Designing the future of the world’s largest carbon market: Two studies provide a quantitative framework for determining both sectoral expansion priorities and enterprise inclusion thresholds for China’s national ETS
Carbon emissions trading scheme (ETS) has become one of the world’s most influential policy instruments for achieving cost-effective decarbonization. Since the launch of China’s national ETS in 2021, the largest carbon market globally in terms of covered emissions, a central challenge has been how to expand the system while maintaining both environmental effectiveness and economic efficiency. Two recent studies led by Professor Ke Wang from the Beijing Institute of Technology (CEEP-BIT) provide the first integrated quantitative framework for addressing this challenge. By combining firm-level microdata with marginal abatement cost analysis, the studies establish evidence-based approaches for determining both the optimal sequence of sectoral expansion and the optimal enterprise inclusion thresholds. Together, they offer an important scientific foundation for the next stage of China’s carbon market reform and provide methodological insights that are transferable to emissions trading systems worldwide.
(i) Optimizing the rolling out plan of China’s national carbon ETS
The first study develops the first optimization framework for determining the rollout sequence of industries entering China’s national ETS. Using a database of more than two million firms spanning over 500 four-digit industries, covering more than 97% of China’s industrial emissions, the researchers constructed marginal abatement cost curves and evaluated multiple market expansion scenarios. Their analysis suggests that if China adheres to its current plan of covering thermal power and 13 designated industries in its ETS, the cement manufacturing industry should be the next sector to be included, followed by the steel smelting industry and the flat glass products industry. In the revised list, the average abatement cost can be reduced by 39.5%-78.3% compared with the business-as-usual scenario. This study informs the macro-level expansion of China’s national carbon ETS and the phased inclusion of new industries by suggesting a priority list for ETS coverage.
Beyond identifying the next industries to enter China’s ETS, the study shifts policy discussions from administrative selection toward evidence-based optimization. Rather than expanding market coverage according to predefined sector lists, the framework prioritizes industries according to their contribution to overall cost-effectiveness, providing a transparent and reproducible methodology for future ETS expansion. This represents an important step toward data-driven institutional design for carbon markets.
Wang, K., Wang Z., Xian Y., Shi X., Yu J., Feng, K., Hubacek, K., Wei, Y. (2023). Optimizing the rolling out plan of China’s carbon market. iScience, 26(1), 105823. https://doi.org/10.1016/j.isci.2022.105823
(ii) Optimizing the enterprise inclusion threshold setting of China’s national carbon ETS
China’s national carbon ETS initially targeted thermal power plants with annual emissions exceeding 26,000 tons of CO2. This study introduces a novel threshold optimization model for ETS that evaluates carbon market benefits across varied inclusion thresholds and identifies the optimal threshold based on the cost savings per unit of emission reduction. The authors applied this model to determine the optimal inclusion threshold for China’s national ETS and to prioritize the order of industry inclusion under the adjusted threshold. Their simulation results indicate the following: i) For the exclusive participation of the thermal power sector in the ETS, the optimal inclusion threshold is 19,000 tons of CO2; however, this threshold decreases to 3,000 tons of CO2 when all major sectors are included; ii) In the expansion phases of the ETS, the optimal sequence for industry inclusion is cement manufacturing, steel smelting, basic chemical raw materials, and aluminum smelting, which maximizes ETS benefits and reduces abatement costs by 36%; iii) Under the optimal threshold, large-scale enterprises benefit significantly more than small and medium-sized enterprises, capturing over 70% of total ETS advantages; iv) There exists an “inverted U-shaped” correlation between ETS benefits and carbon reduction targets.
While previous discussions have largely focused on which sectors should participate in carbon trading, this study demonstrates that the design of enterprise inclusion thresholds can be equally important in determining overall market performance. By quantitatively linking participation thresholds with emission reduction targets, the study provides a new analytical perspective for balancing market coverage, administrative feasibility, and mitigation efficiency.
Wang, K., Li, S., Xian, Y. (2026). Optimizing the enterprise inclusion threshold setting of China’s national carbon market. Fundamental Research, 6(2), 1149-1160. https://doi.org/10.1016/j.fmre.2025.01.006
Taken together, these two studies establish a coherent analytical framework for the institutional design of carbon markets. Rather than treating sectoral expansion and enterprise inclusion as independent policy decisions, the research demonstrates that both can be optimized within a unified cost-effectiveness framework based on firm-level evidence. This integrated perspective not only supports the next phase of China’s national ETS but also provides a valuable methodological reference for emerging carbon markets worldwide, particularly in developing economies seeking to balance climate ambition with economic efficiency.
