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Factbox: How do China's carbon markets work?

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(Reuters) - China's most populous province, Guangdong, will launch a CO2 emissions trading scheme in mid-December, hot on the heels of Shanghai and Beijing this week. A market in Shenzhen was launched in June.

China, the world's biggest source of climate-changing carbon emissions, will initially distribute credits to member firms mostly free of charge, meaning participants will face additional costs only if they exceed their quotas and have to buy.

Carbon markets force companies that exceed their emissions quotas to buy permits from others that reduce their emissions.

Below is how the first four Chinese markets will work. Three more will follow next year.

GUANGDONG

Some 202 companies from the power generation, cement, iron and steel, and manufacturing sectors will be given an absolute cap on their CO2 emissions for 2013 of 350 million tons, while the provincial Development and Reform Commission (DRC) has set aside a further 38 million permits for new entrants and unspecified "adjustment" purposes.

The scheme will in later years be expanded to cover ceramics, textiles, non-ferrous metals, plastic and paper firms.

Companies will initially be given 97 percent of their permits for free, while the rest will be auctioned. The first auction will be in mid-December. In 2015 the share of permits to be auctioned will rise to 10 percent.

The market has no official price floor, but the government has proposed that bids in the first auction start at 60 yuan ($9.85).

Companies will be allowed to use carbon credits from offset projects, known as Chinese Certified Emissions Reductions (CCERs), to meet 10 percent of their overall compliance requirements. These are issued by the National DRC.

Trading will take place at the China Emissions Exchange in Guangzhou. Only spot trading is allowed.

BEIJING

This market, opening on November 28, will cover 490 entities from the power generation, manufacturing and large building sectors, and will be regulated by the Beijing Development and Reform Commission (DRC).

For 2013, covered companies will receive permits equal to 98-100 percent of their average emissions over 2009 to 2011. This will drop over the next two years, to 94 pct for manufacturers in 2015.

A special permit reserve will be set aside for new facilities and for existing ones that expand activities. On April 30 every year, companies will have to produce verified reports for their emissions in the previous calendar year and must submit the necessary amount of permits to the government by June 30.

Companies will be allowed to use CCERs to meet 5 percent of their targets.

Trading will take place on the China Beijing Environmental Exchange. Brokers can operate as long as their deals are registered on the exchange. Only spot trades are allowed. Banks and trading houses not covered by the scheme are allowed to set up accounts on the exchange and trade, but private participants have no access for the time being.

SHANGHAI

This market imposes caps on 191 facilities from power generation, manufacturing, aviation, harbors and commercial buildings, and will be regulated by the Shanghai DRC. For 2013, the annual cap is 160 million tons of CO2. The first trade was recorded on November 26 at 27 yuan ($4.43).

Companies have been given permits based on 2009-2011 emissions for trading in 2013-2015, but they must surrender permits annually to the government on June 30 for the previous calendar year.

Shanghai firms can use CCERs to meet 5 percent of their overall requirements. Trades will be carried out on the Shanghai Environment and Energy Exchange.

Only spot trades are allowed, but since companies have permits for both 2014 and 2015, they may trade those on a spot basis, too. Banks and trading houses are allowed to participate in the market.

SHENZHEN

Launched in June 2013, the scheme covers 635 firms from all sectors of the economy, and around 200 large buildings. Unlike other schemes that cap emissions, the Shenzhen scheme is efficiency-based.

Companies receive free permits based on their expected economic output for the next year, and are forced to buy permits in the market if they fail to meet government-defined benchmarks.

The participating firms currently emit around 31 million tons of CO2 per year, making it the smallest of the pilot markets. The government has issued "around 100 million" permits for the three years from 2013 to 2015.

Trading in the market began at 30 yuan, then went as high as 130 yuan, and the price is currently around 70. Volumes have been small.

Trading is hosted by the China Emissions Exchange in Shenzhen, not to be confused with the exchange of the same name in Guangzhou.

(Compiled by Kathy Chen and Stian Reklev; Editing by Alan Raybould)

http://www.globalpost.com/dispatch/news/thomson-reuters/131127/factbox-how-do-chinas-carbon-markets-work