China to raise penalties in new carbon market rules

By Kathy Chen and David Stanway BEIJING (Reuters) - China, the world's biggest source of heat-trapping greenhouse gases, will impose tougher penalties on firms that fail to comply with emission targets, according to draft market regulations seen by Reuters on Thursday. The draft rules, which have been circulated among market players, will be submitted to lawmakers next year for final approval. If passed, they will raise the cost of noncompliance and give emitters bigger incentives to cut their emissions and improve their reporting standards. With nearly 200 countries to meet in Paris at the end of November to decide on a new global climate accord, China has pledged to establish a national carbon trading scheme that will force enterprises to buy permits and credits to cover their releases of the primary greenhouse gas. The new rules provide the legal basis for the regulator, the National Development and Reform Commission (NDRC), to cap company emissions and could put more pressure on struggling sectors like steel or cement. An NDRC official revealed earlier that six to eight sectors are likely to be included in the cap and trade system, including power generation, iron and steel, nonferrous metals, building materials, chemicals, aviation, paper mills and automakers. If the law is approved, companies that exceed a stipulated emissions threshold will be compelled to participate. While most of their permits will be allocated for free, the total will be decided according to principles set by the state. Firms will be fined at a rate of three to five times the average carbon price over the previous trading year for each permit they fail to surrender to authorities, and they will also have their permit allocations for the following year cut by a corresponding volume. They will be subject to additional penalties for every day they delay paying the fine. The rules also call for the formulation of unified national standards for data reporting, accounting and trading, and proposes fines of up to 1 million yuan ($157,257) to punish misreporting from data verifiers. As well as spot traded permits and carbon offset credits, the new rules allow for the launch of carbon futures. The draft also specifies that funds raised from auctioned permits should be used for carbon reduction activities. It remains unclear whether permits now being traded in seven pilot schemes will be tradable in the new nationwide regime. The draft also provided no details about the level at which carbon will be capped in any future market. (Editing by Tom Hogue)