CEMENT producers participating in the carbon market in China’s Hubei Province have told the local government they cannot afford the millions of yuan required to buy permits to cover mitigation obligations for 2014 and may default, market sources said.

    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 this month to settle their obligations for last year. Around a quarter are cement firms, who complain 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 a broker with knowledge of the situation.

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

    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 27.5 yuan so it could cost the firm 31.63 million yuan (US$5.1 million) to cover its shortfall. Company officials responsible for carbon compliance were unavailable for comment.

    “Hubei is generally oversupplied, but the distribution is not balanced. Most of the power sector is overallocated, but the cement and chemical sectors are short,” said another broker. “Those facing a big gap are not attempting to buy from the market. They are pushing the government for a compromise.”

    (SD-Agencies)