As China lays down plans for a national carbon trading scheme, the world's biggest emitter of greenhouse gases risks repeating mistakes made in carbon trading in Europe by flooding its pilot markets with free permits.
The European Union's scheme, the world's largest, suffered a collapse in prices hurting its credibility when the EU gave away too many permits just as the global financial crisis was slashing demand and in turn curbing pollution levels.
Fifteen traders, brokers and consultants speaking to Reuters said that most of China's pilot markets launched last year were riddled with an over-allocation of permits, bar pockets of scarcity, such as parts of the Beijing market and the electricity generation sector in Shanghai.
Shenzhen's vice mayor said in January that the city's carbon market, China's smallest, had a surplus of around 10 percent of permits in 2013, although he later said some of the surplus would be cancelled.
According to a Shenzhen-based consultant, the market could see an ever bigger surplus for 2014, as eight big power stations had asked the government to give them more permits than last year. The Shenzhen government declined to comment.
If the pilots fail it would be a blow to the credibility of carbon markets as a tool to cut emissions and could cast doubts over Beijing's plans to launch a national market later in the decade, the centerpiece of China's climate change policy.
Jorgen Wettestad, a climate policy expert at Norway's Fridtjof Nansen Institute, said the problems of over-allocation of permits in Europe and elsewhere offered pointers for China.
"Based on the experiences of others it will probably take some time to get the numbers, procedures and institutions right. So a little patience is necessary," said Wettestad.
Xie Zhenhua, China's top climate change official, said in Germany last month that too many free permits and unambitious emission reduction targets had made the EU market "sluggish", and vowed that China would learn from this.
Under China's pilot schemes, companies hand over permits to the government for each tonne of carbon dioxide they are expected to emit. Most are given free, but if they exceed their quota they must buy more in the market.
Permits trade at record low
None of the regional governments operating pilot schemes has released data on the amount of CO2 the companies receiving permits were estimated to have emitted last year or how this compared to the number of permits handed out.
They have published approximate numbers for how many permits they gave out then, ranging from 350 million in Guangdong to around 33 million in Shenzhen.