China's Slowing CO₂ Emissions and the Implications for Global Industrial and Energy Markets

China's CO₂ emissions have stabilized at near-record levels in 2025, marking a pivotal inflection point in its energy transition. While the country's 2024 emissions grew by 0.4% year-on-year, driven by heatwaves and economic stimulus, the expansion of renewables and hydropower has offset much of this growth. By the third quarter of 2025, emissions remained flat compared to 2024, extending a trend of stagnation or decline that began in March 2024. This stabilization reflects a dual dynamic: rapid deployment of solar and wind energy (up 46% and 11%, respectively) and a surge in coal power construction according to analysis. For investors, this duality creates a landscape of dislocated assets-both risks and opportunities-across industrial sectors.

The Dual Trends in China's Emissions

China's energy system is caught between decarbonization and inertia. On one hand, the country added 210 GW of solar and 50 GW of wind capacity in the first half of 2025 alone, surpassing its annual target. Hydropower generation rebounded by 11% in 2024 after droughts in 2022/2023, while industrial process emissions fell by over 5% due to reduced cement production. On the other hand, coal remains a critical pillar. Despite a drop in its share of electricity generation to a nine-year low of 51% in June 2025, China added 80 GW of new coal capacity in 2025-the highest in a decade. This paradox underscores the structural challenges of balancing climate goals with energy security and economic growth.

Policy Shifts and the ETS Expansion

China's national Emissions Trading System (ETS) is evolving to address these tensions. By 2025, the ETS had expanded to cover cement, steel, and aluminum sectors, adding 1,500 companies and 3 billion tonnes of CO₂e emissions. The system currently allocates allowances based on production output, but a two-phase plan aims to introduce absolute caps by 2027. This shift will create financial incentives for emissions reductions, particularly in energy-intensive industries. For example, the steel sector, which emits 1.7–1.9 tonnes of CO₂ per ton of steel produced, faces tightening benchmarks. Companies that fail to adapt risk becoming dislocated assets, while those investing in carbon capture or low-carbon technologies could gain a competitive edge.

Dislocated Assets in Coal and Renewables

The coal sector is a prime example of structural dislocation. While new coal plant permits hit a four-year low in 2025, construction of 44 GW of new capacity resumed in the first half of the year. Provinces like Xinjiang, Inner Mongolia, and Shaanxi continue to prioritize coal, despite national climate goals. Meanwhile, coal-to-chemical projects are expanding, with China Energy Investment Corporation leading global coal power development. These projects face growing scrutiny from environmental groups and international investors, creating risks for firms tied to them.

Renewables, meanwhile, are grappling with overcapacity. China's solar and wind capacity surpassed coal in May 2025, but curtailment rates are rising in 21 provinces. Solar projects in Shandong have won auctions at prices as low as 0.225 yuan per kilowatt-hour-below the threshold for profitability. This overcapacity is compounded by financial distress in the sector: renewable energy manufacturers recorded $200 billion in losses in 2024. However, overcapacity also presents opportunities. For instance, green hydrogen and industrial heating projects in coastal provinces with offshore wind potential could absorb excess renewable capacity.

Opportunities in Clean Tech and ETS-Compliant Industries

China's clean-tech leadership offers another avenue for investment. The country dominates global supply chains for EV batteries, solar panels, and wind turbines, producing over 70% of the world's EVs. The 2025 Green Industry Catalogue emphasizes decarbonization and energy efficiency, creating tailwinds for firms in automation, generative AI, and digital infrastructure. Additionally, companies aligning with ETS reforms-such as those developing low-carbon steel or cement-stand to benefit from fiscal and monetary support. For example, Sichuan and Yunnan provinces, which face 70% renewable energy consumption targets, could become hubs for green industrial innovation.

Geopolitical and Market Implications

China's energy transition has global ramifications. Its dominance in clean-tech manufacturing and exports positions it to lead 60% of the world's renewable capacity expansion by 2030. However, its reliance on coal and overcapacity in renewables complicate this trajectory. For foreign investors, navigating China's restrictive business environment-joint-venture requirements, equity caps, and political pressures-adds complexity. Yet, the expansion of the ETS and provincial renewable targets suggest a long-term trend toward carbon efficiency, which could drive demand for carbon credits and emissions-reduction technologies.

Conclusion

China's slowing CO₂ emissions and structural shifts in its energy system create a mosaic of dislocated assets. While coal infrastructure and overcapacity in renewables pose risks, the expansion of the ETS, clean-tech leadership, and policy-driven industrial reforms offer compelling opportunities. Investors must balance these dynamics, prioritizing sectors and regions that align with China's evolving climate and economic priorities. As the country navigates the tension between decarbonization and growth, the winners will be those who adapt to its dual-track energy future.