Highlights • Firm size and ownership information is crucial in analyzing China's carbon emissions. • MSMEs produced 53%, induced 65% of China's CO 2 emissions along domestic supply chains. • Private MSMEs in the non-metallic mineral sector should be the key for policy-making. • Given the abundance of MSMEs, taxation is suitable for further emissions reduction. • Reducing environmental externalities in China need more supply-chain based governance. Abstract To date, the burden of CO 2 emissions reductions has been largely confined to large enterprises in China. Using new data with firm ownership and size information included, we show that micro, small and medium-sized enterprises (MSMEs) produced 53% of China's CO 2 emissions in 2010. Detailed supply-chain analysis reveals that final demand for products made downstream by domestic-private MSMEs, along with exports made downstream by foreign-owned MSMEs, are the main drivers of China's CO 2 emissions. Most of these emissions occur upstream in the electricity and heat sector, which is mainly controlled by large, state-owned enterprises with the highest carbon intensity, and the non-metallic mineral sector, which consists of a very large number of domestic-private MSMEs with lower levels of enforcement of emissions regulations. Overall, MSMEs induced 65% of China's CO 2 emissions through their supply chains. Our conclusion is that understanding the role of firm size for China is important in developing emissions reduction policies: given the very high per-enterprise overhead of emissions trading systems, and the abundance of MSMEs, our results clearly favour taxation. [ABSTRACT FROM AUTHOR]