume of allowances is more effective in reducing emissions and suggested that the historical method should be prioritised. Similar results were reported in other articles [149]. However, some scholars have noted that firms intentionally increase their historical emissions to obtain more allowances [150]. Peng et al. [47] found the baseline allowance approach better than grandfathered and historical carbon intensity methods in terms of emission reduction and economic performance. Currently, the national carbon market uses the baseline method, and some pilot regions use the historical method and the baseline method according to different industry attributes [11]. According to the report [27], China’s carbon allowance program has been adjusted by combining the actual situation, adopting a different baseline value, and introducing a balancing value. However, at present, the main object of concern for allowance allocation in the national carbon market is only the power sector. In addition, China’s bottom-up approach to allowance allocation has led to discrepancies between provinces. Owing to different levels of economic development, there is a very large gap in allowances between provinces, which can lead to increased regional inequality. Importantly, the free allowance approach may suffer from carbon prices that are too low and insufficient market dynamics.

5.4. Coverage

The coverage of the CETM affects the policy cap setting and allowance allocation. Shi et al. [17] discovered that the greater the number of enterprises participating in quota trading is, the greater the effect on emission reduction. Dai et al. [151] observed that expanding the coverage of the carbon market reduces the cost of abatement, thus suggesting that other manufacturing or service industries should be included in the market scope. Wang et al. [152] established a priority list of industries to be covered by the CETM and concluded that the cement industry should be included first. Xian et al. [71] argued that the optimal order of inclusion for industry coverage should be nonferrous metal smelting and processing first. The different results of the optimal order are related to the data chosen by the researchers as well as the methodological differences. Wu et al. [153] demonstrated that the expansion of the industry scope would reduce the carbon price and increase the cost-effectiveness at the national level. However, some scholars believe that a small percentage of coverage is more appropriate; instead, Lin and Jia [154] reported that the expansion of CETM coverage will lead to higher GDP and lower carbon prices, with the highest emission reduction effect only occurring when energy-producing industries are included in the market. The more industries covered, the lower the carbon price and the lower the willingness of enterprises to reduce emissions; thus, covered enterprises should be carefully selected [155]. On this basis, a carbon price floor can be set to avoid reducing enterprises’ willingness to reduce emissions as well as exacerbating the imbalance in regional economic development.

In general, expanding the coverage of the carbon market industry is conducive to a country’s economic development, and involving more subjects can better stimulate market vitality and promote emission reduction. Some studies have shown that the current CETM in China does not enable China to achieve a carbon peak in 2030 [156]. Moreover, the coverage of China’s CETM has a large gap compared with the market coverage of the EU, Germany, and New Zealand [11]. In September 2024, the national carbon market was about to expand its coverage for the first time [157], and continuous development of the market will be conducive to realising the dual carbon target.

The coverage of GHGs is also an important element of the carbon market. The Kyoto Protocol covers six major GHGs: CO₂, CH₄, N₂O, HFCs, PFCs, and SF₆ [158]. Since CO₂ is the most dominant GHG contributing to global warming and its accounting cost is relatively low, it is the primary regulatory target in all global ETSs [131]. The GHG covered by both China’s national CETM and the pilot regions except Chongqing is CO₂ only, and Chongqing includes CH₄, N₂O, HFCs, PFCs, and SF₆ in addition to CO₂ [11]. The GHGs covered by some countries or regions differ, and the scope of GHGs in the EU ETS includes CO₂, N₂O, and PFCs [159]. The GHGs covered by the New Zealand and South Korean ETSs include CO₂, CH₄, N₂O, SF₆, HFCs, and PFCs [160,161]. Inclusion of CH₄ and N₂O in China is to be greatly encouraged. These have high GHG emission factors [162].

5.5. MRV System, Legal System, and Regulatory System

The legal system and supervision and management system are the basis for the ability of the carbon market to operate well, and the monitoring, reporting, and verification (MRV) system plays a significant role in the carbon market [163]. Deng et al. [164] revealed that the CETM suffers from a lack of mandatory laws and regulations and a shortage of policy cognition within enterprises. Jiang [165] argued that the CETM in China suffers from a lack of clear legal regulations and an effective regulatory mechanism. Shi et al. [19] found that the CETM is more effective in promoting carbon emissions in regions with stronger legal regulation. Tang et al. [166] identified the challenges faced by China’s MRV system as the lack of binding policies and regulations, unclear requirements for the monitoring content, the absence of consistency and harmonisation, and the shortage of a unified information platform. Wang et al. [167] argued that China’s CETM has problems such as low accuracy and credibility of emission data and a weak database.

The Interim Regulations for the Management of Carbon Emission Trading, which is currently in force in China’s carbon market, is the first specialised regulation of the CETM issued by the State Council and established for the first time in the form of an administrative regulation [24]. According to China’s six-level hierarchy of legal effects, the legally binding nature of this administrative regulation is greater than that of previous departmental and local regulations, indicating that the legal system of China’s carbon market is gradually becoming more robust (

Table 1. Legal and policy framework of the national carbon market.

Legal	Structure	Policy
Interim Regulations for the Management of Carbon Emission Trading	Allowance allocation and surrender	December 2020: 2019–2020 Implementation Plan for National Carbon Emissions Trading Total Allowance Setting and Allocation (Power Generation Industry)
		December 2020: List of Key Emission Entities to be Included in the National Carbon Emissions Trading Allowances Administration for 2019–2020
		October 2021: Notice on Allowances Surrender for National Carbon Emissions Trading First Compliance Cycle
		March 2023: Notice on Allowances Allocation of National Carbon Emissions Trading for 2021 and 2022
		July 2023: Notice on Allowance Surrender of the National Carbon Emissions Trading Market for 2021 and 2022
		October 2024: Notice on Allowances Allocation and Surrender of National Carbon Emissions Trading for Power Generation Industry in 2023 and 2024
	Monitoring, reporting, and verification	March 2021: Notice on Strengthening Management of Enterprise Greenhouse Gas Emissions Reporting
		March 2022: Notice on Management of Enterprise Greenhouse Gas Emissions Reporting for 2022
		December 2022: Guidelines for Enterprise Greenhouse Gas Emission Accounting and Reporting-Power Generation Industry
		December 2022: Guidelines for Enterprise Greenhouse Gas emission Verification-Power Generation Industry
		February 2023: Notice on Strengthening Management of Enterprise Greenhouse Gas Emission Reporting in the Power Generation Industry for 2023–2025
		September 2024: Guidelines for Enterprise Greenhouse Gas Emission Accounting and Reporting
		October 2024: Work Plan for Improving the Carbon Emission Statistical Accounting System
	Registration, trading, and settlement	May 2021: The Rules for Administration of Carbon Emissions Registration (trial)
		May 2021: The Rules for Administration of Carbon Emissions Trading (trial)
		May 2021: The Rules for Administration of Carbon Emissions Settlement (trial)
Administrative Measures for Voluntary Trading of Greenhouse Gas Emission Reduction (Trial)	Design and implementation	November 2023: Guidelines for Voluntary Greenhouse Gas Emission Reduction Project Design and Implementation
	Registration and enrolment	November 2023: Rules for Voluntary Greenhouse Gas Emission Reduction Registration (Trial)
	Verification and trading	November 2023: Rules for Voluntary Greenhouse Gas Emission Reduction Trading and Settlement (Trial)
		December 2023: Implementation Rules for Validation of Voluntary Greenhouse Gas Emission Reduction Projects and Verification of Emission Reductions

).

In recent years, the state has successively issued normative documents on GHG detection, reporting, and verification [168,169,170,171], implying that the normativity of market operation has improved. In addition, the national carbon market management platform and the national unified greenhouse gas voluntary emission reduction registration system and trading system were formally implemented in 2023 [24]. The intelligent and unified management of emissions trading management, data quality, verification, and allowances are realised using big data information technology.

Additionally, there are several problems. The first is that the agency responsible for managing carbon trading in the CETM is intertwined with the supervisory agency, and no independent supervisory agency exists [172], nor is there a clear explanation of the supervisory function and the distinction between rights and obligations. An independent supervisory authority would make the market operation more standardised and transparent. Second, the liquidity and timeliness of the market are not sufficient, the information disclosure of enterprises is not sufficient, and some enterprises still fail to complete clearance performance on time [24].

6. Suggestions for Optimising the CETM

Building on the existing literature and critical analysis, this study proposes policy recommendations to address current challenges in China’s CETM.

To curb carbon leakage, provincial authorities must strengthen emission verification systems by actively monitoring anomalies and rigorously tracing emission enterprises moving, especially those with high carbon emissions. Local environmental regulation needs to pay attention to the intensity of regulation, and appropriate regulation will promote emission reduction without forcing firms to relocate. The opening of the national carbon market may eliminate the green paradox. Ge et al. [101] found that carbon transfer disappeared after the announcement of the national CETP. However, whether the pollution transfer problem still exists in the implementation period still needs to be comprehensively investigated and researched. Therefore, further research is needed to determine the existence, transfer direction, and internal causes of the nationwide carbon leakage problem.

Building on this, resolving the challenge of persistently low carbon prices is critical for market efficiency. Currently, the carbon market mainly involves spot trading, and the main participants are enterprises. Furthermore, carbon finance instruments have gained significant popularity in developed regions such as Europe and North America, demonstrating dual benefits of generating economic returns while facilitating the fulfilment of emission reduction commitments by respective nations [173]. In the future, more carbon financial derivatives can be introduced so that stakeholders such as financial institutions, investment institutions, and consumers can participate in the carbon market, which will improve the vitality of the carbon market, improving the carbon price. A higher carbon price will also encourage enterprises to favour technological innovation to provide more carbon allowances. Moreover, we need to pay attention to the role of stakeholders in the carbon market. Previously, Zhejiang conducted a forest management carbon sink project in which farmers participated. Indigenous people and local communities are the managers of forest carbon sinks [30]; an increase in the carbon price will push them to actively participate in the carbon market to obtain income so that the vitality of the market can be better stimulated, and the economic benefits will motivate them to manage forest carbon sinks in a more detailed way, which will form a virtuous circle. Moreover, scholars have found that increasing the proportion of CCER offsets contributes to the co-benefits of air pollutant mitigation and promotes the development of renewable energy [58,174]. China has many marine resources, and in the future, blue carbon trading can be considered to be included in the carbon market. Marine pastures and fishermen can become blue carbon sellers [175].

We suggest introducing an auction mechanism. Currently, the proportion of allowances sold at auctions in China’s national carbon market is zero [11]. Auctions have been adopted as the primary allowance allocation mechanism in California and Quebec owing to their advantages in price discovery and allocative efficiency [176]. Auctions also can increase the vitality of the carbon market and increase the price of carbon. Through auctions, the government can use the revenue gained [177] for the government budget or climate change mitigation actions. In addition, the introduction of auctions will increase the emission cost of carbon emitters, thus promoting the development and application of clean energy technologies [148]. To balance economic development and mitigation effects, special attention should be given to the total allowances in the auction market when introducing auctions [118]. A stable carbon price is a key factor in determining how well the Chinese CETM operates [178]. Beijing is the only pilot city in China that stipulates upper and lower carbon price limits as a price stabilisation mechanism, so its carbon price level is relatively high compared with that of other regions [54]. During the ‘13th Five-Year Plan’ period, Beijing had the lowest carbon intensity in China [179]. The optimal interval for carbon pricing has different conclusions depending on the selected model and parameters [63]. Provinces and municipalities can set reasonable carbon price ranges and price stabilisation mechanisms according to local conditions to avoid carbon prices being too low or the degree of fluctuation being drastic.

Setting a cap can prevent the phenomenon of oversupply of allowances, and it is suggested that the cap can be dynamically adjusted in the future to avoid the phenomenon of excess allowances that reduce the vitality of the market [180]. Allocation of allowances should be carried out in a top-down manner by integrating the principles of fairness and development, and it should be carried out by comprehensively taking into account the responsibility of provincial carbon emissions, capacity, potential, and cost [131]. The technological innovation of enterprises can be included in the allowance allocation index of the following year to encourage enterprises to increase their carbon emission reduction through green technological innovation. The national CETM should gradually expand the number of participants and the coverage of greenhouse gases.

In parallel, establishing a robust legal and regulatory framework, from central to local levels, is essential to enforce accountability and compliance. A unified MRV system regulates the operation of the carbon market. The incentives should be strengthened by linking the compliance rate of enterprises to the performance appraisal and promotion criteria of their executives and by linking the effect of carbon emission reduction to the performance evaluation of local governments. In this way, enterprises and governments should pay attention to carbon emission reduction, encourage enterprises to complete allowance compliance, surrender the work of each cycle on time, and facilitate the enhancement of the emission reduction effect.

In addition to improving the energy structure, increasing the use of clean fuels can radically reduce carbon emissions. A pollution control system that combines source control, process management, and end-of-pipe treatment should be gradually formed, and China’s ‘discharge first, then pollution’ model should be reversed. The cultivation of talent related to carbon emissions trading should be a focus. According to a previous report [24], in 2023, 134 professional trainings were conducted nationwide, and more than 80% of key emission units were equipped with professional carbon market talent. Further training and education activities should be carried out in the future, and educational organisations in universities can consider training corresponding professionals. The government should promulgate relevant professional qualification certificates, assess the qualifications of trained talent, and improve the talent cultivation model.

Finally, China’s CETM linkages with international markets should be increased. Enhancing connections with international carbon markets can help improve China’s position in international climate negotiations and reduce global carbon abatement costs [131]. Early linkages between China and international carbon markets were mainly due to the CDM of the Kyoto Protocol [158]. Cui et al. [38] argued that relating to international markets as opposed to carbon markets operating in isolation has the potential to make both better. Hübler et al. [62] found that linking China’s CETM with the EU’s carbon trading market slightly mitigates China’s GDP and welfare losses, resulting in higher economic efficiency. Therefore, it is feasible to gradually strengthen ties with the international carbon market and enhance exchanges and cooperation by participating in the trading of carbon quotas or purchasing carbon financial products in the international market.

7. Conclusions

This study outlines the three-stage development trajectory of China’s carbon market, which is currently a national market in its initial phase, and evaluates the effectiveness of carbon emissions trading policies across four dimensions: environmental, economic, innovation, and social impacts, identifying both synergies and trade-offs. Environmentally, these policies demonstrate dual benefits by reducing both carbon emissions and pollution, while economically and innovatively, it fosters green innovation while presenting short-term costs for carbon-intensive industries. Socially, they contribute to mitigating inequality, boosting employment, and enhancing public health. The analysis further identifies key challenges confronting China’s Carbon Emissions Trading Market and proposes targeted recommendations, targeting on feasibility and effectiveness. To address carbon leakage risks, real-time monitoring of corporate emission relocations should be implemented. Carbon pricing could be increased by expanding trading entities and introducing auction mechanisms. The cap-setting regime requires improvement through dynamic adjustment of emission ceilings and developing quota allocation methods that balance efficiency with equity. Narrow market coverage and insufficient legal frameworks should be remedied by broadening greenhouse gas categories and participant scope while optimising legislative structures. Future research should focus on regional market heterogeneity and interconnections, accounting for local, natural, socioeconomic contexts. For instance, regional CCER offset ratios ought to be calibrated using localised ecological data, with scenario modelling being employed to optimise allocation methods. Such measures would refine China’s carbon market into a robust, globally integrated system aligned with long-term decarbonisation objectives.