China's environment ministry on July 27 released a draft plan to tighten carbon emission allowance (CEA) allocation for the power sector in 2025-2026 and expand the market to steel, cement and aluminium smelting from 2026, signaling a gradual shift toward stricter supply controls.

The plan, open for public comment until August 5, maintains the existing "emission intensity-based free allocation" framework for the three new sectors, where quotas are tied directly to output with no absolute cap. The power sector will continue to use a benchmarking method.

Despite the framework continuity, the plan introduces multiple tightening measures. The comprehensive benchmark value for the power sector will be cut by 0.35% in 2025 from 2024 levels, with a further 0.35% reduction in 2026. The compensation load rate cap for peaking units will be lowered to 50% from 65%, meaning units operating between 50% and 65% load will no longer receive peaking quota compensation.

The plan proposes scrapping the quota carryover policy previously introduced to boost market liquidity, which allowed companies to carry surplus quotas to future years. The removal is expected to change the strategy of firms hoarding quotas in anticipation of price increases.

For the first time, the plan mentions paid allocation. The January 2026 national ecological and environmental protection work conference had already signaled a "steady push for a combination of free and paid allocation", and this plan marks the formal implementation of that direction.

Small emitters with annual emissions below 26,000 tonnes of CO2 equivalent, as well as low-carbon metallurgy process companies, will receive "equal allocation" — meaning their annual quota equals their verified actual emissions.

Overall, the plan tightens quota supply through multiple channels — benchmark cuts, compensation tightening, carryover cancellation and the introduction of paid allocation — while maintaining the intensity-based framework. The 2024-2026 period serves as a transition phase for the carbon market, with stricter benchmarks and further tightening of free quotas expected after 2027, reflecting a balance between advancing emission reduction targets and industry affordability.