Hong Kong adds transition label to taxonomy, but gas looms in next phase

Hong Kong has become the latest country in Asia to introduce a transition category to its taxonomy, as part of efforts to raise more capital for the decarbonisation of high-emitting sectors in the city, as well as across China and the rest of the region.

“Relative to the rest of Asia, Hong Kong is moving in a direction that’s 1.5°C-oriented. This should reduce cross-border misalignment risk,” said Christina Ng, managing director of Energy Shift Institute, a thinktank which recently warned that the huge divergence emerging in the region’s transition frameworks risk impeding cross-border financing.

Natural gas – which currently dominates Hong Kong’s power mix, followed by nuclear energy – is not currently addressed in its taxonomy. But the Hong Kong Monetary Authority (HKMA) stated that it is one of the areas under consideration in the third phase of the taxonomy which is currently being developed, alongside nuclear, hydrogen, hydropower, sustainable aviation fuel, and carbon capture, use and storage.

The taxonomy now covers six sectors, after the addition of manufacturing, and information communications and technology (ICT).

Among the 13 new activities introduced are aluminium refining and smelting, “in view that the Chinese Mainland is the largest producer of aluminium globally”, wrote the central bank. Some of China’s largest aluminium producers, including state-owned Aluminium Corporation of China and China Hongqiao Group, are listed in Hong Kong.

Caline Tang, taxonomy manager at Climate Bonds Initiative (CBI), who is currently leading the development of Hong Kong’s taxonomy, told Green Central Banking that “similar metrics, if not thresholds, have been adopted” to ensure that the country “stays in step with global developments and to promote cross-border financing flows”.

“The bit to watch in future is gas-fired power,” said Ng. “If Hong Kong loosens its transition criteria for gas power in later phases, cross-border divergence risk returns fast and markets will price that credibility discount.”

For now, Hong Kong’s emissions thresholds broadly align with those in Singapore and Thailand – the only two Asian markets that have included emissions trajectories and sunset clauses for existing gas power within their respective transition pathways.

In fact, the energy sector’s emissions threshold in Hong Kong’s updated taxonomy is currently stricter than other markets, noted Ng.

For existing power assets in Hong Kong to qualify for transition financing, they must not exceed the emissions threshold of 255g CO2e/kWh between now and 2030, reduce their emissions to 145g CO2e/kWh by 2031, and cease to exist by end-2035.

In comparison, by 2031 Singapore’s threshold for transition-labelled activities in the energy sector will be 150g CO2e/kWh, while Thailand’s threshold is 191g CO2e/kWh.

Hong Kong’s transition label is explicitly temporary and time-bound, and does not open the door to new gas or coal power, said Ng.

“Hong Kong is using its transition taxonomy to manage the decline of existing high-emitting assets, and not legitimise expansion. This is very different from Japan, mainland China and Indonesia’s transition taxonomies, where transition has no sunset and new fossil capacity can qualify.”

It is also significant that investments into transmission and distribution infrastructure are not automatically assumed to be green by default in the updated taxonomy, noted Ng. Instead, capital expenditure into grid infrastructure can only be reported as taxonomy-aligned if it accelerates decarbonisation.

“This distinction matters. In many Asian frameworks, grid investment is implicitly green, even if it locks in fossil-heavy generation. Hong Kong avoids this by tying grid eligibility to system-level emissions outcomes,” said Ng. “I think this is a more financeable approach for climate-oriented investors.

Piloting adaptation

In addition to a new transition category, Hong Kong’s updated taxonomy has also become one of the world’s first to integrate climate adaptation activities, starting with the water sector.

“The adaptation elements, focusing on the water sector, is timely against a backdrop of record-breaking typhoon season and multiple ‘black’ rainstorm warnings in the past year,” said the CBI’s Tang, adding that the taxonomy signals the jurisdiction’s commitment to holistically addressing climate change.

HKMA acknowledged the country’s vulnerability to the impacts of tropical cyclones and rainstorms which result in infrastructure damage and economic loss, and noted that the intensity and frequency of these extreme weather events are expected to worsen in a warming climate.

Ng said that the inclusion of adaptation “makes a lot of sense” for Hong Kong, with its exposure to typhoons, coastal hazards and extreme weather. “This addresses physical climate risk, a significant balance sheet risk.”

Hong Kong has identified four adapting measures addressing flood damage and water stress, with reference to the CBI’s resilience taxonomy and guidelines from the UN’s climate body, the Intergovernmental Panel on Climate Change.

In future iterations, other significant climate hazards, including storm damage, mass movement damage and heat stress, will be explored, said HKMA. It also plans to explore “more sophisticated assessment approaches” by including technical specification checks or specific thresholds – which are recommended by the CBI – as global and local understanding of adaptation improves.

Written by