Hong Kong, which is exploring the possibility of setting up a carbon-trading exchange, will need a Stock Connect -type system to make it work, according to a top regulator. The city will need to set up a trading mechanism that not only complies with Chinese and overseas regulations on carbon trading but also takes into account varied international carbon pricing, said Ashley Alder, CEO of the Securities and Futures Commission . “It has to be a scheme with a credible regulatory system – just like the Stock Connect … where multinationals and financial actors will be able to interact with carbon traders in the mainland,” he told the Green Asia Summit hosted by the Hong Kong Exchanges and Clearing (HKEX) on Thursday. “It’s super difficult, because it is not only about the market design, it’s also about the economic design and that comes back to the global evolution of carbon pricing.” He, however, added that the possibilities are enormous as China accounts for 30 per cent of global carbon emissions and Asia 50 per cent. “This is where the action [will be], not in Europe. We need to get our acts together.” The Stock Connect link between Hong Kong and the Shanghai and Shenzhen exchanges allows international investors to trade mainland-listed stocks, and mainland investors to trade Hong Kong-listed shares. The primary role of Hong Kong’s carbon trading exchange will be similar to the Stock Connect – to link mainland Chinese carbon credit holders and investors with their counterparts overseas, Alder said. A working group formed by Hong Kong’s securities regulators on the feasibility of a carbon trading centre based in Hong Kong for the Greater Bay Area is expected to submit its report later this month. The bay area comprises nine cities in the southern Guandgong province and Hong Kong and Macau. Hong Kong ‘naturally’ suited to developing carbon trading products Bourse operator HKEX, which owns 7 per cent of the Guangzhou Futures Exchange that opened in April, is exploring the feasibility of cooperating on carbon credits product development in both onshore and offshore markets. HKEX CEO Nicolas Aguzin told the conference that the bourse has been working hard both internally and with other regulators and market participants on the market design. “It’s not just about doing the exchange, it’s about building the whole [ecosystem],” he said. “I don’t want to promise a timeline. What I can tell you is that there is a lot of work being done. We want to make sure that if we do it, we do it well.” For example, for the voluntary market, the first step is to agree on a common standard internationally, such as deciding on what will count and qualify as a credit, he added. Part of this was addressed in a global deal reached last month at the United Nations Climate Change summit (COP26) in Glasgow. It allowed countries to use offset credits from other nations to partially meet their climate goals. The mutual recognition of globally tradeable credits was a breakthrough, as it will lead to more active and larger transactions among many more nations, compared with a previous UN-led system that ended in 2020. David Simmonds, company secretary CLP Holdings, said carbon offsets and trading will be “incredibly important” for the Hong Kong-based power utility. He said that despite decades of decarbonisation efforts CLP may not be able to completely phase out carbon emission by 2050, the year the city aims to become carbon neutral. A large part of CLP’s long-term decarbonisation progress depends on how fast the cost of zero-carbon “green” hydrogen falls to affordable levels, so that it can be used to replace natural gas in its power plants.