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Carbon Finance, Carbon Economy, Carbon Trading - Why Should Hong Kong Accelerate Carbon Transition?

The 26th Conference of the Parties (COP26) of the United Nations Framework Convention on Climate Change ended late last year. 197 participating countries reached a consensus—the Glasgow Climate Pact. There are many key phrases in COP26, such as "accelerating efforts towards the phasedown of unabated coal power” and "increase [developed countries’] provision of climate finance”. However, I believe that the most profound outcome of COP26 was that the parties reached a consensus on market and non-market mechanisms for carbon trading, under Article 6 of the Paris Agreement. The consensus on this article will release trillions of US dollars to protect forests, enable renewable energy and other climate projects, which will facilitate the implementation of the Paris Agreement.

At present, around 120 countries use carbon markets as one of the means to achieve their submitted Nationally Determined Contribution (NDC). Setting up a carbon market helps countries to reduce costs and attracts developing countries to invest in clean innovation and accelerate emissions reduction, which will create bilateral carbon trading.

The Minister of Environment and Forestry of Indonesia reportedly announced an increase in forestry and land usage shortly after COP26. Their government also passed a regulation on carbon economic value. More countries are predicted to adopt relevant measures. Therefore, this conference has played a positive role on the long-term promotion of the international carbon trading market, which includes regulating carbon financial rules, enhancing the vitality of the carbon economy, and clarifying carbon market mechanisms.

The development of the international carbon market is a blue ocean. The operation scope of the global carbon market continues to expand, benefitting from clearer climate policies of different countries. The carbon market has gradually become an important tool for more countries in response to climate change. The European Union Emissions Trading System (EU ETS) served as the earliest carbon market in the world. At the same time, the EU ETS also took part as the main policy tool for the EU to fulfill the goal of reducing emissions by 55 percent by 2030 and achieving carbon neutrality by 2050.

The EU ETS have always received high attention from around the world. On November 22, 2021, carbon price in the EU rose to €71.21 per ton, exceeding €70 for the first time since its operations in January 2005. The attractive transaction price gave a powerful boost to the development of the global carbon economy and market.

China’s carbon market has developed rapidly in recent years. Since officially launching emission trading in July 16 last year, cumulative carbon transactions in China reached 179 million tons and RMB7.6 billion in transaction volume. Although it is a breakthrough in terms of scale, there is still a large gap from the EU ETS, with a transaction volume of €210 billion.

The concept of "carbon finance” in China started in 2016, and at present, most of the financial institutions lack a comprehensive understanding of it. Under state leadership, China’s pilot carbon markets have operated steadily for many years, with each markets carried out a series of explorations on carbon finance.

However, the trading products are constituted mainly by carbon spot. The variety of carbon market products is limited, and the innovation of products is insufficient. The risk management system of the carbon market is comparatively weak. Although some pilot markets have introduced financial products such as carbon funds, carbon pledges, carbon repurchases, and carbon futures, derivatives in the carbon market are limited and lack specialisation.

Nowadays, carbon trading is covering more and more industries. Forestry, marine and soil carbon sink products are also being explored and incorporated into carbon trading. Therefore, it is necessary to promote the connection of inclusive and digital financing with green and low-carbon financing vigorously.

Through key technologies such as big data and blockchain a low-carbon enterprise project database and an information sharing platform can be established as a means to achieve a connection between financial units with respective enterprises and projects. Meanwhile, the market needs to actively catch up with national policies and international trends to further stimulate the market’s vitality. This helps to steadily develop the national carbon market and to help China in achieving its goals on peaking carbon emissions and reaching carbon neutrality.

To catch the green tide, the Hong Kong government should take advantage of the development in mainland. The city should set up carbon trading markets, particularly the voluntary market and explore integration with carbon market in the Greater Bay Area, such that businesses can bear the environmental cost of climate change and embrace a low-carbon transition.

The government needs to assign a green finance commissioner to lead and oversee the development of green finance in Hong Kong. On the other hand, the government has to put more resources into strengthening ESG education, training green finance talents, and promoting Hong Kong’s development as the green finance hub in the Asia-Pacific region.

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