China strengthens penalties for carbon emission noncompliance

China has strengthened penalties for key emitting entities that fail to surrender their carbon emission allowances on time, introducing an initial fine of 1 million yuan ($149,429) to 5 million yuan and retaining a penalty of up to 10 times the market price for continued noncompliance.

The revised regulations governing carbon emissions trading were unveiled by the Ministry of Ecology and Environment on Saturday. The revision was made in accordance with a State Council decision issued on Aug 8.

The revised provision establishes a two-stage enforcement mechanism, with a fixed monetary penalty imposed at the initial stage and a market-linked penalty for continued violation.

A key emitting entity that fails to fully surrender its carbon allowances within the prescribed period will be ordered to rectify the violation within a specified deadline, and face a fine of between 1 million yuan and 5 million yuan.

If the entity fails to surrender within the rectification period, it will be subject to a further fine equivalent to five to 10 times the average market transaction price of carbon allowances during the month preceding the original surrender deadline. Environmental authorities may also order the entity to suspend production pending rectification.

The previous regulations stipulated that entities failing to surrender their allowances would be ordered to rectify the violation and fined five to 10 times the average market transaction price during the month before the surrender deadline.

If they refused to correct the violation, authorities could deduct an amount equivalent to the outstanding allowances from their allocation for the following year and could order them to suspend production pending rectification.

The regulations were first issued by the State Council on Jan 25, 2024, and took effect on May 1 of that year.

Carbon trading is the process of buying and selling allowances to emit greenhouse gases among designated emitters.

The country initiated pilot carbon trading programs in October 2011 across seven regions, including Hubei province, Beijing and Shanghai. The pilot programs in these regions started trading in 2013.

The national carbon trading market started trading in July 2021, in the coal-fired power generation sector. The program imposes carbon emission limits for every unit of electricity a power plant generates. After each cycle of trading, operators can sell any carbon allowances they have left after complying with the benchmark. If they exceed their limits, they will have to buy allowances.

The national carbon trading market was then expanded to the steel, cement, and aluminum smelting industries in 2025.