AmCham has been tracking closely the annual series of meetings among the 198 countries in the United Nations Framework Convention on Climate Change. Its ultimate objective is to stabilize greenhouse gas concentrations at a level “that would prevent dangerous anthropogenic (human induced) interference with the climate system.” The most recent “COP29” negotiations focused on a standard registry for global emissions trading that will create significant opportunities for business. Here, AmCham Energy & ESG co-chair Genevieve Hilton reports on what COP29 may mean for business.
Since the concept of trading emissions was introduced more than 25 years ago, financial markets have been struggling to create, leverage, and monitor mechanisms that make sense for investors while meeting the original goal: improved environmental performance.
Now, according to Dirk Forrister, President of International Emissions Trading Association (IETA), the Asia Pacific region is on the cusp of several significant developments in carbon markets that will create new opportunities for international business, but also new challenges.
At an October event hosted by the AmCham Hong Kong Energy, Environment, Social and Governance Committee, Forrister said that without international carbon trading, “There is no way to achieve our global climate targets. We have to do it collectively.” Carbon reduction projects, often in the developing world, need financing from abroad; as such, “Ideally, both the developed and the developing world benefit.”
The global market for carbon trading currently stands at more than US$100 billion annually. In Asia Pacific, country-level markets are already established in China, Korea, Japan, Australia, and New Zealand, and these domestic markets are set to expand. In China, for example, only the power sector is covered by the existing scheme, but new caps on the cement, steel, and aluminum industries are coming at the end of 2025 that will add more than 1,500 companies and 3 billion tons of carbon dioxide (CO2) equivalents to the market annually, covering 60% of the nation’s emissions. Additionally, other locations in the region, including Vietnam, Thailand, Indonesia, India, Malaysia and Taiwan, are all looking at mechanisms now.
To deploy the full potential of emissions trading, however, a key breakthrough is needed: the establishment of a UN-level registry program for international emissions trading. Such a registry was negotiated as part of the original 2016 Paris Climate Agreement under Article 6.4, and is now anticipated as an outcome of the 29th Conference of the Parties (COP29) international climate conference, which began on November 11 in Baku, Azerbaijan. This annual meeting of the United Nations Framework Convention on Climate Change is the heart of the global, UN-sponsored process for negotiating an agreement to combat “dangerous human interference with the climate system”.
As a global financial center, Hong Kong benefits from these developments. Major financial institutions are guided by the interests of the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system. Its interests include protection against climate-related systemic risk, including the three scopes of emissions covered by the Greenhouse Gas Protocol. This in turn has led many financial institutions to consider how carbon markets could drive more voluntary action in addressing Scope 3 emissions (those created indirectly through the production or use of products) of financial institutions. The so-called “voluntary markets” – based on demand generated from corporations, rather than the country-level commitments made to comply with the Paris Climate Agreement – hope to move to exchange-based trading, creating an opportunity for Hong Kong Exchanges and Clearing Limited (HKEx) and other regional exchanges. Many carbon credit development companies will seek financing for underlying projects. At the same time, the role of insurers in carbon crediting is growing more important, including in high-cost technological removal projects.
Another crucial new development to watch, according to Forrister, is the Carbon Border Adjustment Mechanism, or CBAM. This European Union (EU) program is meant to address the carbon footprint of a product through its entire lifecycle when it is imported into the EU. Unlike other schemes, CBAM is implemented at the product level. “It’s not just steel, it’s every nut and bolt,” says Forrister. “It could change the world of import and export.” Greenhouse gas allowances in the EU are shrinking year by year, so products with a higher carbon footprint will face higher prices. Industries impacted by CBAM include power, steel, cement, fertilizer, and hydrogen.
Although the voluntary carbon markets, at US$700 million worldwide, are smaller than the “compliance” markets created by national commitments under the Paris Climate Agreement, voluntary emissions targets by the corporate sector do generate demand for carbon trading. Voluntary markets also act as a testing ground for the larger compliance markets. Independent non-government organizations (NGOs) offer guidance to the voluntary markets, such as an initiative under IETA which created a code of conduct for intermediaries in emissions trading.
However, according to Forrister, it is one thing for a company to reduce its carbon footprint through emissions trading, but another thing to make public claims about it. “If you can’t claim it, why would you do it?” Forrister reasons. But the context of making such claims is fraught with complication. The EU has proposed and accepted in principle the creation of a Green Claims Directive, a framework to avoid greenwashing and govern product labels with claims like “carbon neutral” or “net zero”. Meanwhile, the Science Based Targets Initiative, a global standard for monitoring and managing greenhouse gas emissions, does not currently allow carbon credits to be used to meet a science-based target. “You really do need corporate America to be part of the solution,” says Forrister. “But some corporations are pulling back because they think they’re getting just as much grief if they act as if they don’t.”
Deploying the power of international markets to address climate change is not only possible but necessary. “We are in an urgent situation,” says Forrister. “It’s time to get moving.”
Genevieve Hilton has worked in corporate affairs and sustainability in the Asia Pacific region since 1994. She previously led Environmental, Social and Governance (ESG) affairs and communications in Asia Pacific for Lenovo Group (0992.HK), as well as Corporate Citizenship and External Communications Asia Pacific for BASF SE (BAS.DE). She currently acts as a senior advisor for environmental and social activist organizations, as well as co-chairing the Energy & ESG Committee of the American Chamber of Commerce of Hong Kong.
In 2022, she became a full-time sustainability activist and writer and is an award-winning science fiction writer under the pen name, Jan Lee. She is the co-author, with Steve Willis, of “Fairhaven – A Novel of Climate Optimism” (Habitat Press UK), a winner in the Green Stories contest. Her work has also been nominated for a Pushcart Prize and recognized several times in the “Writers of the Future” contest. She also is Editor-in-Chief of The Apostrophe, the quarterly magazine of the Hong Kong Writers Circle.