China is seeking to limit its greenhouse gas emissions by using a pilot program through the use of emissions trading, often referred to as “cap and trade“. Shenzhen is one of six cities involved in which, basically speaking, heavy polluters like power plants and factories must purchase permits that legally allow them to pollute up to a pre-determined limit.

But controversy has erupted in advance of the auction set to take place in Shenzhen on June 6, reports Reuters. Speculators hoping to resell these permits at a premium price are complaining about the minimum price of the permits at the action, only RMB 35.43 (USD 5.67), half the value of those sold last year.

The anger is seething. One investor who did not reveal his identity said, “This is toxic for individual investors. There is no fairness, justice or transparency.”

The China Emissions Exchange (CES) that runs the auction has clearly outlined the rules, saying, “The auctioned permits can only be used for compliance, they cannot be traded in the market.”

It may look as though the speculators are angry without cause as the China Emissions Exchange was not finished yet. Because we’re still wrapping our heads around it, here’s the full text from Reuters:

The note from the China Emissions Exchange said the 200,000 permits would not be enough to cover the total shortfall at companies.

Individual emitters will not be allowed to buy more than 15% of their shortfall in the auction, meaning they would still need to buy more in the secondary market, which traded at 74.99 yuan on Tuesday.

So, all emitters won’t be able to get the permits they need due to a shortfall, and so must get them from a third-party system, one that is not allowed by CES’ own rules.

Let’s move on.

There’s a finite number of permits for the Shenzhen pilot plan that stem from the 33 million carbon permits that were issued in 2013; this new auction will issue 200,000 permits from a 10% reserve of the original cache. Another sum of permits only referred to as “the rest” were given out to emitters for free in a “grandfathering” plan, something that may have to do with the cancelling of some 3 million permits as the government readjusted allocation levels.

Most of these six carbon markets remain dependent on third-party permit transactions since emitters are reluctant to trade their surplus of permits for fear that they may be needed in the future, so we can suppose that there must be a thriving third-party market to meet these demands.

Okay, so that’s why those speculators are so angry.

Photo: San Francisco Gate