Every weather-related news piece raises concerns, especially with global sea temperatures hitting a historic high of 20.96 degrees in late July this year. Despite oceans covering only 70% of the Earth’s surface, their heat capacity far exceeds that of the atmosphere. The heat capacity of the sea water several meters below the sea level is already equivalent to the entire atmospheric layer. Over the past decade, 90% of the Earth’s warming has been absorbed by the oceans. Therefore, soaring ocean temperatures signal the imminent threat of global warming.
To tackle global warming, a dual strategy involving legal emission reduction requirements and tradable carbon credits is essential.
Hong Kong’s role in the global carbon market
Taking the European Union as an example, the government sets annual targets for total greenhouse gas emissions and converts each ton of emissions into carbon credits. These credits are then distributed to companies based on certain criteria. Companies can use these credits to offset their carbon emissions. If a company’s emissions are less than the credits obtained, they can sell the surplus in the carbon market, generating additional income. However, high-emission companies need to purchase carbon credits from the market to offset their emissions, impacting profitability negatively. Failure to meet emission standards may result in fines based on excess emissions. Currently, the market price for carbon in the EU is around 80 euros per ton, significantly cheaper than fines.
Carbon trading requires an exchange, and Hong Kong, with its proximity to Mainland China and the Southeast Asia markets, coupled with the access to global investors, has the potential to benefit. A research report by the Financial Services Development Council in February titled “Road to Carbon Neutrality: Hong Kong’s Role in Capturing the Rise of Carbon Market Opportunities” suggests that Hong Kong could develop into an international “voluntary carbon market.”
The voluntary carbon market is gradually evolving
Carbon market consists of two types: mandatory and voluntary. Mandatory markets are established by countries (such as China) or regions (such as the EU) to facilitate carbon credit trading and pricing for carbon emissions.
The advantage of mandatory markets is the standardized carbon credit, simplifying transactions. Voluntary markets provide a free trading platform primarily for companies, individuals, or non-profit organizations with carbon emission needs not covered by mandatory markets. However, the carbon credits traded in voluntary markets may not fully align with the standards in mandatory markets, making the two markets currently non-interconnected.
Morgan Stanley estimates the voluntary carbon market to be around US$2 billion in 2022, much smaller than the mandatory market. Article 6 of the Paris Agreement encourages cross-border carbon credit trading, providing future growth opportunities for the voluntary carbon market.
If carbon credits between countries can adhere to unified standards for easier trading, it would benefit the voluntary market. Hong Kong, as Asia’s free trade center, can play a crucial role in the carbon market.
This document is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this document, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. All opinions or estimates contained in this document are entirely Zeal Asset Management Limited’s judgment as of the date of this document and are subject to change without notice.
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