Blockchain? Is it the Right Solution for the Climate Crisis?
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A description and justification of the macroeconomic approach and technologies Changeblock is using to mitigate climate change.
Solving the Net-Zero Problem with DeFi & Data
A global effort.
Considering any emissions trading activity as a subset of the global effort to grow the climate markets and in doing so mitigate global warming, this global effort is represented in two international institutions:
· The Kyoto Protocol (top-down)
· The Paris Agreement (bottom-up)
These are two international, cooperative, and where appropriate legally binding agreements that together seek to reduce emissions.
The Kyoto protocol splits the world into the developed and developing worlds. Developed nations are required to provide quantified emissions reductions relative to 1990, whilst developing nations can optionally have specific emissions reduction targets, peak emissions or renewable energy targets and can participate via the trading functions[1].
The Paris agreement can be considered as the global bottom-up effort to mitigate global warming and limit the global temperature increase to 1.5 degrees C above pre-industrial levels. Participants have targets called Nationally Determined Contributions (NDCs) which have to be renewed at least every 5 years and become increasingly ambitious. As a hybrid initiative, grass-roots effort, it encourages information and synergisms between the various mitigation activities and presents open and objective accountability as well as verification frameworks.
Synergising the hybrid structure of the Paris Agreement with Kyoto enables the planet to unify its climate mitigation progress and goals. Effectively interlinking people, processes and machines, globally, is a huge challenge, but in order for the collective efforts of the climate markets to deliver on global warming mitigation, frictionless, trustworthy and transparent information and capital need to flow freely across markets, borders and barriers. A bridge is needed to connect and maintain integrity across the climate markets, including Over the Counter, Voluntary, Compliance, Primary, Secondary, quota- and credit-based. This bridge additionally needs to facilitate the influx of new liquidity and compatibility with new smart contract-based derivative markets. Changeblock aims to leverage blockchain[2], deep learning and decentralised finance to provide trust, liquidity, value, and transparency to the emissions markets and its users.
Two information flows to mitigate Global Warming
We have identified two key objective ‘flows’[3] that exist within the climate markets, Data and Finance (money)
1. Data
Environmental assets exist as data packets, and the process that compiles this data is known as ‘MRV’, and it facilitates the digitisation, automation and security of measuring, reporting and verification (MRV) of climate data.
The Paris Agreement provides an enhanced, global, transparency framework for all countries to contribute to mitigating climate impact and has a two-step verification process[4]
Figure 1 — Data flows facilitating global climate mitigation, the nodes for implementing the Paris agreement can also be seen as databases, sharing of data on actions, emissions, targets, transactions, payments, ownership and sustainable development benefits [5]
The nodes in figure 1 create considerable information flows for which the use of DLT (Distributed Ledger Technology)/ Blockchain and other innovative technology including IoT (Internet of Things), big data and deep learning could be useful.
-Data Collection: Technology can reduce the time and cost of collection as-well as improve accuracy being stored and properly secured on a blockchain
- Impact Quantification & Reporting: Reductions are usually calculated based on a number of variables/ parameters including usage rates, efficiency ratios and leakage. Reductions can be considered as JavaScript objects with defined variables/ attributes/ Blockchain-based smart contracts as-well as cloud-based applications linked to Data/ IoT and Edge computed data, which could enhance the impact quantification process
- Verification: smart contracts allow for encoding of methodologies and processes for verifying the data collected, they also assure its integrity and accuracy. Deep Learning can additionally be leveraged to inform verification by comparing data with results obtained from other, similar activities to detect potential anomalies and irregularities.
Significantly improved data management enhances trust and transparency.
2. Finance
The Paris Agreement calls for a significant increase in financial flows from developed countries to developing countries to help them achieve their climate goals. Private sector finance is also vital in the implementation of the Agreement.
Additionally, we will need to see stronger cooperation on technology development and transfer to implement mitigation and adaptation actions, including clean energy technologies.
Blockchain can support global warming mitigation with regards to finance and clean energy in various ways, including[6]:
1. Clean Energy Prosumers: Blockchain systems are the backbone of new decentralised markets for clean energy where individual “prosumers” are empowered to produce and store their own renewable energy and trade with their neighbors.
2. Access to Climate Finance: Blockchain technology combined with new fingerprint, iris or face recognition technology could allow individuals who lack identity documents or bank accounts to access climate finance in the form of micro credits or micro insurances and subsidy schemes of payments for mitigation or adaptation actions.
3. Result-based Payment Schemes: Using smart contracts for automated issuance, transfer and payment of climate outcomes can facilitate access to results-based finance schemes, particularly for the private sector in weaker regulatory frameworks.
4. Transparency on Financial Flows: Blockchain and other innovative technologies could help with data collection and securely and transparently store information pertaining to financial flows. This could be of particular interest due to the various origins of financial flows, including those from private actors. It could also help to accurately track financial pledges at both domestic and international levels.
Figure 2 — Climate Market Financial Flows adapted from Schalatek 2017
Key: ODA = Official Development Assistance, MDBs = Multilateral Development Banks, UN = United Nations, UNFCCC = United Nations Framework Convention on Climate Change, GCF = Green Climate Fund
Assessing the problems.
Effective solving of problems requires knowledge as to what they are…
Equity? Economic Efficiency? Meeting Goals?
The use of Markets to address climate change was built into the UN Framework Convention on Change and the Kyoto Protocol. Building upon these institutions the Paris agreement embraces further trading mechanisms. All the while the development of international GHG credit or allowance trading is evolving, with various national or regional trading programs being introduced.
The issues/ problems that encompass the GHG markets deal with the fact that while it is true that air credit and allowance trading have saved billions of dollars and will save trillions in the future to meet GHG mitigations goals, it is hobbled.
Perceived impediments may slow, or indeed retard continued diffusion and the reaping of trillions of dollars of savings or missing attainment of climate change mitigation goals.
Article 6 trading alone has the potential to reduce the total cost of implementing National Determined contributions by more than 250bn USD a year by 2030.
Changeblock has identified three, high-level, problems with the emissions markets.
1. User Experience: There is minimal User Experience and Point of Sale access. Almost all prospective market players are not able to easily access the market.
2. Lack of Trust: There is damaged market trust due to poor supply chain provenance; inconsistent regulation and insufficient verification in OTC markets. This has resulted in no secondary market and impeded market growth.
3. Complexity: Emissions markets are highly complex, inconsistent and confusing, resulting in poor buyer confidence and trust
These higher-level problems can be focused into market-specific issues. Notably in order to unleash the true value and environmental benefits derived from trading, we need Article 6 to be finalised, voluntary GHG trading to become standardised, for markets to be integrated and these markets to become widely accessible to more buyers and sellers without impediments.
Problem: What am I buying?
There are two general types of GHG credit: compliance and voluntary, there is some limited overlap between the two.
Compliance credits can have value, but for small or medium-sized buyers, finding these credits and understanding their value is generally beyond their skill set.
Voluntary purchasing is even more challenging due to its OTC nature. It is incredibly difficult to know the history, provenance and legitimacy of what you are buying, or indeed what liabilities you may have purchased.
Blockchain would allow subsequent owners to know who did what and when as well as who has the liability if there is no environmental or regulatory integrity.
Problem: Transaction Costs
Transaction costs can be measured either in money (dollars spent) or in time (indeed hassle, distraction, and confusion).
Distributed Ledger Technology (DLT) eliminates the need for trusted third parties, including intermediaries such as banks or agents. The approvals and processes performed by these traditional players are replaceable with smart contracts.
‘We at Itransition have seen how this reduces the cost and complexity of transacting’
While most people still maintain fiat accounts, there is a move to using crypto for peer-to-peer payments, especially for cross-border payments, where the costs of money transfers and the time it takes, disadvantage both the sender and the recipient. Acceptance of the major cryptocurrencies by traditional retailers is also growing [7].
What are the benefits associated with Smart Contracts?
Speed, efficiency, and accuracy
Once a condition is met, the contract is executed immediately. Because smart contracts are digital and automated, there is no paperwork to process, and no time spent reconciling errors that often result from manually filling in documents.
Trust and transparency
Because there is no third party involved, and because encrypted records of transactions are shared across participants, there’s no need to question whether information has been altered for personal benefit.
Security
Blockchain transaction records are encrypted, which makes them very hard to hack. Moreover, because each record is connected to the previous and subsequent records on a distributed ledger, hackers would have to alter the entire chain to change a single record.
Savings
Smart contracts remove the need for intermediaries to handle transactions and, by extension, their associated time delays and fees. [8]
All of the above cited benefits are highly applicable to the problems Changeblock is addressing in the Climate Markets.
Problem: Access for Developers
As a project developer in the developing world, access to investors and finance is difficult. Especially when identifying small investors for ‘green’ GHG-limiting projects, there are unfathomable complexities in intermediaries and a time shortage to read and respond to all inquiries.
Blockchain and Defi, by extension Changeblock, can offer much wider access to investments and capital for project developers impeded by a lack of developed financial infrastructure.
What do participants want and how can blockchain help?
Is Blockchain the right solution?
DLT and blockchain technologies are being explored in various sectors, including climate action projects. Blockchain offers cryptographic features (integrity, authenticity and non-repudiation) and immutability due to hash functions and digital signatures. As a distributed technology, it offers decentralisation and transparency at different levels depending on the chosen solution.
Blockchain technology could help implement the Paris Agreement’s requirements since it enables different geographically distant parties to cooperatively maintain a ledger of data updated by transactions instantiated by the various and different nodes of the system. The ledger state needs to be stored and shared worldwide, and nodes need to update the ledgers independently.
The decision to use blockchain, or not, and the nature of the adopted solution depends on the system’s level of transparency (verifiability) and is related to the level of trust between the actors that will characterise the system. It is the desired trust level in the different actors that will determine the choice of technology.
Whenever a system requires public verifiability, letting anyone in the public community observe the system’s state and verify its correctness is an open permissioned blockchain would be appropriate. If verification procedures must be kept private, the choice between a fully-permissioned blockchain and a centralised solution will depend on the nature of the verifying nodes (distributed on centralised). Adopting a permissioned chain rather than a centralised Database will be determined by trade-offs regarding system efficiency (throughput) and benefits offered by blockchain.
The decision tree below highlights the steps that can be to determine if blockchain is necessary. The first stage is reading top to bottom and answers the question “when to use blockchain as a technology”. Having decided to use blockchain (or not), the chart can be read from bottom to top to identify the decision steps for the participation mode focusing on two concepts System of Records (SOR) and platform (a digital System of Engagement)[9].
Table 2 — Existing examples of market stakeholders voluntarily implementing blockchain solutions to realise global warming mitigation goals
A special thanks to Billy Richards & John Palmisano for writing this article. This piece was written as an illumination of the background conditions that helped to form the Changeblock platform.
Appendix 1
Since even Article 6 trading alone has the potential to reduce the total cost of implementing nationally determined contributions (NDCs) by more than half (~$250 billion/year in 2030), we should seek more environmentally friendly trading activity. See this table from When Is Blockchain Worth It? A Case Study of Carbon Trading, (https://www.mdpi.com/1996-1073/13/8/1980)
From the World Bank:
Carbon Pricing, an instrument that reduces GHG emissions, also drives technological innovation necessary to mitigate climate change and foster low carbon development. Market based carbon pricing instruments, such as emissions trading schemes, often face challenges around data collection, transparency processing and analysis that make conducting transaction across different systems quite complex. Adoption of Blockchain, Big Data, Internet of Things (IoT) and other Disruptive Technologies holds the promise of addressing the needs of new generation climate-markets to develop, manage and harmonize information of GHG mitigation actions across multiple industry sectors and governmental jurisdictions. It also provides data sharing with transaction management elements well aligned with the requirements of the post 2020 climate markets.
https://olc.worldbank.org/content/blockchain-and-climate-markets-1
And again, from the World Bank:
The Paris Agreement recognizes that Parties may engage in climate markets through decentralized, bilateral cooperative approaches to achieve their nationally determined contributions (NDCs). However, climate markets trade different units, have differences in governance rules, and operate under different technological systems. The differences in these processes constrain market integration and add to the complexity of conducting transactions. Under the Paris Agreement, which relies on a decentralized approach to markets, climate negotiators are still determining whether a centralized infrastructure, such as the International Transaction Log under the Kyoto Protocol, should continue to facilitate communication between registries. Consistent with the bottom-up ethos of the Paris Agreement, the World Bank simulated a Climate Warehouse meta-registry to demonstrate the potential of a decentralized IT approach to link registry systems.
In “Re-engineering the carbon supply chain with blockchain technology,” Infosys write:
In current emission accounting systems, there are various manual steps and bottlenecks related to the MRV and distribution of data that could be automated through blockchain and smart contracts, to reduce transaction and administrative costs. The interconnection of blockchain and other emerging technologies might create innovative data collection approaches to support the Third Party Verifiers (i.e., the Article 6 technical review team). Emerging technologies, like the internet of things (IoT), artificial intelligence (AI), mobile and web applications can enhance MRV by automating data capture from source (e.g., IoT sensors like smart meters or remotely (e.g., remote sensing technologies, LIDAR, RADAR or even drone capture), and enhance datasets (through AI or machine learning for data verification to identify data errors or fraudulent behaviours.
https://www.infosys.com/oracle/white-papers/documents/carbon-supply-chain-blockchain-technology.pdf
Data capture first, data retention second, and data documentation to justify attestation third, all supported by blockchain.
So above, we read why blockchain improves GHG markets.
Look at the decision from another perspective, what are the criteria to determine if your solution merits a blockchain application (See the requirements from one consulting firm: https://www.itransition.com/blog/blockchain-implementation-guide)
[1] This added heterogeneity complacites progress measurement
[2] It is widely accepted that novel technologies, including blockchain, can act as sources of trust enabling a more effective global effort. https://unfccc.int/news/how-blockchain-technology-could-boost-climate-action
[3] There is a third, ‘value’ but arguably it is subjective
[4] Paris Agreement, Article 13.11 and 13.12
[5] Adapted from CLI 2018
[6] CLI 2018
[7] https://www.finextra.com/blogposting/19770/6-use-cases-for-smart-contracts-in-decentralized-finance
[8] https://www.ibm.com/topics/smart-contracts
[9] https://tulip.co/blog/system-of-record-vs-system-of-engagement/
[11] https://openkfw.github.io/trubudget-website/
