Hong Kong has three major roles to play in the development of the carbon market

The just-concluded United Nations "climate conference" reached a consensus on the implementation rules of the Paris Agreement, Article 6 of which aims to build a global carbon market to promote emission reduction. How to develop the carbon market and use the carbon market mechanism in Chinese mainland, the Guangdong-Hong Kong-Macao Greater Bay Area and Hong Kong, and gradually connect with the international community, has become an urgent issue to be studied and solved. The Guangdong-Hong Kong-Macao Greater Bay Area has a high degree of economic marketization and a high level of opening-up, and at the same time, the carbon market has an early start, large scale, and active trading innovation, and has the conditions and capabilities to serve as an important pilot window for the country to explore international climate governance cooperation, promote international cooperation in the carbon market, and serve the construction of the national carbon market. For Hong Kong, actively exploring the construction of a unified carbon market in the Guangdong-Hong Kong-Macao Greater Bay Area, supporting the opening up of the mainland carbon market, and participating in the construction of the global voluntary carbon market should be one of the core contents of Hong Kong's implementation of the carbon neutrality goal and the consolidation of its status as an international financial center. If properly designed and implemented, the ETS is expected to be the next major milestone in Hong Kong's green finance development and have a global impact.

Recently, Hong Kong's financial regulator set up a carbon market task force under the Green and Sustainable Finance Cross-Agency Steering Group to assess whether Hong Kong can develop into a regional carbon trading centre in response to its unique financial advantages, and promote the establishment of a unified carbon market in the Guangdong-Hong Kong-Macao Greater Bay Area. When asked at the third annual meeting of the Hong Kong Green Finance Association on November 30 about how Hong Kong should play a role in building a carbon market, he replied that Hong Kong has a role to play in three areas. Based on the organized discussion of experts from the Hong Kong Green Finance Association, HKUST and the Mainland, this article will elaborate on these three ideas in more detail.

First, Hong Kong should actively participate in the planning and construction of a unified carbon market in the Greater Bay Area. As an economy committed to carbon neutrality, Hong Kong should incorporate its emission reduction activities into the carbon market mechanism, but due to the small size of Hong Kong's economy and total emissions, the construction of a mandatory carbon market on its own will face the bottleneck of insufficient liquidity. Therefore, the best solution for Hong Kong to participate is for Hong Kong, Guangdong and Macao to jointly build a "Greater Bay Area Unified Carbon Market". Based on the existing carbon market structure and good market liquidity in Guangdong, the unified carbon market can promote the Greater Bay Area to play a regional leading role in the global response to climate change, and effectively serve the national and regional carbon peak and carbon neutrality goals. The Guangdong-Hong Kong-Macao Greater Bay Area (GBA) has a comparative cost advantage in terms of capital-intensive, resource-based and technology-based green economic activities, and the construction of the GBA carbon market can promote the transformation of the region from a comparative advantage to a competitive advantage, reduce the cost of social emission reduction and generate a synergistic effect of regional environmental improvement. 

The specific steps to build a unified carbon market in the Greater Bay Area can include: First, Guangdong Province, Hong Kong and Macao will jointly set up a working group on the carbon market in the Guangdong-Hong Kong-Macao Greater Bay Area to jointly design a carbon market plan for the Greater Bay Area. The scheme could gradually cover major emitters in Guangdong, Hong Kong and Macau over a period of several years. Second, the carbon trading section will be launched on the Hong Kong Stock Exchange, and the trading platform portfolio in the Greater Bay Area will be linked to launch various derivative products based on the spot products of the Greater Bay Area carbon market and the spot products of the national carbon market, including carbon futures and carbon swaps. Third, the Hong Kong and Macao Special Administrative Regions carbon emission trading legislation will be launched in a timely manner, and the relevant state departments will formulate and issue carbon dioxide emission accounting methods and reporting guidelines and verification specifications for carbon emission control units in the Greater Bay Area, carry out an auction system for the allocation of carbon emission allowances in the Greater Bay Area, and gradually improve the carbon market in the Guangdong-Hong Kong-Macao Greater Bay Area. Fourth, establish a "carbon market connect" mechanism for cross-border trading of the carbon market (see below for details).

Second, as a function of the GBA's unified carbon market, Hong Kong could establish a Carbon Connect mechanism to kick-start the process of opening up China's carbon market. Refer to the "Stock Connect" and "Bond Connect" mechanisms to establish a "Carbon Market Connect" connecting the mainland carbon market and international investors through Hong Kong, open up the onshore and offshore trading channels of the carbon market, and allow global investors to easily participate in the Guangdong-Hong Kong-Macao Greater Bay Area carbon market and future national carbon market investment through this mechanism. Hong Kong's existing experience in financial transactions, financial infrastructure and service base, and advantages of connecting with the offshore financial system can provide an important foundation for the Carbon Connect mechanism. After the Carbon Connect has gained more mature experience in connecting the Greater Bay Area market with international investors, it can carry out the interconnection between international investors and the national carbon market, and empower the international layout of the national carbon market. On the one hand, it can attract international funds to participate in China's emission reduction activities, and on the other hand, it is also an important channel to promote the connection between China's carbon market and the international market and publicize China's actual efforts in carbon emission reduction.

Third, we will actively explore the establishment of a voluntary carbon market in Hong Kong to serve the Mainland and the world. The mandatory carbon trading market is an important mechanism for countries to implement emission reduction commitments, but due to the complexity of policy coordination, the scope of its coverage and the speed of market development will be subject to many restrictions, and the voluntary carbon market will be an important supplement to the mandatory carbon market. The advantage of a voluntary carbon market is that it can incentivize non-emission control companies to reduce emissions, and at the same time, it can also serve the needs of emission control companies to fulfill their obligations. Its participants can include all suppliers (such as providers of forestry carbon sinks and new energy carbon emission reductions) and demanders (emission control enterprises to offset emissions, as well as various enterprises and financial institutions willing to offset their own carbon emissions by purchasing certified emission reductions to achieve carbon neutrality) that meet the global carbon credit standards. At present, more and more countries and enterprises are committed to carbon neutrality, so the demand for carbon credits and the potential to participate in voluntary carbon market transactions are huge. There are already a number of voluntary carbon markets in the world that serve specific regions, and are gradually moving towards the docking and integration of standards. The recent announcement of the Global Council for High Quality Voluntary Carbon Markets (ICVCM) will promote the formation of a global unified standard for tradable high-quality carbon credits.

Against the backdrop of many countries and regions building international voluntary carbon markets, Hong Kong should also seize this rare opportunity to strive to build the largest and open voluntary carbon market in Asia. Hong Kong can rely on the mature certified voluntary emission reduction mechanism of the country and Guangdong Province, join forces with Hong Kong and Macao, and build a voluntary emission reduction market system that serves both the country and the world, and give full play to Hong Kong's advantages as an international green finance center in terms of standard setting, market infrastructure linkage, trading product design, domestic and international standard docking, and international cooperation, so as to make an internationally influential contribution to the promotion and implementation of Article 6 of the Paris Agreement.

(Ma Jun is the Chairman and President of the Hong Kong Green Finance Association, the Chairman of the Green Finance Committee of the China Society for Finance and Banking, and a member of the ICVCM Council)