China has approved the allowance allocation plan that will govern its national emissions trading scheme for 2025 and 2026, fixing the compliance math for the world’s largest carbon market by covered emissions. The plan sets quota totals and benchmark rules for power generation across both years and, for the first time, a full-year allocation framework for the steel, cement and aluminum smelting sectors added to the scheme in March 2025. For compliance teams, traders and investors with exposure to Chinese carbon, the approval converts a month of draft assumptions into binding parameters.
From Draft to Binding Rules in Under a Month
The timeline was compressed. The Ministry of Ecology and Environment (MEE) opened public consultation on the draft plan on July 27, 2026, under notice 环办便函〔2026〕243号, with written comments due by August 5: a nine-day window. The approval now lands roughly three weeks after that window closed, a fast turnaround that signals the benchmarks and correction factors in the draft survived consultation largely intact.
The plan operates under the Interim Regulations on the Administration of Carbon Emissions Trading (State Council Decree No. 775), in force since May 1, 2024, which give the allocation rules direct legal effect on surrender obligations. Provincial ecology and environment bureaux administer compliance on the basis of these rules, so the approved text is the document that matters for the next two compliance cycles.
What the Plan Actually Sets
The structure follows the annual cycle the MEE has been building since the scheme launched for power generation in 2021. Three elements define the approved framework.
First, power generation receives fixed allocation rules for both 2025 and 2026, continuing the shift from grandfathering toward intensity-based benchmarking that began with the 2025 compliance year. The previous allocation plan, covering the 2024 and 2025 power compliance years, was released on November 16, 2025; the new plan extends that trajectory rather than reversing it.
Second, steel, cement and aluminum smelting get their first full-year benchmark methodology, covering 2026. These three sectors entered the national ETS on March 26, 2025, in an expansion that added roughly 1,500 enterprises and about 3 billion tonnes of CO2 to the system, lifting coverage from around 40 percent to around 60 percent of national emissions. Until now they operated under transitional arrangements; the approved plan is where their allowance positions become calculable.
Third, the architecture around the benchmarks stays conservative. Allowances remain free, with no auctioning component. Offsets through China Certified Emission Reduction (CCER) credits remain capped at 5 percent of verified emissions, leaving the benchmark value as the main lever on each installation’s compliance position. For aluminum smelting, the plan also fixes how the non-CO2 gases CF4 and C2F6, regulated alongside CO2 for primary aluminum, translate into allowance units.
Why Benchmarks Matter More Than the Cap
China’s ETS does not work like the EU ETS. There is no fixed declining cap; allocation is intensity-based, meaning each installation receives allowances in proportion to output multiplied by a benchmark emissions intensity. The practical consequence: the benchmark values in the approved plan, not a headline cap number, determine whether a given plant ends the year long or short.
That design choice cuts both ways for market participants. It keeps compliance costs insulated from output swings, which is why Beijing favors it for a still-industrializing economy. But it also means scarcity only emerges if benchmarks are tightened faster than actual sector intensity improves. The 2025-26 plan is the first real test of whether the MEE intends to use the benchmark lever actively for the new industrial sectors, or to hold them near current performance while the compliance machinery beds in.
What It Means for Buyers, Developers, and Investors
For covered entities, the approval starts the clock on position modeling. Power generators, the large groups such as Huaneng, Datang, Huadian, SPIC and China Energy, plus steelmakers, cement producers and aluminum smelters now have final benchmarks to run against verified 2025 emissions. Any shortfall must be closed through CEA purchases on the Shanghai exchange or CCER offsets within the 5 percent cap, so trading desks can finally price 2026 exposure against fixed rules rather than draft scenarios.
For CCER developers, the unchanged 5 percent offset cap is the relevant number. Demand for eligible credits is bounded by that ceiling across a much larger covered base than in the power-only era, which supports the case for new CCER supply but does not change the volume math overnight.
For international investors and traders watching from outside, the approval is a read on regulatory tempo. A nine-day consultation followed by a three-week approval is not a market being designed for external participation; it is a compliance system being run on administrative timelines. The next structural question, flagged by the State Council guideline of August 2025, is the further sector expansion toward 2027, which would extend this allocation logic to additional industries.
What to Watch
Three checkpoints follow from the approval. First, the published benchmark values themselves: how far they sit below current sector-average intensity will reveal the real stringency of the 2026 compliance year. Second, trading behavior on the Shanghai exchange as covered entities model their positions, since a rush of buying from short installations in the newly covered sectors would be the first stress test of CEA liquidity at this scale. Third, any MEE signal on the 2027 expansion, which would confirm whether the two-year allocation cycle approved this week is the template for the next wave of sectors.
