Hubei’s cement companies may default on carbon obligations

Byjirong

Updated Wed, 10 Jun 2015 11:29:13 GMT

According to Reuters, cement producers participating in the carbon market in China's Hubei Province have told the local government that they cannot afford the millions of Chinese Yuan required to buy permits to cover mitigation obligations for 2014 and may default. Refusal to pay would test China's ability to force companies to comply with carbon targets and undermine efforts to curb greenhouse gas emissions, in which a planned national carbon market would have a central role.

The 138 companies covered by the Hubei exchange have to hand over carbon permits in June 2015 to settle their obligations for 2014. Around a quarter are cement firms, which have complained that they were not allocated enough credits. “They are in talks with the government to gain immunity from non-compliance penalties and are asking to borrow some permits from next year's quota,” said an unnamed broker.

The companies are facing high environmental compliance costs at the worst possible time, as the economy slows and the construction sector struggles. Chinese cement production fell by 4.8% in the first four months of 2015.

Huaxin Cement, the biggest local producer, is 1.15 million permits short of meeting its mitigation targets, according to a document seen by Reuters. Carbon permits in Hubei are trading at US$4.43 so it could cost the company US$5.1m to cover its shortfall.

“Hubei is generally oversupplied, but the distribution is not balanced. Most of the power sector is over-allocated, but the cement and chemical sectors are short,” said another unnamed broker. “Those facing a big gap are not attempting to buy from the market. They are pushing the government for a compromise.” Penalties for non-compliance could include a deduction in permits for 2015 plus a fine of up to three times the value of the obligations in default, although that is capped at US$24,176.