Climate change is one of the most challenging collective problems the world has faced to date. Whether we will be able to curb our carbon emissions quickly enough to avoid the catastrophic impacts of climate change is still very much in question.
In the search for solutions to this global challenge, much of the work to date has focused on climate agreements that create marketplaces to put a price on carbon, thereby creating a compliance carbon market. There are also voluntary carbon markets that have made some headway, allowing businesses to offset their carbon emissions by funding certified greenhouse gas reduction projects such energy efficiency projects, renewable energy projects or rainforest rehabilitation.
Both markets present challenges with issues around double counting, transparency, trust and scalability. Technologies like the blockchain have the potential to assist in improving and bringing integrity to these existing markets. Although it’s very early days, there is some progress in this area.
Improving Existing Markets
Article 6.2 of the Paris Agreement on climate proposes the concept of Internationally Transferred Mitigation Outcomes (ITMOs) as the unit of cooperation and transfer of value of carbon impact. Though the rules of this tool are currently being written, eventually the goal will be to create a system that connects all of the carbon accounts of all of the countries around the world.
In response to the Paris Agreement, Canada-based Blockchain for Climate Foundation is a not-for-profit startup focused on improving global carbon markets and are working on the architecture of a blockchain tool connecting country’s carbon accounts. Founder Joseph Pallant explains that: “We want to support and accelerate this goal by building a smart contract protocol that tracks ITMOs leveraging the Ethereum technology stack and scales, to accommodate use by every country in the world. There will be enough data embedded in each of the tokens so the provenance and eligibility of each tonne of emission reductions is clear.”
For this purpose, Blockchain for Climate have developed a draft specification for a new token type called Unique Fungible Tokens (UTFs) that can contain the unique information of each credit, such as it’s place of origin, for example, being a reforestation or renewable energy project, to be able to validate the authenticity of a carbon credit, while making the token fungible that can enable many UTFs to be traded, creating liquidity in the market for the carbon credit.
Pallant sees distributed ledger technology as a huge asset in global carbon trading co-operation. The public and transparent nature of the information encourages collaboration across nations and strengthens trust in the system. Pallant also believes that if the market is to grow to the size it needs to be able to trade the trillions of tonnes of carbon of an effective global compliance market “you’ll have to track fast and repeated transfers of units and bundle those units into different transactions…and you’ll need these transactions to be updated in real time”. Blockchain’s innate triple-entry bookkeeping (credit, debit and timestamp) will allow this speed and scale required for an effective global trading system.
Blockchain for Climate Foundation’s platform, whilst still in its infancy presents the potential to improve and bring connectivity to the global carbon market.
But how could blockchain and digital payments also be used to create new price signals or marketplaces to accelerate the transition to a low carbon global economy?
Historically, carbon markets have been highly centralized, opaque and in many instances illiquid, resulting in very restricted market participation. The technology behind blockchain has the potential to open up existing and create new carbon markets for a wider range of players, including smaller businesses and individuals. The distributed ledger technology can add more integrity to the system, remove the need for middlemen and allowing more direct and simple channels for purchasing and trading. This ultimately makes it easier for everybody to participate in carbon markets and for new peer-to-peer and business-to-consumer marketplaces to emerge.
Poseidon is a company at the forefront of voluntary carbon markets in the UK, with their blockchain called Stellar. Focused on retail integration and attaching carbon credits to everyday purchases, the company was born out of the realisation that blockchain technology could not only lower the barrier of entry into carbon credit markets but also, for the first time allow carbon credits to be usefully broken down into per transaction or per product quantities. Poseidon CEO Laszlo Giricz explains that “when we realised that on the Stellar blockchain transactions could be done in three seconds and at such a low cost, we realised we were now able to transact in grams of carbon. For the first time carbon credits could be integrated into retail transactions at the point of sale.” As a result consumers can see the carbon impact of a single purchase and be given the opportunity to offset their impact in real time. Giricz has also found that people are constantly amazed at how small this offset cost is, that people are generally very happy to pay it, and that the immediate sense of reward they are given is quite addictive.
Poseidon recently partnered with US ice-cream giant Ben & Jerry’s and the Stellar blockchain network to break down carbon credits into microtransactions that can be attached to every scoop of ice-cream in their London Soho store, allowing Ben & Jerry’s and their customers to see the carbon emissions of purchases at point-of-sale and the opportunity to offset their impact in real time. The project started as a pilot at their London store but was so successful it’s still live four months later and has, to date, already protected over 4,000 trees.
Poseidon have also joined forces with Liverpool City Council with the aim to offset the city’s carbon emissions by 110% by 2020. Giricz explains that;
“Along with the City Council we’re going to be working with a range of companies from across Liverpool – including those in the retail and infrastructure sector, schools, transportation services and garbage collection. The goal is to make the carbon cost of every product or service in Liverpool transparent and to provide the opportunity, through our retail interface, for it to be easily offset.”
There are other blockchain companies like Poseidon emerging in this space but the work is still very nascent. The full potential of blockchain to unlock new markets is yet to be truly unleashed.
The technology behind the blockchain can help bring more trust and scale to existing carbon markets, and this important work is already starting to happen. But perhaps a bigger opportunity remains untapped in harnessing the market creation potential backing cryptocurrencies and blockchain, to expedite the transition to a low carbon world.