January 16, 2008 (Forbes) – Sitting right at the doorstep of the world’s largest greenhouse gas emitter, China, top officials at the Hong Kong Stock Exchange do not need any more evidence to support their optimism about the market potential of a new initiative for a trading center for emissions-related products. All they need do is look out the windows of their harborfront office, to a hazy horizon regularly clouded by pollution and smog. The Hong Kong Stock Exchange, a listed company that doubles as a market regulator, has hired consultants to look at the possibility of introducing trades of carbon emissions-related products and is moving to draw up a concrete plan by the year end. According to a new policy direction set forth by its board, it will build on its existing business and expertise in initial public offerings, exchange traded funds and index-linked products to “focus on environmental and greenhouse gases markets.”
“We welcome the participation of overseas exchanges, as well as financial institutions,” said Paul Chow, chief executive at Hong Kong Exchanges and Clearing, in a luncheon speech on Wednesday. “This is a long-term project. We will not get any benefit this year, or possibly [in] 2009.”
The future is as bright as the pollution problem is grave in China. The current size of the emissions-related trading market globally is small, but it is expanding by leaps and bounds. A World Bank report issued in May put it at $30 billion for 2006, roughly a day’s worth of trading on the Hong Kong stock market, but the figure was three times greater than the year before nonetheless.
Public markets for emissions-related products are evolving. Currently, they are dominated by European Climate Exchange, the world’s largest platform for carbon emissions trading, and Chicago Climate Exchange, with many other up-and-coming exchanges from Singapore to Australia clamoring to join in.
China is ideally positioned to launch such a trading center, but talks have been hampered by political sensitivities because China itself has yet to commit to emission reduction targets set out in the Kyoto Protocol.
Yet, the Kyoto Protocol has given China its current dominance as the world’s largest supplier of pollution credits, with a 61% market share in an emission trading system known as Clean Development Mechanism, or CDM. Created under Kyoto Protocol, the system allows Chinese companies to earn cash by reducing their greenhouse gas emissions and selling the equivalent amount in credits, called certified emission reductions, selling them to companies in rich-country economies, which buy the credits to meet their stringent emission targets at home.
Asia as whole has 80% of the CDM market. China’s leadership in the market has declined from 73% in 2005, while rival India has made a great leap, grabbing 12% of market in 2006, up from 3% in 2005, according to the World Bank.
Trading of these credits has created a vast yet largely opaque pool of intermediaries including foreign banks and obscure middlemen who peddle their own trades and set prices arbitrarily. Which is why stock exchanges like Hong Kong have seen a window of opportunity.
“No one knows what the prices are because the market is not transparent,” said Gerald D. Greiner, chief operating officer at the Hong Kong Stock Exchange. He said many innovative products can be developed to help alleviate the dangers of global warming, including creating tradable warrants with underlying indexes of green companies or public auctions of CER credits, potentially the largest source of green trading, betting on China’s No. 1 position.