Blockchain Technology: Will It Help Improve Global Carbon Markets?

The mighty blockchain technology is not just the bedrock of cryptocurrencies like bitcoin. The technology - in simple terms, a decentralised publicly distributed ledger consisting of blocks which record transactions - is also being seen as an important tool in managing the carbon markets.  

The overwhelming reason being the transparency and safety that the technology provides.    

In fact, a 2019 research paper, ‘Application of Blockchain In Carbon Trading', while noting that many features of the carbon market is similar to blockchain mechanism, reiterated that the technology can make carbon trading “safe and reliable, efficient and convenient, and open and inclusive”.    

“Carbon markets” is the latest buzzword, thanks to the recently-concluded COP26 Summit. After years of negotiations, a deal setting the rules for carbon markets has been reached at the COP26 meeting. The deal, as Reuters notes, will help in "unlocking trillions of dollars" to combat climate change.  

Carbon markets, which aim to eventually reduce greenhouse gases responsible for global warming, allow buying and selling of "credits" that permit an entity (companies or countries) to emit certain amounts of carbon dioxide. In other words, the market allows developing countries like India to sell carbon credits it has earned by switching to less-polluting technologies and rich countries to buy credits to offset their own emissions.  

"There is scope for this (use of blockchain) because blockchain can ensure transparency in transactions. There have been concerns about double counting, which it can address,” says Manjari Chandra, Climate Offset Projects, Portfolio Manager, VNV Advisory Services. Double counting that Chandra refers to is a situation where two countries in a transaction claim the same emission reduction to fulfil their national climate targets.   

“Blockchain technology can also make it easier to track and report emission reductions,” notes Raj Kapoor, Founder, Indian Blockchain Alliance.  

Recently, SDG Exchange, a global exchange for carbon credits, launched a global carbon marketplace which is blockchain-enabled, transparent, third-party verified, and compliant to Article 6 of the 2015 Paris Agreement. All sorts of transactions in the system are in public records via an immutable distributed ledger - records that can remain unchanged. Interestingly, the transactions in the marketplace can be completed through fiat currency, Bitcoin or Ethereum (cryptocurrencies).  

Theoretically, the use of blockchain has many advantages, including the ability to enforce commitments upon entities through “smart contracts”. Yet, the reality is more complex.  

“While blockchain ensures that once-recorded data is tamper-resistant, it can do little to ensure that the data brought onto the blockchain can be trusted,” Kapoor says, adding that powerful countries or companies might be unwilling to participate in a system that makes broken promises transparent.  

Another major issue, flagged by Chandra, is that blockchain technology itself is energy-intensive and thus counterproductive “for a mechanism that is being used for trading in emission reduction units”.  

However, some blockchain platforms like Corda and Fabric are considered energy-sober compared to Ethereum or Bitcoin, largely because the former two validate transactions through a consensus method (digital signatures) and not through mining.