How should Hong Kong prepare for the carbon exchange market?
| Plato Yip, Vice-Chairperson at Friends of the Earth (HK)
carbon trading system developed rapidly in recent years. Although a unified
market has not formed, countries are starting to develop a carbon trading system
on a regional scale, adopting market-based practices. They are working together
to fulfill emission reduction commitments and build linkages between various
opportunities of the carbon trading market, the Green and Sustainable Finance
Cross-Agency Steering Group recently published its preliminary feasibility
assessment on the Hong Kong carbon market’s opportunities. The report supports
Hong Kong to develop as a regional carbon trading centre.
What is a
carbon trading market? What is its potential? If Hong Kong wants to develop as
a carbon trading market, how should the city prepare for it?
We need to
start with the basic concept of the carbon market. There are two types of
carbon market, namely mandatory carbon market (i.e., emissions trading system, ETS)
and voluntary carbon market (VCM).
has been incorporated into the carbon emissions trading system of various
countries. In China, the government requires selected industries to perform mandatory emission
reduction. This is called carbon emissions trading or mandatory carbon market.
is to purchase carbon credits in the VCM, under the carbon credit mechanism, to
achieve voluntary carbon targets set by enterprises.
launch in mid-2021, the ETS system in the mainland has become the world’s
largest emissions trading system, with a cumulative trading volume of over 800
million RMB. In the future, it will cover eight major industries, including
power generation, petrochemical, chemical engineering, cement, steel,
non-ferrous metals, paper and aviation building materials. About 8,000 to
10,000 enterprises will be regulated.
emission reduction targets, VCMs are an important complement for companies that
wish to fulfill their corporate social responsibility. These companies reduce
or offset their own carbon emissions from their business operations by
purchasing carbon credits. This market has grown rapidly in recent years, with
more companies around the world proposing net-zero emissions commitments with a
timeline. In 2021, the trading volume of the global VCM exceeded US $1 billion
for the first time, and the price of high-quality carbon credits often reaches
US$30-50 per ton in the global market.
reference to the forecast of the Taskforce on Scaling Voluntary Carbon Markets
(TFVCM), the world needs to halve emissions from current levels by 2030 and become
net-zero by 2050 to achieve the goals set in the Paris Agreement. This means
that as compared to 2020, the market size needs to increase by 15 times by 2030
and expand by 100 times by 2050 to reach the target.
Hong Kong should focus on the business opportunities of the voluntary carbon
market. We are a leader in financial and professional services within the
region, and we have advantages in linking domestic carbon assets and global
capital. We can definitely take advantage of our professional knowledge,
industry experience, and resource integration capabilities to develop tradable
carbon credits and derivative financial products, together with transaction methods
and regulatory mechanisms. This helps to guide global funds participate in
regional and national low-carbon economic transformation.
In terms of
mechanism design, it could be a good start to solve market pain points. At
present, carbon trading in various countries face almost similar problems.
Firstly, carbon trading is not market-oriented, and the circulation of carbon credits
is not strong enough. Secondly, many companies that are in need cannot easily
participate in carbon trading, and the cost of obtaining genuine information is
comparatively high. Thirdly, there is no unified standard on carbon credits,
and information asymmetry often exists between supply and price. Fourthly, the
transaction process is not transparent and the procedures are complicated.
has the unique advantage of talents to perform well in the development of a
carbon trading market, but it requires collaboration among government departments
and professionals. Experts in the financial sector are needed to design a
mechanism for increasing bankability and liquidity of carbon credits. Besides,
experts in environmental protection and low-carbon technology are needed to develop
methodologies on how to verify and audit carbon credits, based on the supply
and demand potential of various industries.
experts in digital technology such as blockchain technology are needed. For
instance, to utilize the industrial Internet of Things to grasp the generation of
carbon credits automatically, and to ensure correct carbon credit data flow to
the market. Lastly and most importantly, the design of the carbon credit
trading market, such as the tradable carbon credit standards, transaction products
and a convenient trading mechanism.
is an emerging industry and a new growth point of financial innovation in the
world. We suggest conducting a pilot in the Greater Bay Area first. It is a
good time to gather experts in their respective expertise to explore a feasible
path for Hong Kong in accelerating its transformation towards digital economy
and low-carbon economy, serving as a key feature of green and sustainable