The Invisible Trade

Climate change is heating up. In less than a month, world leaders will meet up at the United Nations Climate Change Conference in Copenhagen to discuss the new international framework on emission reduction targets after 2012, when the first commitment to the Kyoto Protocol, signed in 1997, will expire.

But for Hong Kong, the conference is about far more than just environmentalism—in classic Hong Kong fashion, some in this city see it as a chance to make a profit. Earlier this year, the Hong Kong Stock Exchange launched a consultation into the question of whether the city could become Asia’s carbon trading center. But what is carbon trading? Basically, developed countries (those that have ratified the Kyoto Protocol; the United States is not included) are given emission quotas and carbon limits targeted at the major polluters within those countries. If they exceed that limit, they can either buy allowances from other less-polluting companies or buy carbon offsets from projects that reduce greenhouse gas emissions in developing countries.

The scheme is called the Clean Development Mechanism (CDM) and the credit being generated is Certified Emission Reduction (CER). It’s monitored and regulated by the CDM Executive Board under the United Nations’ Framework Convention on Climate Change.

In response to this, the Hong Kong Stock Exchange is considering setting up a platform for CER trading in the Asian time zone—with China, the world’s major CER supplier (with 84 percent of the market share in terms of 2008 transacted volume), to provide the credits, and Europe to be the major compliance buyers.

Christine Loh, the chief executive officer of local think tank Civic Exchange, thinks it’s reasonable for Hong Kong to consider setting up a trading platform. “Carbon trading and the widespread interest in it is a sign of the trend,” she says. “The trend is that there should be a cost attached to emitting carbon and the world wants to find a mechanism to determine what that price should be.” She adds that other countries outside of Europe have tried to start their own trading systems to experiment with how the price for emissions can be decided through the market. More countries are expected to follow because carbon businesses and markets are expected to become highly lucrative in the future.

David Webb, activist shareholder and former Hong Kong Stock Exchange board member, thinks Hong Kong has potential because although China is a huge source of emissions and the fastest growing one, we have a better legal infrastructure and could fill a niche as the trading center for mainland emissions.

While it is true that trading carbon credits as a commodity is still quite a new concept, especially in Asia, it’s a market with big potential. A report by the UK-based independent financial organization International Financial Services London shows that carbon market trading rose 61 percent last year, with a turnover surge from 40 billion euros in 2007 to 92 billion euros in 2008. While other countries, such as the US, Japan and Australia, have set up their own trial regional systems, the European Union Emissions Trading Scheme is by far the largest multi-national greenhouse gas emissions trading scheme in the world, created in conjunction with the Kyoto Protocol and headquartered in London.