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Published: 10:10, November 25, 2022 | Updated: 14:30, November 28, 2022
HKEX to offer high-integrity carbon trading
By Oswald Chan
Published:10:10, November 25, 2022 Updated:14:30, November 28, 2022 By Oswald Chan

Markets to trade carbon credits are only one mechanism in the complex jigsaw of actions to combat climate change. Even that lacks standard definitions, specifications, and independent audit verification. There is rampant carbonwashing. It seems too little, too late, to meet the global carbon emissions reduction target. Oswald Chan reports from Hong Kong.

The intention with carbon trading is to reduce greenhouse gas emissions, particularly carbon dioxide, emitted by burning fossil fuels. Fossil fuels are the primary energy source for manufacturing, road transport, and aviation, critical to industrialized economies. 

The carbon market allows high-polluters to buy “carbon credits” from low-polluters to “offset” continued pollution — not stop it. It is not direct action to reduce the carbon emissions which cause global warming. Carbon credits compensate low-polluters by assigning an economic value. The price is set by direct negotiation between buyers and sellers. At least, that is the theory promoted by the big polluters.

There is no agreed universal pricing for carbon credits, no independent verification, no audit, no vetting of tradeable carbon permits. As with most profit-seeking behavior, the incentive to cheat is strong, and the system is easily abused. “Carbonwashing” is rampant as corporates game the system, as they do with unaudited declarations of environmental, social, and governance. 

National support

Hong Kong is not a major emitter of greenhouse gases. Its manufacturing base migrated decades ago. The city does not have enough domestic carbon emissions to trade. It cannot grow a sizeable carbon market by itself, without linkages with Chinese mainland manufacturing centers. That requires central government approval and support.

ESG professionals urge a carbon market-connect program, similar to the stock and bond connect programs, to boost carbon credit trading value by channeling global capital flows. They propose “Carbon Market Connect” in the Guangdong-Hong Kong-Macao Greater Bay Area — where global investors and corporations can trade on a high-integrity Hong Kong platform they can trust.

Friends of the Earth (HK) Chairperson Plato Yip Kwong-to says such connect can trigger a virtuous cycle: enterprises in the city-cluster can utilize the proceeds from selling carbon credits to reinvest in low-carbon manufacturing capabilities to generate more carbon credits to trade in the Hong Kong carbon market.

Yip sees the need for strong overall national leadership to integrate coherent policy in regulation, compliance, technology specifications, digital transformation, and talent supply for a robust ecosystem. 

“If international credits traded in Hong Kong can be recognized by the central government, then regulated entities under the mainland’s Emissions Trading Scheme (ETS) can leverage Hong Kong’s voluntary carbon markets (VCMs) to offset emission limits,” says Judy Chen Yingyin, senior researcher at Our Hong Kong Foundation.

Carbon price gap

Financial information provider Refinitiv, records the average price of the China Emissions Allowance (CEA) at about 60 yuan ($8.37) per metric ton of carbon dioxide in July, compared with the average European Union Allowance price of over 76 euros ($79) for the same period. Refinitiv hopes the CEA price will rise on tighter benchmarks and more balanced supply and demand, with better data quality and monitoring, review, and verification measures.

The China National ETS clocked a year by July. It covers 12 percent of global greenhouse gas emissions. The trading program includes over 2,200 companies in the power sector, accounting for more than 4.5 billion metric tons of carbon dioxide per year, according to the Ministry of Ecology and Environment.

Under the 14th Five-Year Plan (2021-25), the mainland will add the top eight emitters to the national ETS, which will cover chemicals, petrochemicals, iron and steel, nonferrous metals, building materials, paper, power and aviation, increasing the total number of participants to 12,000.

The EU ETS, established in 2005, is the world’s largest cap-and-trade program, covering 45 percent of greenhouse gas emissions in EU countries. Carbon markets are rapidly developing in South Korea, Japan, New Zealand, Australia and Singapore. They are still nascent. Climate Impact X, the Singapore carbon exchange platform, covers eight projects and 19 global players.

Core Climate

Hong Kong Exchanges and Clearing (HKEX) last month launched Core Climate, matching Singapore’s Climate Impact X. It seeks to connect capital and opportunities in Hong Kong, the mainland, Asia, and beyond. Carbon credits on the platform will be from certified global projects of carbon avoidance, reduction, and removal. All projects listed on Core Climate will be verified against international standards, such as the Verified Carbon Standard (Verra).

Global investors and consumers are skeptical of the quality and credibility of carbon credits when carbonwashing is rampant. In addition, VCM is fragmented and unregulated, lacking a unified standard for emission allowances in corporate financial statements, making due diligence opaque. 

There is great hope invested in technology as the answer to this conundrum, rather than the hard political will of local governments, and the approval of the central authority, to standardize and regulate carbon emissions. Without policy coherence, robust enforcement, and the outing of corporate green washers, little will change. Technology is only a tool.

Yip advocates blockchain technology. “When regulators, stock exchanges, buyers and sellers, tax authorities and banks, are all in the blockchain domain, they can monitor and validate the information, to enhance transparency, accuracy, and trust in carbon credit trading.” 

Pivot to action

The US Oceanic and Atmospheric Administration confirmed that planet Earth has already warmed by 1 C due to carbon emissions from industry, farming, heating, and transport from 1950.

The United States, as the largest economy with the latest technologies, seemed the logical global champion on climate change. That collapsed after then-president Donald Trump exited the country from the Paris Agreement in 2017, which took effect in 2020. President Joe Biden rejoined the Paris Agreement in February 2021. By then, the US had lost its credibility as a reliable, global leader. 

Simon Stiell, executive secretary of the United Nations Framework Convention on Climate Change (UNFCCC), addressing the New York Climate Week in September, said: “Despite this data (reports of the Intergovernmental Panel on Climate Change), humanity continues to pollute the skies, poison its oceans, and wreak havoc on our land and biodiversity … the biggest gap we must bridge is the gap between aspiration and reality.” Stiell urged national governments to activate their climate change plans to 2030. He called for a pivot to implementation, after the cyclical meetings, agreements, and pledges. 

IPCC says global emissions must be halved by 2030 and be net zero from 2050. It says “drastic transformations” are needed in energy, food, and transportation. Otherwise, the 1.5 C limit will be breached between 2030 and 2052, at which point it will soar for the remainder of the 21st century. Whether any human will be alive to document that, is unknown.

An IPCC report warns that failing to hold the temperature rise to 1.5 C by 2030 will trigger unmanageable risks. The report alerts that under a +2 C temperature rise scenario, the proportion of global population facing heat waves every half decade will jump from 14 percent to 37 percent, which will cause ozone-related mortality and spread vector-borne diseases like malaria and dengue fever. Flooding disasters for coastal populations will double. Within the 1.5 C rise scenario, ocean fish stocks will deplete by 1.5 million metric tons annually. 

Protect people, not polluters

Like the World Economic Forum, of political and corporate posturing, the Conference of Parties (COP) pledges to mitigate climate warming, while millions of victims already suffer severe flooding, drought, wild fires, loss of habitat, and refugee conditions in their own countries. 

Europe, especially Germany, saw unprecedented urban flooding mid-2021. Pakistan was submerged more than usual during the 2022 monsoon. Climate change does not recognize borders, and the sheer power of weather devastation overwhelms. The situation for the most vulnerable populations, is chaotic and unpredictable. Island nations are terrified of being swamped by rising sea levels.

The 1992 UNFCCC agreement in Rio de Janeiro was signed by 154 countries as a global commitment to save the planet. The carbon trading idea was introduced at the Kyoto Protocol in 1997 to reduce greenhouse gas emissions of carbon dioxide, methane, nitrous oxide, and others, via market mechanisms to price and trade emissions permits. 

The protocol for the first commitment period (2008-12) required the participating countries to reduce their carbon emissions by an average 5 percent below 1990 levels by 2012, representing 29 percent of the world's total greenhouse gas emissions.

In December 2012, parties to the Kyoto Protocol met to draft the Doha Amendment, adding new emission-reduction targets for the second commitment period of 2013–20. Participation is voluntary as is the honoring of pledges.

Participating entities signed yet another pact, the Paris Climate Agreement of 2015-16, which effectively replaced the Kyoto Protocol, to limit global warming to 1.5 C compared with pre-industrial levels. At worst, to hold temperature rise to below 2 C by 2030 and strive for net zero by 2050. That would require global greenhouse gas emissions to be cut by 45 percent of current levels by 2030, and shrink to net zero by 2050. 

Of the 197 countries that signed the Glasgow COP26 agreement, only 29 submitted updated 2030 action plans for COP27 — mostly policy pledges rather than concrete action. That left a “massive gap” that needs to be urgently bridged, according to Climate Analytics CEO Bill Hare’s September report — to hold to the “aspirational” 1.5 C limit by 2030.

Ugandan climate activist Vanessa Nakate, who was appointed a UNICEF Goodwill Ambassador in September, tired of the empty promises from the world’s leading carbon dioxide emitters, and declared on behalf of the voiceless victims of climate change: “In the end you know, we cannot eat coal, we cannot drink oil … and money will be useless on a dead planet.”

Fudged carbon credits

In March, Andrew Macintosh, former head of the Emissions Reduction Assurance Committee of the Australian government, blasted the nation’s carbon credit program as a sham. He alleged that most of the carbon credits approved do not represent real or new cuts in greenhouse emissions. All major government approved methods to create carbon credits, according to Macintosh, have serious integrity flaws, either in their design, or in the way they are administered. Macintosh called for the abolishment of the flawed methods, the termination of low integrity projects, and an independent inquiry to examine the failures of the carbon credit programs.

In May, German prosecutors and financial regulators raided asset management company DWS and the headquarters of its majority owner Deutsche Bank over allegedly exaggerated and misleading claims about the sustainability credentials of their products. Sustainable finance scholars In Soh-young of Stanford University and Kim Schumacher of the Tokyo Institute of Technology, listed market pressures, societal value shifts, and loose regulatory contexts, as encouraging corporates and financial investors to engage in carbonwashing scams. In and Schumacher discovered that carbonwashing is multiplying in quantity and quality.

McKinsey Sustainability, the sustainability advisory business of McKinsey & Company, identifies six core actions to combat carbonwashing: criteria to define and verify carbon credits; standardized contract terms; trading and post-trade monitoring; the proper use of carbon credits; market integrity; and clear demand signals for carbon credits.

VCMs and regulated markets

Via VCMs, corporate buyers and traders purchase carbon credits generated by projects that avoid, or remove, greenhouse gas emissions, to neutralize or compensate for their own excessive emissions. 

The Taskforce on Scaling Voluntary Carbon Markets estimates the market size of global VCMs to be worth up to $50 billion in 2030, from the 2021 value of $2 billion.

Regulated carbon markets provide a mechanism for participants to trade allowances, representing an official permit to emit a metric ton of carbon emissions. Such markets covered 17 percent of global greenhouse gas emissions in 2021 with a market value of over 760 billion euros, according to Refinitiv. The best examples are the EU ETS and China National ETS. 

Despite the growing interest in carbon markets, global coverage of carbon emission reduction remains low. Global carbon pricing revenue increased 60 percent in 2021 from a low base to around $84 billion. Revenues generated by ETS surpassed revenues contributed by carbon taxes. 

As of April, there were 68 carbon pricing instruments worldwide, including 37 carbon taxes and 34 ETSs, according to the World Bank report on carbon pricing in May. That covered only about 23 percent of total global greenhouse gas emissions. The poor coverage is attributed to the carbon price being too low to induce corporations to invest in decarbonization. The World Bank says less than 4 percent of global emissions in 2022 are covered by a direct carbon price at or above the estimated volume required by 2030, to meet the targets of the Paris Accords.

Carbon trading ecosystem

Yip of Friends of the Earth feels all of this needs government funding to orchestrate. “We need subsidies to promote research and development in carbon credit trading,” he adds. The experts from the HKEX and ESG, need to formulate a standardized, high-integrity methodology to calculate carbon credit, benchmarked to Verra, to fairly compute greenhouse gas emission reductions or removals.

“The Hong Kong Stock Exchange can focus on the trading of high-quality carbon credits which will increase the transaction value of trading and bring more liquidity into the market,” counsels Yip. 

Helene Li Wai-pok, co-founder and CEO of GoImpact, an ESG and sustainability education firm, claims that combating corporate greenwashing is the key pillar in developing a VCM. “Greenwashing is a real threat to the whole sustainable finance and ESG agenda.” Li advocates a three-pronged remedy: “First, a heightened reporting and disclosure regime on listed companies. Second, pressure on the independent directors. Third, educate the corporates, so they do not see ESG as a threat.” 

Yip adds that Hong Kong can evolve a corporate carbon index to showcase best practices in decarbonizing operations. These can be shared with companies in the Greater Bay Area for collective learning. If all the above measures fail to eliminate carbonwashing, Li believes it would be high time for the financial regulators to consider enforcement. Li also urges enterprises to use artificial intelligence and data analytics to track upstream and downstream supply chains to reduce carbon emissions.

Chen from Our Hong Kong Foundation feels corporates should include indirect emissions from a company’s upstream and downstream supply chains, as these constitute the bulk of total emissions. Few companies map their upstream and downstream activities. “Companies should invest in supply chain partners to improve environmental standards,” suggests Chen.


1. Apply artificial intelligence and digital tracking for transparency and trust in carbon trading.

2. Formulate a unified, high-integrity carbon credit calculation standard.

3. Shut down corporate greenwashing by mandatory reporting, disclosure, auditing, and education.

4. Quantify supply-chain emissions at all upstream and downstream levels.

5. Lobby carbon market-connect with the mainland for global capital flows.

Contact the writer at oswald@chinadailyhk.com

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