SAR seen as connector in world carbon trade

Melody Chen

Hong Kong Financial Services Development Council proposed in a report to set up a Carbon Connect in the Greater Bay Area, facilitating mainland counterparts to trade carbon credits with the rest of the world via the SAR to help the nation meet carbon neutrality.

FSDC chairman Laurence Li Lu-jen said Hong Kong is well-positioned to become a leading regional carbon market by supporting the global integration of mainland China's burgeoning carbon market.

China is the largest carbon dioxide emitter globally and has the world's largest mandatory carbon market, covering 5 billion tonnes of emissions. The market size of its mandatory carbon market is projected to reach 1.47 trillion yuan (HK$1.57 trillion) and its voluntary market could grow to 73.5 billion yuan by 2030.

However, the nation's carbon trading is still at a preliminary stage, currently limited to state-owned enterprises in the power sector, and its standards differ from those of others, including the mature European Union market.

The mainland's mandatory carbon market is expected to cover the steel, cement and aluminium sectors in the near future with carbon credit demand projected to increase to 400 million tonnes.

China also aims to reach peak emissions by 2030 and achieve carbon neutrality by 2060 - often referred to as the "3060 target." Achieving it will require a 139-trillion yuan investment, but the yuan is not yet freely convertible and the country remains largely inaccessible to international investors.

Hong Kong Exchanges and Clearing's Core Climate, launched in 2022, is a carbon marketplace that offers Hong Kong dollar and yuan settlement for the trading of international voluntary carbon credits. However, the platform remains voluntary and at a preliminary stage.

To this, the FSDC proposed that Hong Kong establish a Carbon Connect to play a middleman role, helping China trade carbon credits and secure funding to support its 3060 decarbonization efforts.

"This effort aligns with the country's national strategy to build an effective, vibrant, and internationally influential carbon market," Li added.

Jeff Huang of AEX Holdings said as an international financial center, Hong Kong is well positioned to efficiently price carbon with China underlyings. He added the hallmarks of efficient pricing include adequate participation of compliance companies, healthy open interest and trading liquidity above and beyond just 12 months over the forward price curves.

The FSDC also recommends such policies as stimulating market demand and providing legal certainty for carbon credits, and establishing a non-governmental carbon registry.

Meanwhile, CarbonCare InnoLab chief executive Chong Chan-yau expressed doubts that Hong Kong can meet its 2050 carbon neutrality goal as the community does not even have any debate on clean energy.