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Vision of a Hong Kong Climate Exchange

As climate change becomes a global consensus, countries around the world actively incorporate financial innovation in the carbon reduction system. Carbon finance will provide new development to Hong Kong’s economic growth as an international financial center. By injecting more green funding, carbon finance will become an opportunity for the future of Hong Kong. Is Hong Kong ready to build a climate exchange? What are the prerequisites of establishing a climate exchange? How should the construction of a carbon emissions trading market be accelerated?

Opportunities to build a Hong Kong Climate Exchange
At present, Hong Kong is actively developing into a regional carbon trading center, accelerating the establishment of a unified carbon market in the Greater Bay Area (GBA), and promoting the GBA as a regional leader in combating climate change. We studied the development of the global voluntary carbon trading market, along with the unique characteristics of the GBA and the development trend of carbon finance innovations. We discovered that the development of a voluntary carbon market has many advantages for Hong Kong and is a suitable path to shape the city into an international carbon trading center. We can draw on global experiences to design the best mechanism and plan for a Hong Kong Climate Exchange.

The voluntary carbon market not only serves the compliance needs of sectors under emission control, but also encourages those that are relatively inactive to take carbon reduction actions, matching global supply and demand. At the same time, as an important hub connecting the mainland and the world, Hong Kong can adopt a variety of transaction methods to actively promote the liquidity of the secondary market and develop carbon financial derivatives. By complementing the advantages of the GBA, Hong Kong can shape itself into the largest voluntary carbon trading market in Asia, or even globally.

A closed loop of low-carbon technology, carbon trading and green finance
Through analyzing the positioning of the global carbon trading market and the advantages of Hong Kong, we suggest that the proposed Hong Kong Climate Exchange can be developed around high-quality and high-value carbon credits. The GBA can fully utilize its capital, human talent and technological advantages to mark, register, certify and transfer verified carbon credits to the respective trading platforms as they are produced. The whole process can be digitized and integrated into the national development of the digital economy and green finance.

One feasible technical path is to merge the new blockchain and industrial internet infrastructure developed by the Ministry of Industry and Information Technology to label key locations for energy conservation (i.e., industrial parks and renewable energy facilities) and use consensus algorithms and multilateral agreements to create credible digital carbon credits. This enables carbon credits providers, certification companies, buyers, investors, banks and regulatory bodies to utilize the characteristics of blockchain to supervise and verify information for each other. At the same time, it enhances the industry standardization capabilities and the financial attributes of digital carbon credits, making cross-border transactions more convenient.

More importantly, the digital integration of the carbon chain allows low-carbon technology, carbon trading and green finance to form a closed loop with the real economy. Through the establishment of a Hong Kong Climate Exchange, it can motivate the development of low-carbon technologies and low-carbon finance, bringing in new growth for the green finance industry in the GBA and Hong Kong.

Improving the carbon finance system through blockchain
Hence, we proposed that the Hong Kong Climate Exchange should focus on the voluntary carbon trading market and construct a diversified, high-quality and multi-level trading system. As energy consumption and conservation practices in many markets is decentralized in nature, the characteristics of blockchain—decentralized, self-trust, transparent, immutable, collectively maintained and confidential—are very useful for this very purpose. These characteristics enable transactions to be traceable and certification records to be stored, introduce a rating system, help stakeholders and regulatory bodies in supervision, and minimize defaults.

Blockchain technology can also effectively merge artificial intelligence, big data and cloud computing through decentralized carbon ledgers to encourage more small and medium-sized enterprises and low-carbon technology start-ups to participate in the market. It enables these companies to participate in a low-cost and efficient manner, while ensuring a stable supply of high-quality and high-value carbon credits.

The Hong Kong government should seize the opportunities brought by the voluntary carbon market and accelerate the development of Hong Kong as an international climate exchange. We believe that digital technology can help promote the green and low-carbon transformation, assist Hong Kong and the mainland to achieve the dual-carbon goals, and realize sustainable development of a low-carbon economy.

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