Blockchain Technology: Will It Help Improve Global Carbon Markets?

Powerful blockchain technology isn’t just the foundation for cryptocurrencies like bitcoin. Technology – in simple terms, a decentralized publicly distributed ledger made up of blocks that record transactions – is also seen as an important tool in managing carbon markets.

The main reason being the transparency and security that technology offers.

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

“Carbon markets” is the latest buzzword, thanks to the recently concluded COP26 summit. After years of negotiations, an agreement setting the rules for carbon markets was reached at COP26. The deal, as Reuters notes, will help “unlock billions of dollars” to fight climate change.

Carbon markets, which ultimately aim to reduce the greenhouse gases responsible for global warming, make it possible to buy and sell “credits” which allow an entity (companies or country) to emit certain quantities of dioxide. of carbon. In other words, the market allows developing countries like India to sell carbon credits they have earned by switching to cleaner technologies and rich countries to buy credits to offset their own emissions.

“There is room for that (the use of blockchain) because blockchain can provide transparency in transactions. There have been concerns about double counting, which she may address, “says Manjari Chandra, Climate Offset Projects, Portfolio Manager, VNV Advisory Services. To which Chandra refers is a situation where two countries in a transaction claim the same reduction emissions to meet their national climate targets.

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

Recently, SDG Exchange, a global carbon credit exchange, launched a global blockchain-enabled, transparent, third-party verified, and Article 6 of the 2015 Paris Agreement-compliant carbon market. All kinds of transactions in the system are recorded in a public archive via an immutable distributed ledger – records which may remain unchanged. Interestingly, market transactions can be done through fiat currency, Bitcoin, or Ethereum (cryptocurrencies).

Theoretically, the use of blockchain has many advantages, including the possibility of enforcing the commitments of entities through “smart contracts”. However, the reality is more complex.

“While the blockchain ensures that the data once recorded is tamper-proof, there is little it can do to ensure that the data transferred to the blockchain can be trusted,” Kapoor said, adding that powerful countries or companies could not wanting to participate in a system that makes broken promises transparent.

Another major problem, pointed out by Chandra, is that blockchain technology itself is energy intensive and therefore counterproductive “to a mechanism that is used to trade emission reduction units.”

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

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