BEIJING Aug 19 (Reuters) - Guangdong, the biggest of China's seven pilot carbon trading markets, will this year hand out around 6 percent more emission permits to companies than in 2013, potentially aggravating oversupply that sent prices tumbling earlier this year.
The market is meant to rein in climate-changing greenhouse gas emissions from power stations, cement factories, petrochemicals, and iron and steel producers emitting more than 20,000 tonnes of carbon dioxide each year.
The market will cover 193 facilities this year, nine fewer than in 2013, who will be issued 370 million permits, the provincial Development and Reform Commission (DRC) said in a note on its website on Monday night.
In addition, 8 million permits will be set aside for auctions, and a further 38 million can be bought be new factories or held in reserves that the government can introduce to the market later if there is a severe shortage.
The DRC note did not explain why the amount of permits had been increased, but an official with the China Emissions Exchange, which operates the permit trading platform in Guangdong, said there were some changes in the list of market participants.
"The amount of permits increased because companies brought into the scheme this year are bigger than those eliminated," he told Reuters. He did not want to be identified as he is not authorised to speak with media.
The local government has not released the names of the facilities covered.
According to the DRC note, electricity generators will receive 95 percent of the permits they are expected to need for free, while manufacturers will get 97 percent.
Most of China's new CO2 markets handed out too many permits in 2013, their first year of operation.
In Guangdong, this led to prices dropping by almost a third to 41.50 yuan ($6.74) in the weeks ahead of a compliance deadline.
In the last two weeks, permits in the Guangdong market have traded around 50 yuan. Daily volumes have been around 10,000 permits, a significant uptick from the 2013 compliance year, when there were barely any trades going through at all.
A second source at the local exchange said most of the trading is done by around 10 institutional investors that the government has allowed to join the market in a bid to boost liquidity.
Hoping to solve some of the difficulties the Guangdong market experienced in its first year, the local government has also removed an obligation for companies to buy 3 percent of their permits in government auctions.
The mandatory auctions at a minimum price of 60 yuan for last compliance year sparked anger among local industry, and many initially refused to participate.
For 2014, companies can choose whether to cover any shortage by buying in auctions or the secondary market, or cut their emissions.
The government will hold four auctions ahead of the compliance deadline next June, the first due in September. The minimum price will start at 25 yuan in the first auction, climbing to 40 yuan in the final one. (Reporting by Kathy Chen and Stian Reklev; Editing by Joseph Radford)