How to Handle Carbon Credits and Emissions Trading for Trust Assets

The voluntary carbon market (VCM) surpassed USD 2 billion in notional value in 2024, with the International Emissions Trading Association (IETA) projecting a global compliance market worth over USD 100 billion by 2030. For Hong Kong-based private trust structures, this represents both a fiduciary opportunity and a legal risk. The HKMA’s 2024 Green and Sustainable Finance Cross-Agency Steering Group update explicitly flagged carbon credits as an emerging asset class requiring enhanced due diligence under the Supervisory Policy Manual (SPM) module SA-2 on credit risk. Meanwhile, the SFC’s 2023 consultation on the proposed “Carbon Market and Registry Platform” (CMRP) confirmed that carbon credits held within a trust may constitute “securities” under the Securities and Futures Ordinance (SFO, Cap. 571), triggering licensing obligations for trustees who trade them. The intersection of environmental assets and private trust law—particularly STAR and VISTA structures—creates a novel compliance matrix that no single regulatory framework fully addresses. This article examines the legal classification, custody mechanics, and tax treatment of carbon credits within Hong Kong trust arrangements, drawing on the latest regulatory signals from the HKEX, SFC, and HKMA.

The Legal Classification of Carbon Credits as Trust Assets

Defining the Asset: Commodity, Security, or Intangible Property

The threshold question for any trustee considering carbon credits is their legal characterisation. Under Hong Kong common law, as affirmed in Commissioner of Inland Revenue v. Hang Seng Bank Ltd (1991) 1 HKRC 90-001, property must be “definable, identifiable by third parties, and capable of assumption by a trustee” to form the subject matter of a trust. Carbon credits—whether verified emission reductions (VERs) from the voluntary market or certified emission reductions (CERs) from the Clean Development Mechanism—fail to meet these criteria uniformly.

The SFC’s 2023 consultation paper on the CMRP (SFC CP-2023-12) proposed that carbon credits traded on the proposed exchange would be classified as “securities” under Schedule 1 of the SFO, specifically as “structured products” where the underlying is an environmental attribute. This classification would trigger the full licensing regime under Part V of the SFO for any trustee engaging in the “business of dealing in securities” (Type 1 regulated activity). However, the consultation acknowledged that voluntary carbon credits not listed on the CMRP may remain “intangible property” or “commodities” under the Commodities Trading Ordinance (Cap. 250), creating a bifurcated regulatory landscape.

For VISTA trusts (Virgin Islands Special Trusts Act, 2003) commonly used by Hong Kong HNW families, the BVI Trustee Act (Cap. 303) does not specifically address carbon credits. The BVI Financial Services Commission’s 2024 guidance on virtual assets (VA Guidance, Section 4.2) treats carbon credits as “digital assets” when tokenised, but as “intangible property” when held as registry entries. This ambiguity means that a trustee holding carbon credits in a VISTA trust must determine, at the point of acquisition, whether the credits are being held as investments (triggering the SFO licensing regime if traded) or as environmental offset assets (likely falling outside the SFO’s scope).

Custody and Registry Mechanics

Carbon credits exist as entries on registries operated by entities such as Verra (the Verified Carbon Standard, VCS) or Gold Standard. The HKMA’s 2024 circular on “Custody of Digital Assets” (HKMA B10/1C) explicitly included carbon credits within its definition of “digital assets” for custody purposes, requiring authorised institutions to maintain “segregation of client assets” and “independent verification of registry balances” at least quarterly. For a Hong Kong trust, this creates a custody obligation that differs fundamentally from holding listed equities or bonds.

The practical challenge arises from the fact that most carbon registries are not Hong Kong-licensed custodians. Verra’s registry, for instance, is operated from Washington, D.C., and Gold Standard’s from Geneva. The SFC’s 2023 “Guidelines for Virtual Asset Custodians” (SFC GL-2023-04) require that any custodian holding client assets must be licensed under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO, Cap. 615). A trustee relying on an overseas registry operator may be deemed to have delegated custody to an unlicensed entity, potentially breaching the trustee’s duty of care under Section 41 of the Trustee Ordinance (Cap. 29).

The solution adopted by several Hong Kong family offices in 2024 has been to establish a special-purpose vehicle (SPV) in the Cayman Islands or BVI that holds the carbon credits directly on the registry, with the Hong Kong trust holding 100% of the SPV’s shares. This structure, while adding a layer of administrative cost, ensures that the trustee retains legal control over the asset through share ownership rather than direct registry access, circumventing the custody licensing issue.

Tax Treatment and Cross-Border Considerations

Hong Kong Profits Tax on Carbon Credit Trading

The Inland Revenue Department (IRD) has not issued specific guidance on the taxation of carbon credit trading by trusts. However, established principles under the Inland Revenue Ordinance (IRO, Cap. 112) provide a framework. Section 14 of the IRO imposes profits tax on any person carrying on a trade, profession, or business in Hong Kong. For a trust, the question is whether the trustee’s acquisition and sale of carbon credits constitutes “trading” or “investment.”

The leading authority is Commissioner of Inland Revenue v. Yick Fung Estates Ltd (1969) 1 HKTC 272, which held that the frequency, volume, and profit-seeking motive of transactions determine whether an asset is held as an investment or as trading stock. If a Hong Kong trust acquires carbon credits with the intention of holding them to offset the family’s own carbon footprint (e.g., for a private jet or corporate travel), the credits are likely capital assets, and any gain on disposal would be capital in nature and not subject to profits tax. Conversely, if the trust actively trades credits—buying and selling within a 12-month period, or using derivatives such as carbon futures on the HKEX—the IRD may treat the activity as trading, exposing the trust to profits tax at the 16.5% corporate rate (or the 15% progressive rate for unincorporated trusts under Section 14(1)).

The 2024 HKEX consultation on “Carbon Futures and Options” (HKEX CP-2024-05) proposed listing carbon futures contracts referencing the ICE Global Carbon Index. For a trust that uses these instruments to hedge its carbon credit holdings, the HKMA’s 2023 “Prudential Measures for Commodity Derivatives” (HKMA B10/3C) require that any hedging transaction be documented as a “bona fide hedge” with a clear economic relationship to the underlying exposure. Failure to document this properly could result in the HKMA treating the position as speculative, triggering higher capital charges under the Banking (Capital) Rules (Cap. 155L).

Stamp Duty Implications

Stamp duty under the Stamp Duty Ordinance (Cap. 117) applies to the transfer of Hong Kong stock and immovable property. Carbon credits held on overseas registries are not Hong Kong stock, and their transfer does not trigger stamp duty under current law. However, if the credits are tokenised and traded on the HKEX’s proposed CMRP, the SFC’s 2023 consultation suggested that the transfer of such tokens would be treated as the transfer of “securities” under the SFO, which in turn would bring the transaction within the scope of the Stamp Duty Ordinance if the tokens are “Hong Kong securities” as defined in Section 2 of Cap. 117.

The 2024 Budget announced a reduction in stamp duty on stock transfers from 0.13% to 0.10% of the consideration for each of the buyer and seller, effective from 1 April 2024 (Stamp Duty (Amendment) Ordinance 2024, Section 3). If carbon tokens are classified as Hong Kong securities, the same rate would apply, adding a 0.20% transaction cost for each trade. For a trust holding a portfolio of carbon credits valued at HKD 50 million, this would represent an annual stamp duty cost of HKD 100,000 if the portfolio is turned over once per year.

Cross-Border Tax Risks for HNW Families

For Hong Kong families with multi-jurisdictional holdings, the interaction between the trust’s carbon credit assets and the family’s tax residence creates additional complexity. The OECD’s Model Tax Convention Article 7 (Business Profits) allocates taxing rights to the jurisdiction where the “permanent establishment” of the trust is located. If a Hong Kong trust holds carbon credits generated from a forestry project in Indonesia, the Indonesian tax authorities may assert that the trust has a permanent establishment in Indonesia through the project, exposing the trust to Indonesian corporate income tax at the 22% rate (Law No. 7 of 2021 on Harmonization of Tax Regulations, Article 17).

The HKMA’s 2024 “Guidance on Climate-Related Disclosures” (HKMA C1/2024) requires that authorised institutions disclose the “geographic breakdown” of their carbon credit holdings as part of their Pillar 3 disclosures under the Banking (Disclosure) Rules (Cap. 155M). For a trust that holds credits from multiple jurisdictions, the trustee must maintain a register of the source jurisdiction for each credit, and ensure that any tax liabilities arising from those jurisdictions are properly accounted for in the trust’s financial statements.

Fiduciary Duties and Regulatory Compliance

The Trustee’s Duty to Monitor Market Integrity

The SFC’s 2023 consultation on the CMRP identified “market manipulation” and “insider trading” as key risks in the carbon credit market. For a trustee holding carbon credits, the duty under Section 41 of the Trustee Ordinance to “exercise the care and diligence of an ordinary prudent person of business” extends to ensuring that the trust’s carbon credits are not used in market abuse activities. This is particularly relevant where the trust holds credits that are subject to verification audits under the Verra VCS or Gold Standard protocols.

The HKEX’s 2024 “Guidance on ESG Reporting” (HKEX GL-2024-06) requires that listed companies disclose their use of carbon credits for offsetting purposes, including the “source, vintage, and verification status” of each credit. While this guidance applies to listed companies, not trusts, the SFC’s 2023 consultation suggested that the same disclosure standards would apply to any issuer of carbon-linked products on the CMRP. A trustee that sells carbon credits to a listed company for offsetting purposes must therefore be able to provide the company with the verification documentation required by HKEX GL-2024-06, or risk the company being unable to use the credits in its ESG reporting.

Licensing Implications for Trustee Trading

The SFC’s 2023 consultation on the CMRP proposed that any person “dealing in carbon credits” on the platform would require a Type 1 (dealing in securities) licence under the SFO. For a private trust, the trustee typically holds a Type 9 (asset management) licence if it manages investments on a discretionary basis. However, Type 9 licence holders are not automatically authorised to deal in securities; they require a separate Type 1 licence or must rely on the “incidental” dealing exemption under Section 115(2) of the SFO.

The SFC’s 2023 “Guidelines on the Incidental Dealing Exemption” (SFC GL-2023-09) clarified that the exemption applies only where the dealing activity is “ancillary” to the asset management function and does not exceed 10% of the total transaction volume of the licensed corporation. For a trust that trades carbon credits as a core investment strategy, this exemption would not apply, and the trustee would need to apply for a Type 1 licence. The application process, which includes the “fit and proper” test under Section 129 of the SFO, typically takes 6-9 months and requires the appointment of at least two Responsible Officers with relevant experience in environmental markets.

AML/CFT Obligations for Carbon Credit Transactions

The AMLO (Cap. 615) imposes anti-money laundering and counter-terrorist financing obligations on “regulated persons,” including licensed corporations under the SFO. The 2024 amendment to the AMLO (Amendment Ordinance 2024, Section 5) extended the definition of “virtual assets” to include “any digital representation of value that may be digitally traded or transferred and may be used for payment or investment purposes.” The SFC’s 2023 consultation on the CMRP proposed that carbon credits traded on the platform would fall within this definition, triggering the full AML/CFT regime under Part 2 of the AMLO.

For a trustee, this means that any acquisition or disposal of carbon credits must be subject to customer due diligence (CDD) under Section 3 of the AMLO, including the identification of the beneficial owner of the counterparty. Given that many carbon credit trades involve counterparties in jurisdictions with weaker AML regimes (e.g., project developers in developing countries), the trustee must conduct enhanced due diligence (EDD) under Section 4 of the AMLO, including obtaining information on the source of funds and the purpose of the transaction.

The HKMA’s 2024 “Guidance on AML/CFT for Digital Assets” (HKMA B10/2C) further requires that authorised institutions maintain “real-time monitoring” of carbon credit transactions for suspicious activity, including “layering” through multiple registries and “structuring” to avoid reporting thresholds. For a trust that holds carbon credits across multiple registries, the trustee must implement a consolidated monitoring system that tracks all transfers, regardless of the registry, and reports any suspicious transactions to the Joint Financial Intelligence Unit (JFIU) under Section 12 of the AMLO.

Structuring Solutions and Practical Recommendations

The Cayman STAR Trust with a Carbon Credit SPV

The most common structure adopted by Hong Kong HNW families in 2024 involves a Cayman Islands STAR trust (Special Trusts (Alternative Regime) Law, 1997) holding a BVI SPV that owns the carbon credits directly. The STAR trust allows the settlor to retain “enforcer” powers under Section 13 of the STAR Law, ensuring that the trustee’s actions regarding the carbon credits are subject to the enforcer’s approval. This structure protects the trustee from liability for investment decisions while maintaining the tax transparency of the trust.

The BVI SPV is typically incorporated as a Business Company under the BVI Business Companies Act (Cap. 218), with its registered office in Road Town, Tortola. The SPV holds the carbon credits on the Verra or Gold Standard registry, and the Hong Kong trust holds 100% of the SPV’s shares. The trust’s income from the SPV (dividends or capital gains) is subject to Hong Kong profits tax only if the SPV is considered to be carrying on a business in Hong Kong under Section 14 of the IRO. The IRD’s 2023 “Guidance on Controlled Foreign Companies” (IRD DIPN 63) provides that a BVI SPV is not considered to be carrying on business in Hong Kong if its board meetings are held in the BVI and its assets are managed from the BVI.

The VISTA Trust with a Direct Registry Holding

For families who prefer direct ownership of carbon credits without the SPV layer, a BVI VISTA trust can hold the credits directly on the registry. The VISTA trust allows the “office of director” to be retained by the settlor or family members under Section 6 of the VISTA Act, meaning that the trustee does not have the power to interfere with the management of the carbon credit portfolio. This structure is particularly suitable for families who intend to hold the credits as a long-term offset asset rather than as a trading portfolio.

The key risk with direct registry holding is the custody licensing issue discussed above. To mitigate this, the trustee should appoint a Hong Kong-licensed custodian (e.g., a licensed bank under the Banking Ordinance, Cap. 155) to hold the registry access credentials and to verify the trust’s holdings on a quarterly basis. The HKMA’s 2024 circular on “Custody of Digital Assets” (HKMA B10/1C) requires that the custodian maintain “independent records” of the trust’s holdings and provide “real-time reporting” to the trustee. The cost of this arrangement, typically 0.25-0.50% of the portfolio value per annum, is a necessary expense to ensure regulatory compliance.

The Hong Kong Unit Trust for Carbon Credit Pooling

For families with multiple branches or generations who wish to pool their carbon credit holdings, a Hong Kong unit trust under the Securities and Futures Ordinance (Cap. 571) provides a regulated structure. The unit trust must be authorised by the SFC under Section 104 of the SFO, and its trust deed must comply with the SFC’s “Code on Unit Trusts and Mutual Funds” (SFC Code, Chapter 7). The SFC’s 2023 consultation on the CMRP proposed that carbon credit unit trusts would be subject to the same disclosure requirements as other unit trusts, including the publication of a prospectus under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32).

The advantage of the unit trust structure is that it provides a clear regulatory framework for the custody, valuation, and trading of carbon credits. The trustee must appoint an SFC-licensed custodian under Chapter 7.3 of the SFC Code, and the valuation of the carbon credits must be performed by an independent valuer at least monthly under Chapter 7.4. The unit trust’s income is subject to Hong Kong profits tax at the 16.5% rate, but the trust is transparent for tax purposes, meaning that unitholders are taxed on their share of the income rather than the trust itself.

Actionable Takeaways

1. Trustees must obtain a legal opinion on the classification of carbon credits under the SFO before acquiring them, as the licensing obligations under Part V of the SFO differ depending on whether the credits are “securities” or “commodities.”

2. For any trust holding carbon credits on an overseas registry, the trustee should appoint a Hong Kong-licensed custodian under the HKMA’s 2024 digital asset custody guidelines to hold registry access credentials and perform quarterly verification.

3. Trusts that actively trade carbon credits should apply for a Type 1 licence under the SFO, as the incidental dealing exemption under Section 115(2) is unlikely to apply where trading is a core investment strategy.

4. The IRD should be consulted on the tax treatment of carbon credit gains before any disposal, as the frequency and volume of transactions will determine whether the gains are capital (non-taxable) or trading (subject to profits tax at 16.5%).

5. Families with multi-jurisdictional carbon credit holdings should structure their trust through a Cayman STAR trust holding a BVI SPV to ensure tax transparency and to avoid permanent establishment risks in the source jurisdictions.