Asia-Pacific carbon markets accelerate their evolution: regional shifts driven by China's ETS expansion and CBAM.

Asia-Pacific Carbon Markets Accelerate: Regional Shifts Driven by China's ETS Expansion and CBAM

Lead: The Asia-Pacific region is experiencing a historic acceleration in carbon pricing mechanisms. Driven by the approaching COP30, the full implementation of the EU Carbon Border Adjustment Mechanism (CBAM), and the expansion of China's national carbon market, the region's carbon markets are transitioning from fragmented pilot projects to mature compliance systems. This article, based on the latest analysis by ClearBlue Markets, reviews carbon market dynamics, price trends, and deep impacts on energy systems across major Asia-Pacific economies.

Industry Background: From Fragmented Pilots to Compliance Market Transformation

The Asia-Pacific region is experiencing a historic acceleration in carbon pricing mechanisms. Under multiple drivers—the approaching COP30, the full implementation of the EU CBAM, and the expansion of China's national carbon market—the region's carbon markets are moving from fragmented pilot projects toward mature compliance systems. Due to differing energy structures, industrial policies, and development stages, countries have formed a diverse landscape where carbon taxes, cap-and-trade systems, and hybrid frameworks coexist. As noted by Jennifer McIsaac, Chief Market Intelligence Officer at ClearBlue Markets, and Yan Qin, Chief Analyst for Asia-Pacific, although most APAC carbon programs still have prices below $20 and focus primarily on emissions monitoring and reporting in the thermal power sector, the momentum of regional development is rapidly strengthening.

Current Developments: China Leads, Multiple Countries Advance

China's ETS: From "Reset" to Financialization

China's national carbon market was officially launched in 2021, initially covering only the power sector. Now, the market is expanding to include three carbon-intensive sectors affected by the EU CBAM: aluminum smelting, cement, and steel. This expansion brings China's ETS to cover approximately 8 billion tonnes of CO2 emissions, about 60% of the country's total emissions, and a market size roughly seven times that of the EU carbon market, covering about 3,500 companies. In 2025, the average allowance price fluctuated around RMB 81 per tonne (approximately $11).

Market participants regard 2025 as a "reset year" for China's carbon market. Entering the fifth compliance cycle, regulators introduced strict carry-over rules to address the surplus of nearly 400 million tonnes of allowances accumulated previously. According to ClearBlue Markets analyst Yan Qin, allowances from older years can only be converted in limited proportions, and from 2026 onward, only 2025-vintage allowances can be used for compliance. This restriction forced companies to sell off surpluses, pushing prices to a recent low of RMB 52 per tonne. Subsequently, regulators stabilized the market by increasing the carry-over ratio for industrial companies and issuing high-level policy opinions, with prices recovering to the RMB 80–81 range in early 2026.Over the long term, the ClearBlue Markets model shows carbon prices will rise gradually. China has committed to peaking carbon emissions before 2030 and plans to reduce economy-wide emissions by 7% to 10% from their peak by 2035. To achieve these goals, the ETS must introduce allowance auctions in 2026 (initially at 3% of annual allowances) and shift to an absolute, declining cap from 2031 onward. Although rising prices reflect abatement costs, analyst Qin warned that the price level of the EU carbon market will not be reached in the near term, because China still relies on intensity-based allocation and loose baselines, its energy market structure limits the pass-through of carbon costs to consumers, and overlapping policies such as fossil fuel subsidies and large-scale renewable energy buildout are also in play.

Meanwhile, China’s voluntary carbon market has also been reactivated. In 2025, China formally restarted the national voluntary greenhouse gas emission reduction trading market (the mechanism previously suspended in 2017 under the CDM), publishing nearly 20 methodologies covering renewable energy, energy efficiency, and nature-based solutions. Among these, coal mine methane projects are expected to be very active, potentially generating 20 million tonnes of offsets per year by 2030. Companies covered by the national carbon market can use new China Certified Emission Reductions (CCERs) to meet up to 5% of their compliance obligations. In a market covering 800 million tonnes, this 5% cap implies a theoretical demand of up to 400 million tonnes per year. Only about 20 million tonnes of new CCERs have been issued so far, so their trading price initially exceeded the allowance price at around RMB 90–100 per tonne. But as the allowance market tightens and more offset supply comes online, CCERs are expected to become a cheaper compliance alternative.

In a major development that could change market liquidity, the State Council issued high-level opinions on the same day as the seminar, encouraging financial institutions to participate directly in carbon trading. A list of qualified institutions has also been circulated, signaling that more financial capital and liquidity will flow into the CEA market.

India: Central Trading Platform Launched

India launched its central carbon market trading platform in March 2026, serving as the foundation of its Carbon Credit Trading Scheme (CCTS). The scheme will initially support a large-scale voluntary market, then transition to a compliance model covering 490 large industrial units across seven energy-intensive sectors.

South Korea: Strengthened 2035 Targets and Market Stability

South Korea announced its enhanced 2035 Nationally Determined Contribution (NDC) ahead of COP30 and finalized its Phase 4 allocation plan. At the same time, South Korea plans to formally establish a Market Stability Reserve by August 2026 to govern its K-ETS market.

Australia: Steeper Abatement Baselines

Australia’s enhanced NDC requires its Safeguard Mechanism baselines to decline at a default rate of 4.9% per year. High-emitting facilities that outperform their baselines can earn Safeguard Mechanism Credits (SMCs), while other facilities rely on Australian Carbon Credit Units (ACCUs) generated through land-based projects.

New Zealand: A Warning of Policy ReversalsIn stark contrast to other Asia-Pacific countries tightening their carbon markets, New Zealand recently announced it would decouple its ETS targets from its NDC, causing NZU prices to fall sharply as the market recalibrated to lower compliance ambitions. This is seen as a typical case of policy uncertainty impacting the carbon market.

Emerging Markets: Vietnam, Indonesia, and the Philippines

Vietnam has planned pilot programs in the power, steel, and cement industries, while the Philippines is advancing a hybrid framework combining emissions trading with a carbon tax. These countries are actively refining their pricing mechanisms to address the challenges posed by CBAM.

Impact on Energy Systems: Carbon Cost Pass-Through and Structural Transition

The expansion of carbon markets and rising carbon prices are reshaping the Asia-Pacific energy system through multiple channels. First, the introduction of carbon emission costs directly raises the marginal cost of fossil-fuel power generation, prompting power companies to increase their allocation to renewable energy. In China, although the current carbon price is relatively low, the introduction of the auction mechanism and the tightening of the emissions cap will gradually increase the cost of coal-fired power, creating greater competitive advantages for solar and wind power. Second, carbon markets provide additional revenue streams for low-carbon technologies, such as the CCER mechanism, which offers financing channels for projects like coal mine methane utilization and forestry carbon sinks. In addition, the Carbon Border Adjustment Mechanism forces export-oriented enterprises to account for and reduce embedded carbon emissions, driving the supply chain toward green production transformation.

Challenges: Low Prices, Fragmented Mechanisms, and International Alignment

Despite strong momentum, Asia-Pacific carbon markets still face multiple challenges. First, carbon prices are generally low, with most APAC carbon programs priced below US$20, making it difficult to effectively incentivize deep emission reductions. Although China's carbon price has rebounded since the 2025 reset, it remains significantly lower than EU levels. Second, market regulation and mechanism design remain immature, and frequent policy adjustments—such as carry-over rules, allowance allocation, and compliance flexibility—increase the unpredictability of long-term corporate investment. New Zealand's decoupling episode demonstrates that policy reversals can severely undermine market confidence. Third, the implementation details of CBAM are complex, particularly the monetary deduction mechanism, which requires exporting countries to have verifiable carbon pricing records, but many developing countries have not yet established corresponding systems. Fourth, fragmentation among markets has led to huge differences in abatement costs, and multinational companies face complex compliance burdens.

Future Outlook: The Regional Carbon Market Landscape over the Next 5-20 YearsLooking ahead, the Asia-Pacific carbon market will present the following trends. First, the global influence of China's carbon market will continue to expand. With the goals of covering all industrial sectors and domestic aviation by 2027 and 80% of total emissions by 2030 achieved, the Chinese market will become the anchor for global carbon pricing. At the same time, the participation of financial institutions will enhance market efficiency and depth, and carbon prices are expected to gradually move closer to EU levels in the future, although they will remain relatively low in the short term. Second, the "carbon pricing rebate" mechanism of CBAM will prompt more Asia-Pacific countries to establish or strengthen domestic carbon pricing systems in order to retain carbon revenue. This may give rise to a unified regional carbon market framework, such as the interconnection schemes that countries are exploring. Third, the integration of voluntary carbon markets and compliance markets will accelerate, and offset mechanisms such as CCER will provide funding for low-carbon projects while controlling total emissions. Fourth, at the technology level, carbon-negative technologies such as carbon capture, utilization and storage (CCUS) and green hydrogen may form synergies with the carbon market, generating returns for early-stage projects through carbon credits. Over the next 5 to 20 years, the Asia-Pacific region is expected to develop a landscape with China at its core and multi-tiered carbon pricing mechanisms coexisting, becoming a key driver of the global carbon market.