Hong Kong Building A Greater China Carbon Market Gateway

• Published date: 24 November 2022
• Subject Matter: Finance and Banking, Financial Services, Commodities/Derivatives/Stock Exchanges
• Law Firm: Stephenson Harwood
• Author: Ms Penelope Shen

Hong Kong is pursuing a ground-breaking plan to develop market structure and regulatory models for global investors to access mainland China's carbon markets.

The potential is unsurprisingly immense. As Hong Kong's Green and Sustainable Finance Cross-Agency Steering Group noted in a preliminary feasibility assessment report in March 2022, investment demand in carbon credits as an asset class is set to head north. For example, interest in voluntary carbon markets (VCM), one of two key carbon markets, has surged on the back of a potential European Union carbon tax on imported goods, as well as rising CSR activity. Case in point? Over 200 global asset managers with US$57 trillion in AUM have committed to meet net-zero targets. Further, over 300 companies have signed onto The Climate Pledge¹, a global initiative that aims to achieve net-zero carbon emissions by 2040 via decarbonisation policies and offsetting remaining emissions with carbon credits. The Hong Kong Stock Exchange's Net-Zero Guide² and enhanced ESG reporting criteria will also likely drive listed companies in the city to decarbonise.

In the other key carbon sector, namely compliance markets, global cooperation is expected to be fueled by mainland China's "Dual Carbon" goals, as well as the country's intention to build an emission rights trading and financial services platform in the Greater Bay Area that will be open to qualified foreign investors.

No blueprint is, however, without potholes. Those here include the potential regulation of VCM, which are now largely unsupervised. Provisions of carbon credits, emission allowances and carbon derivatives could be included in current legislation e.g. the Securities and Futures Ordinance, or set up in a separate...