Hong Kong ‘naturally’ suited to developing carbon trading products, can leverage Guangzhou exchange link, experts say

It is not too late for Hong Kong to develop carbon emissions futures products, as the market in mainland China is still in its nascent stages, and exchanges overseas do not cover carbon emissions offsets traded in the world’s second-largest economy, industry watchers said.

The city is also a natural place to host a voluntary carbon trading platform because it is an international finance hub, as well as the largest offshore yuan centre.

“With proximity to mainland China and unique access to global investors, Hong Kong comes naturally as the top choice for a voluntary carbon trading platform regionally and globally,” said Tracy Wong Harris, vice-president and deputy secretary general of the Hong Kong Green Finance Association.

Moreover, Hong Kong could team up with the Guangzhou Futures Exchange to develop carbon emissions futures products and catch up and compete with overseas exchanges.

Hong Kong Exchanges and Clearing (HKEX), the local bourse operator, and the Guangzhou exchange signed an agreement in August to explore the development of such products. And while no launch date had been set, green finance experts were confident that both Hong Kong and mainland China, despite being new to trading in carbon emissions futures, could catch up with the United States and the European Union, where similar financial instruments were already available.

“Currently, emissions derivatives products offered by exchanges in the US and EU do not cover carbon emissions allowances traded in China,” said Karen Lam, structured finance and derivatives partner at lawyer firm Linklaters.

Beijing launched a national carbon emissions exchange on July 16 in Shanghai, a project key to its ambition of achieving its 2060 carbon neutrality target.

And just last week, Carrie Lam Cheng Yuet-ngor, Hong Kong’s leader, outlined a number of measures aimed at further enhancing the city’s role as an international financial hub, including a deeper collaboration between the exchanges in Hong Kong and Guangzhou for the introduction of carbon emissions futures contracts.

Support from the Hong Kong government and collaboration with Guangzhou Futures Exchange would enable Hong Kong to develop as a carbon trading centre, which would be beneficial to the financial ecosystem in Hong Kong, said Stephen Chan, a partner at lawyer firm Dechert.

If HKEX and the Guangzhou exchange develop the carbon emissions futures or options contracts, they could provide hedging tools for mainland investors, as well as allowing international investors to trade these products in Hong Kong.

“The two exchanges can … play an important role in connecting offshore investors to the onshore China emissions derivatives market, and in connecting Chinese onshore investors to overseas emissions trading markets,” Linklaters’ Lam said. “Regardless, carbon emissions trading is a fast-growing area, and we see room for multiple international and regional carbon trading centres developing to meet the expanding needs of the international community in achieving their carbon-reduction goals.”

The scale of trading in the voluntary carbon offset market currently stands at about US$320 million, and is expected to grow as demand for global decarbonisation increases and climate hedging strategies become more standardised, according to American derivatives exchange CME.

“The global voluntary carbon [offset] market still has a lot of potential, and that in China has not been [tapped] yet. Therefore, it is never too late for Hong Kong and Guangzhou to develop carbon emissions contracts,” said Hong Kong Green Finance Association’s Harris.

King Au King-lun, executive director of the Financial Services Development Council, which promotes the city as an international financial centre, said any new carbon emissions products to be introduced by HKEX and Guangzhou Futures Exchange would be complementary to, and not a substitute for, other markets trading similar products.