Exchanges pave way for carbon derivatives market in GBA – The Asset

Hong Kong Exchanges and Clearing Limited (HKEX) and Guangzhou Futures Exchange (GFEX) are paving the way for the rapid development of a cross-border carbon derivatives market in the Greater Bay Area (GBA).

Under a memorandum of understanding announced on August 27, HKEX and GFEX will work together to promote sustainability and product development in both onshore and offshore markets, with the aim of supporting China’s pledge to reach peak carbon emissions by 2030 and carbon neutrality by 2060.

Both exchanges will cooperate in areas such as clearing, technology, marketing and investor education, according to a statement. The GBA aims to develop the Guangdong-Hong Kong-Macao area into a cross-border financial centre.

“Carbon derivative”, also known as “emission derivative”, is a contract between two or more parties with carbon dioxide (CO2) emission allowances or carbon credits as its underlying asset. Trading in carbon derivatives is usually done through certified emission reduction, a global carbon currency, where the carbon derivatives market comprises swaps, spot and forward trading transactions, as well as investment products.

In China, the government will be issuing China Certified Emission Reductions (CCERs), a voluntary form of carbon emission credits, under the Emissions Trading Scheme (ETS), the national carbon trading market which was launched on July 16 2021. GFEX is one of two trading centres for CCERs.

Under the ETS, qualified entities will be able to use CCER projects to offset as much as 5% of emissions by volume. A single CCER unit will be able to offset one tonne of CO2 emission, which could come from sources such as renewable projects, carbon sinks and methane recovery.

Foreign investors are not covered by the scheme at the initial stage and trading products remain limited, but China is expected to gradually open its ETS markets to foreign investors in the long term.

“HKEX is the first offshore institution to have a direct investment in a mainland derivatives exchange and we are very excited today to be confirming our commitment to work with GFEX in promoting the development of China’s derivatives markets,” says HKEX chief executive officer Nicolas Aguzin.

“Reflecting our China Anchored strategy, HKEX will work with GFEX to actively explore new opportunities to drive the development of a green and low-carbon market in the region, and progress innovations to further the opening-up of China’s futures market.”

Established on April 19 2021, GFEX is the fifth futures exchange in mainland China. Based in the Guangdong-Hong Kong-Macao Greater Bay Area, GFEX seeks to become an innovative and market-oriented exchange with international influence, focusing on serving the real economy and green development initiatives. HKEX has invested 210 million yuan (US$32 million) for a 7% stake in GFEX.