Advancing carbon market reforms

‘The current economic conditions in China mean that growth in demand and price levels may not be immediately visible,’ says Lit Ping Low, partner of Asia Pacific Sustainability and Climate Change at PwC Hong Kong. ‘But the longer-term outlook should remain as more companies seek to offset their emissions to meet carbon neutrality targets.’

The January 2024 relaunch of China’s voluntary carbon credit market ‘marks a potential shift for businesses operating in both [mainland] China and Hong Kong’, says Low.

‘Historically, the voluntary carbon credit market in China faced stagnation, leading to a pause in 2017 when the approval of projects generating China Certified Emission Reductions [CCERs] was halted,’ says Low. The revival now ‘encourages broader participation, allowing Chinese businesses not previously covered by mandatory compliance markets to voluntarily engage in the purchase of CCERs’.

Low cautions that ‘the relative attractiveness of an emissions reduction project to CCER project developers in China may need to be assessed against opportunities elsewhere’, given that international voluntary carbon market projects can vary in price per tonne.

Crossborder potential

In Hong Kong, the HKEX launched its voluntary carbon marketplace Core Climate in October 2022. With over 80 participants, the platform trades primarily in Verified Carbon Standard credits by Verra and recently added Gold Standard’s Verified Emission Reductions (GS-VERs).

‘Core Climate’s strength is to be the only carbon marketplace offering settlement in both Hong Kong dollars and renminbi, where crossborder businesses can benefit,’ says Low. ‘But its true potential would be when it [can] offer CCER projects, allowing international buyers to purchase credits from China out of Hong Kong.’

Nevertheless, Core Climate’s trading volume has yet to gain significant traction, with only 900,000 tons traded to date – less than 1% of CBL, the world’s largest spot exchange for trading carbon credits. Low emphasises that future success hinges on quality assurance. ‘The projects offered [need to be] recognised as high quality and are credible for offsetting emissions to minimise the risks of greenwashing by the purchasing entities,’ she says.

Indeed, concerns about corporate emissions data accuracy have prompted regulatory changes in China. In May 2024, the country introduced its first dedicated legal framework for its carbon market – the Interim Regulation on the Management of Carbon Emissions Trading. This new framework establishes strict reporting requirements and penalties for companies that falsify data or mislead authorities, aiming to build market credibility.

The push to align with international standards is creating complex compliance challenges, with overwhelming data collection workloads and inconsistent data measurement standards presenting difficulties for corporate teams.

‘A large listed company in China with a listed subsidiary in Hong Kong, and with “significant” operations in the EU or California, may need to comply with at least four sets of mandatory disclosure requirements in the near future,’ Low explains. ‘Forward-looking companies are looking [at] how to streamline these requirements but manage their transition in a pragmatic way.’

Carbon trading push

Though still in their nascent stages, both Hong Kong and mainland China are pushing ahead with their carbon trading ambitions. As China races to peak its emissions by 2030 and achieve carbon neutrality by 2060, the country is gearing up to bring major industrial players like steel and cement manufacturers into its mandatory market by 2025.

‘The carbon market in mainland China is evolving rapidly, leveraging both cap-and-trade mechanism and environmental-related policies to control carbon emissions and achieve its targets,’ says William Chan, founding officer of the Asia Carbon Institute, a voluntary carbon credit standard organisation and registry. He notes that the CCER scheme has evolved from a voluntary mechanism to become ‘a complementary tool to the compliance market’.

Looking ahead, Chan sees room for growth in ‘regional voluntary carbon credit standards or markets to complement the carbon market in China for different demands and needs,’ driven by export requirements and offshore investor demand. There is also potential for individual-level voluntary carbon markets, supported by China’s ‘well-developed e-payment infrastructure and attached economic value’.

Green finance hub

Hong Kong, meanwhile, is making strides in its bid to become a global green finance hub. The city hit a major milestone in 2023, breaking into the global top 10 for the first time with US$14.4bn in aligned green bond issuance.

‘Hong Kong hardly has any compliance market needs, but its well-developed financial market would need to meet the market changes in ESG-related initiatives,’ Chan notes. ‘A voluntary carbon marketplace would help complement the existing infrastructure and financial product offerings.’

The Special Administrative Region is strengthening its ties with mainland China markets through partnerships. HKEX joined forces with the Guangzhou Futures Exchange in 2021 and inked a memorandum of understanding with the China Emissions Exchange Shenzhen in 2023 to boost carbon trading across the Greater Bay Area.

‘The speed and extent of its development will be driven by the buy side, meaning the ESG or carbon emission and offsetting requirement from the investors,’ says Chan. ‘There are still a lot of challenges and uncertainties on how and where the demand side will be landed.’

The implementation of Article 6.4 of the Paris Agreement across Asian nations is adding new layers of complexity to an already intricate carbon trading landscape, according to Chan. ‘Listed companies and large responsible conglomerates in the region are still having a wait-and-see attitude on when, where and what carbon credits to buy in fulfilling their net-zero plan,’ he says.