ESG Series – Carbon credits and carbon trading

Climate change has impacted our daily lives especially in recent years as we are witnessing extreme weather conditions such as heavy rains, floods and heat waves on a global scale.

To limit global warming, many countries, companies and world leaders have pledged to achieve net carbon dioxide emissions to zero by 2050. In this article, we will discuss the basic framework and the development of credits and markets. of carbon in the world and how it can help slow climate change. We will also discuss some of the current energy saving and renewable energy measures taken in Hong Kong to reduce carbon emissions.

Carbon credits and how they can slow climate change

In general, a carbon credit is a permit that allows a company that holds it to emit up to a certain amount of carbon dioxide or other greenhouse gases. The aim is to limit the extent of pollution caused by the emission of carbon dioxide or other greenhouse gases. In addition, the government can lower the number of permit levels each year, thereby lowering the total emission caps. Companies are therefore motivated to invest in clean technologies.

In a “cap and trade” system, the government issues a limited number of annual permits that allow companies to emit a certain amount of carbon dioxide. The total authorized amount is the issue “cap”. Companies are taxed or fined if they produce a level of emissions higher than that authorized by their permits.

When this system is applied to the commercial world, companies are incentivized to reduce their carbon emissions so that they can sell excess carbon credits to other companies that have not yet caught up to carbon reduction standards. Despite the investments made in environmental protection, companies can offset such investments or even make profits by selling carbon credits. This provides a more measurable incentive for the business sector to make contributions to slow climate change.

UNFCCC and Kyoto Protocol

The United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol play an important role in reducing emissions. The UNFCCC sets out the commitments of its parties (which include both developed and developing countries) to reduce climate change. The Kyoto Protocol is a protocol of the UNFCCC that imposes emission reduction targets on developed country parties. In general, emission reduction targets under the Kyoto Protocol can be achieved through:

a. International emissions trading which allows developed countries to trade carbon credits;

b. Clean Development Mechanism that allows developed countries to carry out emission reduction projects in developing countries, generating carbon credits; Where

vs. Joint implementation that allows developed countries to carry out emission reduction projects in other developed countries.

Primary and secondary carbon markets

Carbon credits have a primary market and a secondary market each with a different purpose. A primary carbon market consists of obtaining carbon credits from the development of emission reduction projects. A secondary market deals with the trading of carbon credits as investments.

The secondary market consists mainly of two groups of buyers which are (i) entities that use the emission allowances attached to carbon credits to comply with emission control requirements under international or national law and ( ii) banks and investment firms that treat carbon credits as in the normal course of their business, like the way they trade other commodities.

Compliance and voluntary markets

Generally, there are two types of carbon markets. Compliance markets are created and regulated by mandatory national, regional or international carbon emission reduction regimes, and are used by entities that are required by law to account for their carbon emissions. Voluntary markets allow companies to trade carbon credits on a voluntary basis.

On July 16, 2021, the mainland Chinese carbon market officially started at the Shanghai Environment & Energy Exchange. Mainland China’s carbon trading market is overseen by the Ministry of Ecology and Environment. China aims to strengthen its climate target by 2030, reach a peak in emissions before 2030 and achieve carbon neutrality by 2060.

Hong Kong carbon market opportunities

On July 15, 2021, the Green and Sustainable Finance Cross-Agency Steering Group, which includes the Hong Kong Monetary Authority, the Securities and Futures Commission (SFC), the Environment Bureau, Financial Services and the Treasury Bureau , Hong Kong Exchanges and Clearing Limited (HKEx), Insurance Authority and Mandatory Provident Fund Schemes Authority, announced next steps to advance Hong Kong’s green and sustainable finance strategy, in particular climate-related disclosures and reporting on sustainability, carbon market opportunities and the launch of the new Center for Green and Sustainable. Finance.

The group seeks to establish a carbon market working group co-chaired by SFC and HKEx to assess the feasibility of developing Hong Kong as a regional carbon trading hub to strengthen collaboration in the region of China. the great bay of Guangdong-Hong Kong-Macao. The work stream will actively explore the opportunities presented by both the “cap and trade” compliance market and the voluntary carbon market in China and abroad. 1

Hong Kong’s initiatives to promote renewable energy through certificates and payments’

The Hong Kong government is promoting the adoption of renewable and low-carbon power generation technologies and carbon footprint offsetting by introducing the following programs:

The Renewable Energy Certificate Program2

This is a major voluntary market-based initiative introduced by the Hong Kong government and the two Hong Kong power companies to promote the development of renewable energy and achieve the goal of reducing electricity. Hong Kong carbon by 2050. Under this program, renewable energy certificates are sold by power companies for units of electricity from renewable energy sources so that buyers can claim their operation or their activities without carbon. Each Renewable Energy Certificate represents a certain volume of electricity from local renewable sources (e.g. solar, wind and landfill gas generated at home by local electric utilities or purchased from homeowners. green projects).

Renewable energy feed-in tariff (FiT) 3

The private sector (including individuals) can participate in the device by installing solar and / or wind renewable energy systems in their premises. Once a system is successfully connected to the electricity grid, the power company will purchase the electricity produced by the system at a FiT tariff and FiT payments will be reflected on the electricity bills. Currently, the FiT tariffs under this program are as follows: HK $ 5 for 10 kW; 4 HK $ for> 10 kW to ≤ 200 kW; and HK $ 3 for> 200kW to ≤1MW. The above FiT tariffs will be revised annually and FiT will be offered throughout the life of the renewable energy system project until the end of 2033. Electricity produced after 2033 will be owned by the owner of the system. renewable energy.

To take with

We are seeing many jurisdictions, including mainland China, gradually transitioning to green, low-emission, climate-resilient economies and, therefore, we expect global carbon markets to grow. Hong Kong, being one of the world’s most important financial centers, is in a unique position to play a strategic role as China’s gateway and capital mobilizer and perhaps an important carbon market for facilitate the national goal of carbon neutrality.