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Under the Kyoto Protocol's Clean Development Mechanism (CDM), countries worldwide co-operate on encountering climate change by emissions trading, which enables a win–win situation by effectively “regenerating” a cleaner environment in developing countries, whilst efforts in developed countries may still not meet their committed targets of carbon reduction. According to the CDM rules, energy efficiency improvement projects in the building sector are valid for emissions trading. Although the potential saving of energy is significant, there is only a limited number of building projects being registered as CDM projects. This paper explores the applicability of CDM in the building sector by reviewing the implementation of CDM and its advantages and disadvantages. Hong Kong was selected for an in-depth study due to its eligibility for CDM and yet non-starter status. According to a questionnaire survey supplemented by interviews with the stakeholders in this study, major hindrances such as the lack of financial incentive, inadequate knowledge about emissions trading and insufficient governmental support were found in potential CDM projects in the building sector. It is recommended that an inter-city emissions trading market covering mainland China and Hong Kong, and suitable emission reduction targets should be established and led by the government at the initial stage. By setting up an emission exchange centre, local emissions trading activities could be facilitated and job opportunities could be created. In addition to conducting emissions trading, Hong Kong may also contribute to emissions trading in the region by making use of its highly skilled professional services and efficient business environment. This study paves the way for a densely built city such as Hong Kong to benefit environmentally and economically from a cleaner region in its vicinity. [ABSTRACT FROM AUTHOR]