BEIJING Dec 12 China's Guangdong province has warned emitters that unless they bid for carbon permits in government auctions at a regulated minimum price, they will not receive any free permits under the nation's fourth emissions trading scheme, sources said.
China, the world's biggest emitter of greenhouse gases, is launching seven pilot carbon markets ahead of a nationwide scheme later this decade as a key measure to cut its emissions per unit of GDP to 40-45 percent below 2005 levels by 2020.
Emissions trading is new to China, and most observers expect a bumpy ride before the government finds a formula that works, but Guangdong's strategy is unprecedented in carbon markets. The move could boost demand at auctions but undermine the market.
The province will hold its first auction of 3 million carbon permits on Dec. 16 and launch secondary trading of CO2 allowances three days later in what will be the world's second biggest emissions trading scheme.[ID: nL3N0JP0S1]
But the 240 companies covered by Guangdong's emissions market -- including state power companies Datang, Huaneng and Shenhua -- have been told they must make successful bids in this or future auctions, according to several independent sources.
For those that don't, the government will hold back free permits, potentially a huge economic blow as the free emissions licences are expected to make up 97 percent of what companies need to comply with the scheme.
The Guangdong Development and Reform Commission (DRC), the government body running the carbon trading scheme, did not respond to questions from Reuters.
The DRC risks undermining the scheme by taking demand out of the market, demoting the value of companies buying their extra requirements from the secondary market, according to Craig Hart, an associate professor at Renmin University's School of Environment and Natural Resources in Beijing.
"If the government is relying on this policy to drive demand in the primary market ... it will undermine the carbon market and the policy goal," Hart told Reuters.
The plan and the minimum price could also discourage speculative traders from using the auctions to take long positions on bets the carbon prices will rise.
Sources speaking on condition of anonymity said the DRC move was likely made to ensure there would be demand at the auctions.
The DRC has also issued regulations demanding a minimum 60 yuan ($9.88) per permit at the auctions, an unpopular decision among scheme participants, who think that's too high.
Forcing companies to buy permits at the auctions is likely to raise prices and increase government revenue, one source said. A total of 29 million permits are to be sold in auctions before June next year, generating at least $287 million.
Auctioning a share of the total permits in a market is not unusual, with markets in Canada, Europe and the United States all following similar strategies.
But in those markets, companies can choose whether they want to buy additional permits in auctions or in the secondary market, or cut their emissions so they won't need more permits.
In the three emissions markets already launched in China -- in Shenzhen, Shanghai and Beijing -- no auctions were held, and all the initial permits were distributed free to participants.
Hart said Guangdong could avoid long-lasting damage to its market if it phased out the mandatory auction strategy in a way that builds confidence.
"Transparency here is critical. Any policies affecting the market should be announced publicly and, wherever possible, in advance of private investment in allowances," he said. (Editing by Tom Hogue)