By Kathy Chen and Stian Reklev

China is planning hefty fines for companies that fail to comply with the rules of its national carbon trading market but has yet to decide how to set emission caps for big polluters, according to a draft government document seen by Reuters.

The world's biggest emitter of greenhouse gases plans to launch a national emissions trading scheme in 2016 in a bid to reduce its impact on climate change and make its economy less reliant on polluting fossil fuels.

Under the scheme, big emitters such as coal plants and factories will be given a cap on their CO2 emissions. If they emit more than they have permits for, they must buy additional permits in the market.

The Chinese market is expected to be the world's biggest, covering around 10 percent of the world's total carbon emissions from the outset.

China's top economic planning agency, the National Development and Reform Commission (NDRC), has drawn up a draft law that would provide the legal backbone for the scheme.

The draft, which does not take a position on several key issues, such as how many CO2 permits will be handed out under the scheme, has been distributed to a handful of ministries for comment. A final version will be sent to the State Council, China's cabinet, for approval in November.

The NDRC did not respond to Reuters questions about the draft bill.

In most of China's seven existing pilot markets, companies that fail to comply with the rules get fixed fines - or no fine at all, as in the Tianjin market - but the national scheme will potentially be tougher.

"For each tonne of CO2 that companies fail to surrender permits to cover for, they will be fined 300 yuan ($49). For overdue payments, an additional charge of 3 percent will be added daily," the draft said.

According to the draft, the main responsibility for implementing the national market will rest with the NDRC.

The agency will draw up rules deciding how many permits companies can get, but local authorities would have the power to adjust the number of permits downwards.

Provincial governments can also add more sectors of economic activity to the scheme than advised by the NDRC, it said.

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Unlike carbon markets elsewhere, the NDRC draft proposed that the government should be able to adjust permit levels issued to each company and in the overall programme on an annual basis.

In most CO2 schemes the authorities draw up multi-year plans that give participating firms long-term certainty as to how much CO2 they will be able to emit.

The NDRC proposal would allow China to avoid situations such as the one in the European Union, where an ever-increasing surplus in permits since 2008 has cut demand, pushing the price down, with the regulatory body unable to interfere.

But some say issuing caps for only a year at a time might have negative consequences as well.

"Without more certainty in these caps, a variety of adverse outcomes may occur, ranging from stunted appetite for trading to a lack of long-term price signals," Resources for the Future, a U.S.-based think tank, said in a report on the Chinese pilot markets released this week.

Under the current proposal, most permits would be handed out free initially, with a gradually increasing share sold by the government.

According to the draft, the law seeks to ensure the quality of emissions data, proposing that local governments double-check at least 5 percent of company emission reports each year, even after they have been verified by independent auditors. (Editing by Alan Raybould)