China Daily: HKEX to offer high-integrity carbon trading

By Oswald Chan, China Daily
25 Nov, 2022

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.

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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.