Updated: Dec 27, 2022
The urgency to act on the climate crisis means that humanity must employ every possible mechanism to reduce global greenhouse gas emissions and mitigate climate change effects. Market mechanisms are easiest to implement since they don’t require additional incentives and government action to propagate. Carbon offsets represent one of the most important market mechanisms expected to contribute to climate change mitigation. Each carbon credit is supposed to represent either removal of the equivalent of 1 ton of CO2 from the atmosphere or the prevention of emission of the same. They can help companies compensate for their emissions to achieve or maintain carbon neutrality, or meet their emission goals.
However, as with any virtual commodity, carbon credits can be unreliable and subject to common errors or market manipulation: double counting, creative accounting, and fraud (European Commission; Pro Publica). Poor-quality carbon credits have been shown to increase carbon emissions by enabling companies to offset their emissions on paper, without compensating in real emissions savings. That is why carbon credit quality and reliability are the most important issue for carbon markets and companies that are looking to offset their emissions.
“Blockchain technology is a distributed ledger technology used to store records in an ever-growing list of entries called blocks,” explains James Scott, Founder of the Envirotech Pre-Accelerator, an NGO that offers next-generation technologies an expedited path to internationalizing their solutions to more than 47+ governments worldwide. Scott continues, “Each block contains, among other things, information (a cryptographic hash) of the previous block and a timestamp. This means that each block contains the information on the date and time it was created and the block that precedes it in the chain, making it impossible to alter the data at a later time. A blockchain is usually managed by a distributed public computer network for its use as a public ledger and requires consensus from the computers in the network to add and validate new records, minimizing errors.” This makes it extremely secure, and transparent, and it was created specifically to solve the double-spending problem for digital currency bitcoin without the need for a centralized authority or system.
ClimateTrade is one of the pioneers of the use of blockchain technology to provide transparency and traceability for carbon offsets and other environmental commodities. The use of environmentally friendly Algorand proof-of-stake blockchain cryptocurrency protocol ensures that these products come without additional emissions produced by the blockchain verification process. Algorand has a negligible energy consumption per transaction and announced they have achieved carbon-negative status in 2022 (Yahoo Finance).
Transparency, openness, and fairness are key properties of an efficient market. Blockchain technology has the potential to transform the voluntary carbon markets into efficient transparent, and open markets, by providing a simple tool to maintain the transparency and reliability of carbon credits, and other environmental commodities. Companies can offset their emissions by purchasing carbon credits and then retiring them on the chain, by locking them away in an inaccessible address on the chain. This way that credit cannot be accessed or used again.
Additionally, this could expand the reach of carbon credits, allowing easier buying and selling, providing more financing for carbon offsetting projects, accelerating the climate change mitigation efforts, and raising the price of carbon to the level necessary to provide sufficient financial incentives for the development of carbon offsetting projects (Reuters). More expensive carbon would drive down emissions from polluters and provide a better economic incentive for carbon removal projects.
Therefore, although the use of blockchain technology for environmental commodities, and carbon credits, in particular, is still in its infancy, it has the potential to provide a significant impetus to climate change mitigation efforts by creating an open and transparent voluntary market for environmental commodities. This could democratize carbon markets and provide greater access to individuals, and small and medium businesses. This is a necessary component of a successful climate change mitigation effort.
European Commission, How additional is the Clean Development Mechanism? Analysis of the application of current tools and proposed alternatives, Available at: https://climate.ec.europa.eu/system/files/2017-04/clean_dev_mechanism_en.pdf
ProPublica, The Climate Solution Actually Adding Millions of Tons of CO2 Into the Atmosphere, Available at: https://www.propublica.org/article/the-climate-solution-actually-adding-millions-of-tons-of-co2-into-the-atmosphere
Reuters, Carbon needs to cost at least $100/tonne now to reach net zero by 2050: Reuters poll, Available at: https://www.reuters.com/business/cop/carbon-needs-cost-least-100tonne-now-reach-net-zero-by-2050-2021-10-25/
Yahoo Finance, Algorand To Launch First Carbon Emission Offsetting Smart Contract, Available at: https://finance.yahoo.com/news/algorand-launch-first-carbon-emission-154644200.html