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Don’t miss this opportunity! Hong Kong should develop as a regional carbon trading center

Under climate change, carbon neutrality has become a global consensus. From the basis of the United Nations Framework Convention on Climate Change, the Kyoto Protocol completed its two-term mission from 2008 to 2020. In terms of effectiveness, top-down emission reduction policies cannot fully push participating developed countries, which in turn weakened the effectiveness of the Convention. The Paris Agreement took the leading role after 2020 in setting international treaty on climate change. The agreement does not advocate absolute criterion for emission reduction, but promotes a voluntary bottom-up approach as an incentive.

After years of exploration, there has been incremental progress for the global voluntary carbon market development with the participation of more than 200 countries. Mutual influence between the carbon markets of countries or economies have deepened, while the market size of voluntary carbon emissions reduction continues to expand every year. As of the end of August last year, the volume of transactions in the voluntary market already exceeded US $748 million, with an increase of 58% compared to 2020. It is notable that this growth under the impact of the COVID-19 pandemic. The growth rate may be more significant under normal circumstances.

At present, voluntary carbon emission reduction is not traded on exchanges, but on carbon trading platforms. These platforms are based in different regions such as Europe, America, Australia and Asia, with the main businesses coming from derivatives trading of futures contracts and options contracts. In terms of project types, carbon credits are mainly derived from eight categories, with reference to the present international mechanism and information provided from the ecosystem market. These include forestry and land use, renewable energy, energy efficiency, agriculture, waste management, transportation, household equipment, and chemical/industrial manufacturing. Among these types, forestry and land use, renewable energy and energy efficiency are the main categories for carbon credit transactions.

In order to achieve the Paris Agreement, the 2050 carbon targets and the regular ESG disclosure required by HKEx, more companies are setting their voluntary carbon neutrality goals. Companies will voluntarily purchase carbon credits to offset unavoidable carbon emissions. It is anticipated that the demand will grow further in the next five years. Based on the current situation of Hong Kong’s carbon market, the city needs to develop a specialized carbon trading platform to standardize management. Besides, the status of Hong Kong as an international finance center helps to promote technological innovations through the development of voluntary carbon trading platforms, such as carbon capture utilization and storage (CCUS), hydrogen energy and other advanced technologies. These technologies provide advanced solutions for the future voluntary carbon market.

To set up a new carbon exchange in Hong Kong, it is essential to be equipped with a world vision and adopt clear standards and methodologies in establishing a global carbon trading mechanism. A global carbon emission reduction standard requires a more stable project governance framework, a wider range of project types, and a standard which does not require the permission of specific national governments to be used (such as CCER). These criteria allow the standard not be affected by the uncertainty of the mandatory carbon market policies and maintain the stability of long-term trading. It is useful to establish effective market participation rules and formulate market pricing for carbon offset commodities involved in the transactions. This strategy encourages more listed companies or international companies to freely purchase high-quality voluntary emission reduction quantity through the carbon trading platform in Hong Kong and to offset their carbon emissions.

The Hong Kong government needs to take advantage of the opportunity of developing a carbon exchange to promote the progress of low-carbon technology and actively participate in global actions on climate change. It should focus on high-quality, high-value carbon sink to encourage enterprises or companies participating in resources reduction, in addition using blockchain and Internet of Things technologies to trade and transfer credible carbon sinks. The government should also provide targeted convenience measures in raising funds for local start-ups to guide and support low-carbon technologies and the development of low-carbon finance. Hong Kong and the Greater Bay Area should become the incubation center for enterprises with low-carbon technologies, such as green hydrogen energy and CCUS, closing the loop with carbon trading, green finance and green technology.

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

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