Enhancing China’s Carbon Market: Current Status, Challenges, and Strategic Recommendations

China’s national carbon market, since its launch in July 2021, has become the largest globally, surpassing the EU Emissions Trading System (EU ETS). It consists of a mandatory emissions trading system and a voluntary emissions reduction market, which operate independently but complement each other through an offset mechanism, forming an integrated national carbon market framework. Despite its scale, the market has yet to establish a carbon price signal that reflects the full social cost of emissions, with challenges in sectoral coverage, trading activity, and policy consistency weakening its effectiveness. This paper proposes several measures to enhance market efficiency and regulatory frameworks, including introducing a hybrid allocation system combining free and paid allowances, strengthening the financial attributes of the market through carbon derivatives, and expanding market participation. It also highlights the need to improve data quality management and establish a stable, long-term policy framework. As China enters a critical period for achieving peak carbon emissions, transitioning from intensity-based to absolute emission caps should be prioritized. Furthermore, the paper suggests fostering cross-border cooperation with ASEAN or other regions and seeking mutual recognition with the EU’s Carbon Border Adjustment Mechanism (CBAM) to enhance China’s position in the global carbon market and create a more balanced competitive environment for domestic enterprises.