Ep86 How China is Building a Global Carbon Market with Jeff Huang, AEX Holdings

DISCLAIMER: THIS AUTOMATICALLY GENERATED TRANSCRIPT IS PROVIDED FOR CONVENIENCE ONLY AND IS NOT THE OFFICIAL OR COMPLETE RECORD OF THE PROCEEDINGS. THE ORIGINAL AUDIO/VIDEO RECORDING REMAINS THE SOLE AUTHORITATIVE RECORD, AND NO RELIANCE SHOULD BE PLACED ON THIS TRANSCRIPT FOR ANY LEGAL, EVIDENTIARY, OR DECISION-MAKING PURPOSES. Ep86 How China is Building a Global Carbon Market with Jeff Huang, AEX Markets Jeff Huang: My question, as a practitioner, as a former exchange guy, is how do you make efficient trading work?

Mm-hmm. Because without efficient pricing of your carbon, the carbon trading is not going to work. Narrator: Welcome to Asia Climate Finance, your front-row seat to the policies, investments, and actors shaping climate business and finance across Asia Pacific. Subscribe now so others find this essential guide to Asia's Climate Economy and note the disclaimers at the end.

Now over to the host, analyst, investor, and author Joseph Jacobelli. Joseph Jacobelli: Good morning, good afternoon, or good evening, wherever you may be listening from. Welcome to Asia Climate Finance. Today we get into China's carbon markets and where they're headed, from how emission caps are being tightened, to carbon accounting, to what all of this means for companies trying to stay on the right side of the rules, like the EU's carbon border regulations.

I caught up in Lisbon with Jeff Huang, CEO of AEX Holdings. He'd flown in for a conference. Jeff has seen this world from the inside, having worked with the people who built the Chicago Climate Exchange, and later the Intercontinental Exchange. And he's now one of the key figures connecting international markets with mainland China.

If you're watching the green transition in Asia, this one is worth your full attention. One more thing before we start. Carbon markets do come with their own vocabulary, lots of jargon. I put together a plain language glossary for anyone who wants a bit of a cheat sheet, and you'll find it in the transcript.

Please do send your comments, ideas, and anything else to the email address at the top of the show notes. It's ACFpod@outlook.com, ACFpod@outlook.com.

Thanks and enjoy the show. Hi, Jeff. Thank you very much for making it today. I really appreciate your time.

So you just came in from Beijing, and you've got a couple of days for the conference and then you go back. So really, really glad that I caught you. Now, Jeff, we've got your bio in the show notes, all of your achievements and your background, etc. But if you were to introduce yourself to somebody, how would you describe yourself?

Jeff Huang: I'm trying to be a bridge. My own background, my association with the Chicago Climate Exchange of the past with Dr Richard Sandor, the pioneer and the father of Global Emissions Trading. My experience of working with him and subsequently working with the Intercontinental Exchange gave me an opportunity to witness and to work with some of the best pioneers in carbon trading and frankly in building new markets, right, and growing new markets. So that hands-on experience gave me the support, the intellectual capacity to eventually try something like what these guys did in the past, in the United States, in Europe, and to try to work with the stakeholders in Hong Kong on the mainland.

The friends and the colleagues and the partners I worked with over the last 10, 15, 18 years and really try to see if we can replicate some of these successes in carbon trading, in building efficient new markets, in building markets that work, period. So those are the things that I've been fortunate to be able to be involved in. After I left ICE and formed AEX Holdings in Hong Kong, the goal is to really build new markets, working with the coalition of people. And then to apply these expertise and these financial market tools to work with stakeholders: the compliance companies, the energy companies, financial firms, the regulators, the educators, the NGOs to see how we can use the market to achieve energy transition and the green economy goals at a lower cost.

Joseph Jacobelli: So you mentioned your company, you are the CEO of AEX Holdings. Can you just explain a little bit what AEX is all about? How you created it and the evolution and where you are right now? Jeff Huang: AEX Holdings is an incubation company with Hong Kong Cyberport.

The idea of AEX is to build new markets, adopting international trading platform best practices. That could mean the market operator and, by extension, the market operator as it relates to the regulators, the market users, the compliance companies, the financial trading firms, the banks, brokers, et cetera. So building markets that function, basically, is our reason for being. And we have been, as you may know, working with Cyberport, we've been trying to conduct simulated trading over the last years of the carbon forwards, including the European Union Allowances, because of the CBAM and maritime EU ETS - one of the things I am in this conference in Lisbon for - as well as the Chinese carbon underlyings, including the Chinese allowances and the CCERs, the voluntary markets.

In the future, as the coalition we're building in Hong Kong expands, we will be able to work and include other energy asset classes like green methanol, ammonia, or hydrogen, and green energy projects highlighted in the Chinese government’s 15th Five-Year Plan. Joseph Jacobelli: Right. One of the biggest challenges, not just for AEX, but for the carbon markets in general, and we discussed this earlier before we started recording, is about data, about the transparency of data, about the availability of data.

Could you share your thoughts about that a little bit? Jeff Huang: Well, our experience is, if you develop the right framework, if you develop the right goals, and you talk to the stakeholders, especially the stakeholders onshore in the PRC, very often we'll be able to work with the stakeholders, with the regulators, with the companies within the confines of a developed data framework. So that we will be able to get the data into Hong Kong, process the data, and come up with the desired outcome, the desired results as you could witness in our Asia REC Registry programme, which is also part of the Cyberport incubation process.

We're able to work with the China Southern Power Grid and work with Midea, the company that produces refrigerators. In the last autumn, we worked with these stakeholders and the generator in Guangdong Province to conduct the first hourly matched PPA, harmonising with the EU CBAM requirements. Even before the EU CBAM published their detailed regulation, the green energy attributes were coming over into European markets. So those are the kind of proven track record of AEX and Asia REC, the non-profit NGO we helped found over the last two years, to be able to collect this data and process it for the final goal of harmonising for the supply chain company.

When they consume wind or solar energy, the standards and the data will be harmonised in order for these supply chain companies to ultimately lower the carbon exposure of the products going to European markets. Joseph Jacobelli: The two areas I really wanted to pick your brain on, and one is a little bit about what's going on with the Chinese carbon markets because I think there's a lot of misunderstandings around. It's not as well researched as one would like - well understood, I should say - as one would like.

And then the other one is about Hong Kong and within that also what AEX's role is with the China's carbon markets and the Hong Kong carbon markets. So, starting with China, where are we at with the Chinese carbon markets right now? Jeff Huang: I think the Chinese carbon market, the national ETS, is on the right track. I think the regulator, MEE, has made it very clear as the market develops more, above and beyond the power sector obviously.

The national ETS started with the power sector alone as it launched online trading in July 2021. So now we have hands-on experience over the last five years. MEE is in the process of expanding above and beyond the power sector - the 5 billion tonnes - into the cement, the aluminium, and the steel sectors. Experts in China are telling me there is going to be an additional 3 billion tonnes coming into the market.

So it's sizeable and, more importantly, the policymaker has also made it clear that China is transitioning the ETS from an intensity-based cap into an absolute cap. That transition is ongoing. Obviously, we, Dr Sandor and other people, have been advocating publicly in China about this transition from that intensity cap to an absolute cap over the last 3, 4, 5 years. So the other main thing to watch is the auction.

Jeff Huang: Two weeks ago, I had a bit of a lengthy discussion with one of the biggest SOE generation companies and I asked them what is top of mind for you guys coming into the new year, right, the Year of the Fire Horse? So they said, "Jeff, number one priority is we're getting ready for auctioning." So now all of a sudden, you're starting to talk about these frontline compliance companies making detailed preparation for an intensity transition into an absolute cap and making preparation for auctioning.

So I'm just saying these two are signposts that potentially will elevate the Chinese ETS from a startup to the level of European best practice, or from a regulatory perspective, a market that matures. Joseph Jacobelli: See, one of the things that I think is very widely misunderstood - and I don't know if it's the analysts not doing a good job or the journalists not doing a good job or whatever it is - but one of the things I read, for example, is, "Oh yeah, China has a carbon market, but it's very limited because a lot of the sectors are not included yet," et cetera, et cetera.

So they don't know how China operates. They don't understand that, for example, China today has electricity trading, but it took maybe two decades before they got there, right? There was a lot of preparation, a lot of trial, a lot of pilot projects because they're very concerned about potentially something going wrong, obviously. So they really want to focus on taking it step-by-step.

They're very open to learn from experiences in the US. They're very open to learn from experiences in Europe, but all of that is almost not really well understood because the way they did it in Europe, first they talked about it forever, then they set up the rules and then they launched it. Whereas in China you do a pilot project and then you do another pilot project, you refine it and you kind of build brick-by-brick, and once the foundation is there, then you launch it. So I think there's a lot of misunderstanding in my personal opinion about where China is at today.

And I think what you just mentioned just now is extremely, extremely important to basically say: it's not a matter of whether you think China's doing a fantastic job or China's not doing a fantastic job; it's where are we at in China today? And we're a lot more advanced than we were say five years ago, but we still got a long way to go. So as you were saying, more sectors are going to be included very soon. But there's just something I wanted to add because I think there's a lot of misunderstandings out there in terms of what China is doing.

Jeff Huang: Yeah, I agree with you. Not only that, I think if you are talking to the practitioners in China, they're probably looking at a different diagram, different changes than some of the observers outside China. I mentioned this intensity cap transitioning into an absolute cap and the auctioning. And relative to what we're trying to do in Hong Kong as a member of the coalition - I keep saying it's not just about AEX Holdings, it's about a coalition functioning in Hong Kong - is really probably more fundamentally as the ETS market in China matures.

Now, probably you can take a second look at the fundamental principles of a cap and trade. Right? So that's why people like us, that's why this coalition and what I'd like to propose is my thinking about ETS or cap and trade: in order for cap and trade to work, both cap and trade - trade means efficient pricing - needs to work simultaneously in order for the whole programme, of course, to function as designed. Right now on the cap side, like policy changes, migration, and evolution I mentioned.

Then my question as a practitioner, as a former exchange guy, is how do you make efficient trading work? Because without efficient pricing of your carbon, the carbon trading is not going to work. Joseph Jacobelli: It's not going to work. Yeah.

Jeff Huang: So for me, I have to apologise for jumping into some of the jargon, right? It's about liquidity, about institutional participation. And when I say institutional participation, if you look at Europe, if you look at North America, right, the RGGI market, the California carbon markets, it is the industry, the ecosystem. It's the compliance companies and the brokers, the financial trading firms that help provide liquidity, that help the compliance companies to lay off their price risks.

All these people need to come together so we have a market that has transparency and visibility, not just today a spot exchange, but over the next 12, 24, 36 months. Joseph Jacobelli: Right. And that's not particular to carbon. I mean, it could be any commodity trading or even equities or whatever.

Jeff Huang: It's easier said than done. Everybody understands that, right? Of course. Like I said, in order to have a world-class carbon market, you need to have a world-class infrastructure, including the regulators, the compliance companies understanding risk management, the banks and broker-dealers that know how to price commodities and energy commodities in particular.

And you had an NGO, the journalists, the academia, the lawyers, the accountants, right? All these guys need to come together and say, "Hey, these are the designs, these are the implementation processes, these are the trading platforms." So when all these coalition members come together and converge, then you start to have a functioning market. Joseph Jacobelli: And where are we now in China?

Are they open to this? Jeff Huang: Yes, I'm sure they are. As a guy that deals with these stakeholders in the PRC and in Hong Kong, we see people talk about it. We see people like us doing pilots in Hong Kong, simulated trading with software developed in Zhengzhou City.

So I think the idea is we seem to have a blueprint. And that's the easy part, right? If you look at CCX or CCFE (Chicago Climate Futures Exchange) about 30 years ago, it started to price sulphur futures regulated by the CFTC. So we have the blueprint: the EUA, the California markets, the Hong Kong markets, the China markets.

So then it's about implementation. My experience working with CCX and ICE is that in order for implementation to come to pass, the whole wheel needs to be involved. Joseph Jacobelli: Moving on to Hong Kong, Jeff. Hong Kong, a small place but an important financial market.

What's the role of Hong Kong in carbon markets in general and with the Chinese carbon markets specifically, and how can Hong Kong grow to have a more global presence or reputation when it comes to carbon markets? Jeff Huang: Yeah, if you look at the FSDC (Financial Services Development Council), the Hong Kong FSDC published a white paper at the end of 2025. I'm a small part of that working group to produce that white paper. It calls for the internationalisation of the Chinese carbon markets.

There are, I think, four or five recommendations. One is to leverage the financial market infrastructure in Hong Kong and to develop a derivative market, a world-class derivative market for the CCERs, for example. The other recommendation is to build a civil society-based, non-profit, transparent entity with proper infrastructure and proper governance structure that's similar to, let's say, Verra or Gold Standard, to process projects out of China. Or for lack of a better word, I probably want to use an easier term like iCCER - the international version of CCER based in Hong Kong.

So I think two things, right? As a super connector between the international markets and the Chinese markets, as in the stock and bonds, green bonds, commodities or ETFs, right, swaps; all these similar versions of Stock Connect. I think carbon is the same thing. It could be the same thing in terms of harmonising standards for voluntary carbon markets with international markets.

The second is pricing, trading, liquidity, and price discovery. You have Chinese stock traded on A-share markets and the same Chinese company listed on the Hong Kong Stock Exchange, catering to different trading groups and institutional investors. I think carbon could be the same thing. There as we did the CEA and CCER forward simulation last August, we have trading firms and carbon trading desks in California that came to participate, to critique the contract design and participate in the simulation in Hong Kong.

Because some of these guys told me privately that they want to build - as a sizeable carbon trading firm of 20 years - exposure to Chinese carbon via Hong Kong. They like the role Hong Kong plays as a financial market among many other things: super connector, right? They understand the law in Hong Kong, they understand the derivatives, the CCP, the central clearing, the exchange regulations; they want to build that exposure through the derivative market in Hong Kong into the carbon asset class.

I mean, … in China. Joseph Jacobelli: China's going to be the biggest carbon market in the world by a significant mile. Jeff Huang: Yeah. Well, if you are a carbon trading firm in California and you have no exposure to China via Hong Kong, what kind of carbon trading firm are you?

Joseph Jacobelli: You're not going to go very far. You mentioned the simulation that you did in Hong Kong, can you tell us a little bit more details about that? Jeff Huang: We basically got a grant from Cyberport. We want to test the water.

Somebody told me, "Jeff, nobody is going to come, it is so early." So we said, why don't we just put it up? I do a little bit of engagement with trading firms in China, compliance companies in China, and people outside China and see what comes. So, we talked to, as we named in the press release, people in California.

They said, "Yeah, we'll come, we'll critique your contract design, we'll see who else comes." So, we talked to the TPC, the trading shipping firm in Singapore. We talked to China National Building Material - the cement guys, right, the biggest cement company probably in the world. They're coming to the ETS as I just described to you, the second batch, and they have a joint venture with Mercuria.

So I talked to them. Would you come? You are a big player in the carbon market and now we're doing a forward contract simulation. They came.

Fortune Oil, listed in Hong Kong, an oil company, they came. We talked to a big gas company in Shenzhen, they came. And we also talked to some of the big SOEs in the chemical business and some of the biggest broker-dealers in Shanghai and in Beijing. They came.

And we talked to one big generation SOE, right? They came. So, I think it's a good kind of mixture of trading firms and compliance companies. 17, 18 traders in total.

So we put it together, we listed the three contracts, we test every day. We're trying to coincide with the spot market in Shanghai for the CEA and the spot exchange in Beijing for CCER. So we gained a lot of experience from the back and forth with these guys. We managed to trade several hundreds of millions of RMB notional by the end of the pilot with a small but meaningful open interest - close to 2 million tonnes of carbon.

The important thing is many of these guys don't trade commodity futures or have no experience of trading live markets in the past. So it's a good educational tool to them. We write up a report internally and we share it with these people. So it's kind of a test of waters, gaining experience, and collecting feedback on the contract design and the GUI of the trading software.

The non-Chinese guys may like one version of the GUI, and the Chinese guys would like a different version. And how are you going to eventually settle into a physical delivery from cash? We'll have a bit of discussion, very superficial discussion on these things. Mark-to-market, pre-trade risk management; so these things are mundane to guys like you outside China or to a trading firm.

But I think for them it's a good learning experience, it's good exposure. And frankly, we can prove to the market and hopefully to the regulators that there is enough pent-up demand to trade a real market: a well-developed, properly crafted, a well-regulated market in Hong Kong. And hopefully that confidence will allow us to work more closely with the same stakeholders and more to eventually go live trading. Joseph Jacobelli: Just one last question about the carbon markets before we talk about your outlook.

It requires an enormous number of entities. You've got to get a lot of people in the room basically and coordinate and make sure that they cooperate and collaborate. That's a massive, incredibly difficult job - not because it's China, but just it's difficult in Europe as the EU 27 countries have 400 opinions. So do you feel that because most people understand the importance and the urgency to have a properly functioning transparent carbon market, do you see these people coming in wanting to cooperate and collaborate more willingly?

Or how have you seen these kinds of people coming in? Jeff Huang: Yeah, I'm just saying more and more people understand in order for carbon trading to work, both cap and efficient pricing needs to work. It could be Hong Kong, it could be Shanghai, it could be a Hong Kong-Shanghai Carbon Connect; it could be a lot of people. A lot of people have the same skill sets and experience.

So for us, working with Cyberport - obviously Cyberport has a much more power of convening, we're just a small potato part of the Cyberport infrastructure - the idea is to talk to more people. I wrote an op-ed on China Daily and I do ESG Town Halls with CCTV, with other experts from China. So I think from what I see on the frontline is more and more people understand efficient pricing of carbon is the next logical step. How eventually that would evolve and come to pass is for the whole industry.

So I think our strategy is to talk to more people; eventually people come together. It becomes a small coalition, becomes a larger coalition, and then once that large coalition reaches a critical tipping point, stuff happens. Joseph Jacobelli: Right. And you see early evidence that this convening is taking place.

So people are willing to talk, people are willing to cooperate and collaborate and create these markets, basically. Jeff Huang: That's why we did the pilot. That's what the pilot tells us. It's proof.

There are enough experts in Tsinghua University, in MEE, and CSRC. They all came to California in the past, came to the EU, came to Brussels, came to ICE, came to EEX; they saw it with their own eyes and they talked to them. So I think we're looking at a convergence of different forces and different members. We see what these guys are telling us, and we see what the markets are telling us.

Again, I'm just working with other big potatoes as a small potato and when the critical mass is there, stuff happens. Joseph Jacobelli: You may be a small potato, but you're a very key small potato. Now just moving on to the last question, Jeff. If we fast-forward 10 years from now - could be 20, whatever number you like - how do you see the Chinese and Hong Kong carbon markets?

Are we still kind of evolving? Have we already surpassed the EU market in terms of size of trading? How do you see the future? Jeff Huang: I know as a former exchange person I like to see the size, the trading, and the volume, because this is how an exchange or a trading platform makes money.

But I think you are an impact investor. So I think at the end of the day, the critical criteria of how and if an ETS works is number one: you need to look at the carbon reduction. China might have peaked this year, the carbon emission, or might not. Experts externally are looking at this trajectory and the data.

For us, the point is: is the ETS - like the European markets for example, the California markets, or the RGGI markets in the Northeastern United States - are they performing the way they are designed to perform? Is the total emission on the cap going down? Yes. Is the total emission coming down without harming economic growth?

You look at the EU or the California RGGI, it's a resounding yes. The same criteria apply to China on a much larger, massive scale. So it should be bigger. It should be the biggest.

The market should be the biggest because it's the biggest emitter. But comparing size, I would like not to compare size alone. I would like to compare the impact. Of course, is the goal reached while the cost of the transition is lower?

That's why people like us in the financial sector - that's our reason for being - to implement the policy so this economic growth, the job growth, and the transition happens on that historical scale, and it happens at a lower cost. Joseph Jacobelli: Great. Last question, which is the light-hearted question: do you have any personal recommendations? I mean, it could be books, reports, films, documentaries, or anything else for our listeners?

Jeff Huang: Yeah. The president of the United States a few weeks ago was in Beijing. First time the US president made a trip to China in nine years. So geopolitics is something that always trends in social media like TikTok in China - I mean Douyin.

So probably I should recommend one of my all-time favourite non-fiction geopolitics books: a book called The Great Game by Peter Hopkirk. The book was published in 1990, 35 years ago. It is the definitive non-fiction history book about the rivalry in Central Asia between the British Empire and the Russian Empire. It has tonnes of juicy stuff about military manoeuvres, secret missions, diplomatic missions, and political intrigue.

So, if you like history, geopolitics, and great power politics rivalry, and what happened a hundred years ago in Central Asia, it is a fun book. It's very detailed. Joseph Jacobelli: I'll definitely put that on my reading list. Jeff, I really want to thank you for participating in the Asia Climate Finance Podcast and thank you so much for your time.

Jeff Huang: Thank you, Joseph. It's always nice to see you in person again. Narrator: Please note that the Asia Climate Finance Podcast is provided for educational purposes only and does not constitute investment advice. Any information discussed should not be relied upon for making investment decisions.

Listeners should always seek advice from a suitably qualified and authorised investment professional. The views and opinions expressed by guests are their own and do not necessarily reflect the views of their current or former employers or of the podcast host or producers. _____________________________________________________________________________________________ Carbon Markets Related Terms Absolute cap : A fixed total limit on greenhouse gas emissions. AEX Holdings : Guest's company building new carbon trading markets.

Asia REC : Registry for Asian Renewable Energy Certificates. Carbon forwards : Contracts to buy or sell carbon at future dates. CBAM : EU tax on carbon-intensive imported goods. CCP : Central Counterparty mediating between buyers and sellers.

CCER : China Certified Emission Reduction; voluntary carbon offsets. CCFE : Chicago Climate Futures Exchange for environmental contracts. CCX : Chicago Climate Exchange; early US emissions registry. CEA : Chinese Emission Allowance for the national ETS.

Central clearing : Process where a third party settles trades. CFTC : US Commodity Futures Trading Commission. CSRC : China Securities Regulatory Commission. Cyberport : Hong Kong digital technology hub and business incubator.

Derivative market : Market for financial instruments derived from underlying assets. EEX : European Energy Exchange for energy and carbon. ESG : Environmental, Social, and Governance standards. ETF : Exchange-Traded Fund traded on stock exchanges.

ETS : Emissions Trading System for reducing greenhouse gases. EUA : European Union Allowance; tradable unit for emissions. EU ETS : European Union’s cap-and-trade emissions trading system. FSDC : Hong Kong Financial Services Development Council.

GUI : Graphical User Interface for trading software. iCCER : Proposed international version of Chinese carbon offsets. ICE : Intercontinental Exchange, a global exchange operator. Intensity based cap : Emission limits set relative to economic output.

Liquidity : The ease of buying or selling market assets. Mark to market : Valuing assets based on current market prices. MEE : China’s Ministry of Ecology and Environment. NGO : Non-governmental organisation.

Open interest : Total number of outstanding derivative contracts. PPA : Power Purchase Agreement for electricity supply. PRC : People’s Republic of China. Pre-trade risk management : Controls used to assess risk before trading.

RGGI : Regional Greenhouse Gas Initiative in Northeastern US. RMB notional : Total position value in Chinese currency. SOE : State-owned enterprise. Spot exchange : Market for immediate delivery of traded assets.

Verra : Nonprofit managing leading carbon credit standards.