Cement producers in China’s second biggest carbon market have warned the provincial government they cannot afford to comply with the Hubei emissions trading scheme, Reuters reported Friday.
Hubei emitters are expected to hand over permits to cover their 2014 emissions by the end of this month, but cement producers have entered into talks with the local government about escaping penalties for non-compliance or borrowing permits from the 2015 allocation, the agency reported, citing unnamed sources.
The talks are a re-run of last year’s compliance process in Guangdong, when a handful of manufacturers ended up refusing to meet their targets under the scheme.
Over the past 18-24 months, a slowdown in China’s economy and a conscious move by the government to shift away from its reliance on manufacturing for GDP growth have coincided with increased environmental regulations, including carbon as well as air, soil and water pollutants.
As a consequence, many manufacturers are struggling financially, especially smaller, privately-owned factories.
According to Reuters, Huaxin Cement, Hubei’s biggest cement producer, is short 1.15 million allowances for 2014.
At Friday’s closing price of 25.90 yuan for Hubei allowances, that would mean an additional cost of nearly 30 million yuan ($4.8 mln) for the company to comply with the ETS.
Hubei ETS rules state that the penalty for non-compliance is the deduction of twice the amount of permits they fail compliance with, plus a fine of up to three times the market price per tonne of CO2. But the fine is limited to 150,000 yuan.
In theory, Huaxin could simply refuse to comply and pay the 150,000 yuan fine, and then refuse to comply again next year when they would be even shorter, but observers note that would potentially spell disaster for the companyh’s relationship with the provincial government and its ability to obtain further project approvals, bank loans and so on.
For Hubei, which is going through its first compliance season, the opposition against the scheme is problematic.
The seven pilot markets in China are focused more on achieving a high compliance rate than actual emission reductions, as the schemes are seen primarily as a training session ahead of the launch of the national market.
Around a quarter of the 138 participants in the Hubei ETS are cement producers, and a failure to make them comply would raise questions over the provincial government’s ability to implement environmental regulations as well as cast doubts over whether the Hubei market should function as a model for the development of the national ETS.
By Stian Reklev – stian@carbon-pulse.com
