China Environmental Compliance: Three Trends Businesses Need to Know

China’s new five-year plan for tackling climate change signals major shifts in the country’s environmental compliance landscape, from an expanding carbon market to stricter non-CO2 emissions controls. Businesses operating in China should understand these trends now to prepare for the potential of new reporting and compliance obligations through 2030 and beyond.

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In July, China released the 15th Five-Year Plan for the National Response to Climate Change (“Climate Change FYP”), the country’s first-ever five-year plan dedicated specifically to tackling climate change as the country heads toward its first major carbon commitment – reaching peak CO2 emissions by 2030.  

While this plan largely reiterates targets and initiatives outlined in earlier policy documents, including the National 15th FYP released in March, the elevation of climate policy to 15th FYP status sends a strong signal to local governments and other key stakeholders that climate action is now a national priority, on par with other core areas of economic and social development. It also provides a coherent and unified blueprint for the development of clean energy and low-carbon industry policy up until 2030.

For businesses, the document is also a useful indicator of where environmental compliance in China is headed over the next five years and beyond. Among the key initiatives, the document offers a clear view into how the country plans to expand its carbon market to cover more industries, develop its carbon footprint certification system, and tackle non-CO2 greenhouse gases (GHGs). 

Expansion of China’s carbon market 

A key pillar of the Climate Change FYP is to improve China’s carbon market to become an effective system for reducing GHG emissions. 

China’s domestic emissions trading market became the world’s largest carbon market in terms of emissions coverage when it officially launched in 2021. However, it has thus far had little impact in achieving its purpose of reducing emissions from polluting industries, due to a reliance on efficiency-based benchmarks rather than an absolute emissions cap, hampering the construction of an effective cap-and-trade system.

Moreover, the system is currently only mandatory for four high-emitting industries – power generation, iron and steel, cement, and aluminium smelting. These industries are also allocated a share of free carbon emissions allowances (CEAs), which cover only certain GHGs that vary by industry but include CO2, carbon tetrafluoride (CF4), and hexafluoroethane (C2F6). 

Despite these challenges, the Climate Change FYP sets a target of reducing CO2 emissions per unit of product in sectors covered by the carbon market by around 3 percent by 2030 relative to 2025 levels. 

China has already established a roadmap to address some of these issues. In August 2025, the government released a set of opinions on improving the carbon market, which aims to expand mandatory participation to more sectors by 2027 and establish an absolute emissions cap by 2030. In a press briefing held in November 2026, an official from the Ministry of Environment and Ecology (MEE) confirmed that the new industries will be chemicals, petrochemicals, civil aviation, and paper production. 

The Climate Change 15th FYP builds on these targets by outlining future priorities, including further expanding the scope of covered industries and types of GHGs and steadily increasing the ratio of free-to-paid CEA allocations. 

Expansion of voluntary participation in carbon reduction program 

Alongside the expansion of the mandatory carbon market, China is seeking to enhance voluntary participation in the China Certified Emission Reductions (CCERs) program, a system that enables companies to trade carbon reduction credits earned through participation in certain approved emissions-reduction and environmental initiatives. 

While the Climate Change FYP lacks direct incentives to voluntary participation beyond the structure itself, it seeks to ease participation through supply-side adjustments, such as expanding the number of methodologies that can be used to calculate carbon emissions reductions – currently numbering 18. It also expects to expand the market to cover all key sectors by 2027 and seeks to position CCERs as a tool companies can use to meet international compliance obligations and product neutrality commitments. 

What it means for companies in China 

While the expanded carbon market will immediately affect only companies in the covered industries, the Climate Change FYP signals a longer-term shift toward mandatory participation for more sectors.

Specifically, the document calls for “diversifying market participants” and “introducing other non-compliance entities at an appropriate time”, suggesting a possible route to participation for sectors not currently covered by the mandate. This could offer early access to carbon-asset management experience – as well as possible profit for clean companies – ahead of potential future mandatory obligations. 

Meanwhile, for companies that already have GHG emissions reduction commitments, voluntary participation in the CCER can also be a legitimate source of additional income by generating and selling CCERs from qualifying projects, rather than treating emissions reductions purely as a cost. 

An emerging carbon footprint management system 

China has been steadily developing a carbon footprint tracking system over the last few years. In 2024, the government released a range of policy documents and initiatives, including an implementation plan and a set of ISO-based standards.  

The system is still being implemented on a voluntary pilot basis, with limited scope of product applicability. In June 2025, the MEE, along with China’s market regulator and industry regulator, released the first batch of pilot programs for product carbon footprint labelling and certification, covering 17 products across eight sectors, including li-ion batteries, photovoltaic products, steel, and home appliances.

Given the limited scope, the FYP focuses on expanding the standards and foundations needed to broaden the system’s coverage and move it toward a more effective economy-wide application.

Initiatives include formulating standards for product carbon footprint accounting and carbon emission limits for key products, building a national product carbon footprint database, launching further pilot programs for labelling and certification, and standardising product carbon labelling and certification.

It also proposes expanding the applicability of carbon footprint requirements in trade, fiscal, financial, and industrial policies, and applying them in areas such as government procurement and green finance. This implies that alignment with voluntary carbon footprint standards will become increasingly advantageous for companies competing for government contracts or seeking access to green financing. 

What it means for companies

A more robust carbon footprint certification system will provide companies with ESG commitments with another potential avenue for evidencing their environmental efforts. A standardised and government-sanctioned certification can help to support sustainability disclosures, satisfy investor due diligence requests, and differentiate products in both domestic and export markets.

At the same time, as the carbon footprint system matures and expands beyond its current pilot scope, companies should expect carbon accounting and statistics infrastructure to tighten in the future. This may create a higher compliance burden for companies that need to track, report, and verify product-level emissions data against government standards. 

Improving control and reduction of non-CO2 gases 

While China has made major strides in developing a system for monitoring and reducing CO2 emissions, the equivalent system for non-CO2 gases is relatively immature, lacking the same level of investment in infrastructure, policy, and pilot programs.

China’s national 15th FYP, the overarching blueprint for the country’s development from 2026 to 2030, set a target of establishing an “emissions reduction capacity” of around 30 million tonnes CO2 equivalent (Mt CO2e) by building non-CO2 GHG control projects covering methane, nitrous oxide N2O, and F-gases in sectors including coal mining, agriculture and animal husbandry, waste management, and chemical production. 

The Climate Change FYP expands on the target set in the national FYP by outlining specific projects across the three target GHGs: 

• For methane, initiatives include advancing coal mine methane utilisation and improving the recovery and utilisation of associated gas and vented gas from oilfields.
• For N2O, the plan calls for guiding producers of adipic acid and caprolactam – chemicals used extensively in the production of synthetic fibres such as nylon – as well as nitric acid – used in fertilisers among other products – to reduce nitrous oxide emissions through measures such as installing catalysts.
• For F-gases, the plan calls for strengthening the management and control of hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulphur hexafluoride (SF6), and nitrogen trifluoride (NF3) through measures including source substitution, recovery and utilisation, and end-of-pipe destruction. It also calls for the strict implementation of a quota for the production and use of HFCs and highlights the need for recovery and substitution of SF6 in power equipment. 

What it means for foreign companies

More focus on non-GHGs will mean more pressure on companies to clean up emissions of these gases in the future. This may translate to more compliance burdens for companies in heavily emitting sectors, such as power equipment, cooling and refrigerator systems, and chemical manufacturing.

While the focus is currently on high-emitting industries, the scope is likely to expand to more sectors as the system matures.  

Improvements to capacity to monitor and reduce non-GHGs is also a benefit to foreign companies that have made global reduction commitments, as better infrastructure for monitoring, capture, and destruction will improve their ability to reduce emissions across their supply chains. Companies in sectors that are high emitters of these non-CO2 gases, ranging from home appliances to apparel to fertilisers, may also find Scope 3 emissions accounting for their China supply chains easier and more reliable in the future. 

At the same time, China’s push to build out non-GHG control infrastructure will also drive up demand for expertise in emissions reduction, resource efficiency, and environmental monitoring, creating new opportunities for companies in green technologies and digital solutions that can track and optimise environmental performance in real time. 

How Dezan Shira & Associates can help 

As China’s environmental compliance requirements continue to evolve, Dezan Shira & Associates helps businesses track relevant regulatory developments and build the compliance and reporting infrastructure needed to stay ahead of new obligations. Our team supports clients across carbon market participation, emissions monitoring, and broader ESG strategy as China’s environmental compliance landscape continues to mature. Contact us for advisory on ESG strategy design to regulatory compliance, and comprehensive reporting.