* Hubei to be second Chinese emissions exchange to sell permits
* Government still to give away 90 pct of the permits
* Hubei to ban carryover of unused permits one year to next
By Kathy Chen and Stian Reklev
BEIJING, Feb 11 (Reuters) - China's Hubei province will auction up to 2 million carbon permits at a government-set minimum price next month to kick-start the nation's sixth pilot emissions trading scheme (ETS).
Hubei's carbon market will be only the second to sell a share of the permits. In most of the other trial schemes, the permits have been handed out for free.
China, the world's top emitter of greenhouse gases, is seeking to limit its impact on climate change, and successfully operating the schemes is seen as vital for the foundation of a national emissions market.
Under China's schemes, hundreds of power generators and manufacturers must buy permits if they emit climate-changing gases above a certain allocated quota.
The Hubei scheme will cap emissions from 138 power generators and manufacturers at around 300 million tonnes of carbon dioxide a year, making it China's second largest market after Guangdong in terms of emissions covered.
"We will arrange the first round of auctions ahead of the market launch in March. We are thinking about setting the available amount at one to two million," Wang Hai, vice general manager of the China Hubei Emission Exchange, told Reuters.
No specific date has been set for the launch or auction, but they are expected to fall in the same week. The exchange will host all trading of emission permits under the Hubei ETS.
The minimum auction price for the permits has not been set.
In Guangdong province, the only other region charging for carbon permits, the government set the minimum price at 60 yuan ($9.90), drawing complaints from local industry, which said the price was too high.
Ninety percent, or 270 million, of the Hubei permits will be handed out to emitters for free, although nearly a third of those will be held back until firms have reported their annual emissions, allowing the government to adjust the number of permits each company gets.
This will cast uncertainty on pricing, because companies will not know how many permits they will need from the open market, said Chen Bo, an assistant director at the Research Centre for Climate and Energy Finance at Beijing's Central University of Finance and Economics.
Bargaining is likely to be between companies and the government rather than between companies trading permits, Chen said.
The remaining 30 million permits each year will be set aside in various government reserves, with 9 million to be auctioned.
In a change from other carbon markets, Hubei will not allow companies to bank unused permits from one year to the next, but will instead cancel any surplus permits.
Local government officials were not available for comment, but the ban on permit banking is most likely an attempt to prevent the development of a glut that could pull down prices.
In markets such as the EU Emissions Trading System and the Regional Greenhouse Gas Initiative in the Northeastern United States, annual surpluses of permits carried over from year to year have caused big dips in demand and falling prices, rendering the schemes ineffective in cutting emissions.
Hubei's draft rules also specified that companies can use offset credits from carbon-cutting projects to cover for up to 10 percent of their emissions, but only projects located within the province would be eligible. (Editing by Tom Hogue)