Strict penalties show country’s commitment to emissions cuts

When China's national carbon market began trading in July 2021, it was built around a relatively modest enforcement regime. Under the Ministry of Ecology and Environment's trial measures, a key emitting entity that failed to surrender its carbon allowances on time only faced a fine of 20,000 yuan ($2,994) to 30,000 yuan. The system has since moved decisively toward stronger and more practical enforcement.

In early 2024, the State Council, China's Cabinet, adopted interim regulations on carbon trading management, which took effect on May 1 that year. They replaced the fixed fine with a penalty of five to 10 times the average market transaction price in the month before the surrender deadline. Continued refusal could also lead to deductions from the allowance allocation to the emitting entity and even production suspension.

A fresh revision of the regulations, effective since Aug 15 but unveiled recently, further reshapes the enforcement framework. An emitting entity that fails to surrender its allowances in full and on time must first rectify the violation within a prescribed period and pay a fine of 1 million yuan to 5 million yuan. If it still fails to surrender its carbon allowances within the new deadline, it faces a second penalty of five to 10 times the relevant market-linked average price. Regulators may even order the entity to suspend production.

The revision is not about stricter or more lenient penalties. It is a shift to a parallel toolkit that combines an immediate fixed fine with a price-linked penalty. The previous rule of deducting unpaid allowances from the following year's allocation did have an impact, but its effect was delayed and depended on the next year's allocation process. The revised provision makes the consequences more immediate and easier to calculate.

The change also strengthens accountability inside companies. Under the revised regulations, the minimum fines on entities that refuse or obstruct supervision and inspection have been raised from 20,000 yuan to 50,000 yuan, while the maximum fines have been kept unchanged at 200,000 yuan. Directly responsible managers and other directly responsible personnel may face fines of 5,000 yuan to 50,000 yuan. This is the first time the regulation has explicitly attached personal financial liability to this type of violation.

That detail matters. Carbon allowance management can no longer be treated as routine paperwork left to a small back-office team. Senior managers need to understand allowance allocation, trading arrangements, emissions data and surrender deadlines. Carbon performance must become part of corporate compliance systems and internal accountability. A carbon market can influence corporate behavior only when responsibility reaches the people who make decisions.

The revision comes as China's national carbon market enters a broader and more demanding phase. Steel, cement and aluminum smelting were brought into national market management in 2025, expanding the market beyond the power sector. The Ministry of Ecology and Environment said 3,378 key emitting entities — including 232 steel companies, 962 cement companies and 97 aluminum smelting companies — were included in the 2025 market.

The current compliance cycle will provide an early test of the revised enforcement approach. Under the 2026 work plan, companies must complete the surrender of allowances for 2025 by the end of this year. With the deadline less than three months away, the message to market participants is clear: failure to comply is no longer a manageable administrative expense.

The deeper objective is institutional credibility. A carbon price can guide investment only when companies believe that the rules will be enforced. Stronger penalties do not replace the market mechanism. They help make that mechanism credible. China's carbon market will need both: the flexibility and efficiency of market pricing, and the authority of effective government regulation.

A carbon market works only when carbon has a real cost. The latest revision is an important step toward ensuring that it does.