Will Blockchain Technology Aid the Global Carbon Markets?

A Brief Summary

Carbon markets are the latest buzzword, thanks to COP26 meeting. Carbon markets allow buying and selling of "credits" that permit an entity (companies or countries) to emit certain amounts of carbon dioxide. The deal will help in unlocking "trillions of dollars" to combat climate change. Blockchain technology can address issues of "double counting", says Manjari Chandra, Climate Offset Projects, Portfolio Manager, VNV Advisory Services.

SDG Exchange, a global exchange for carbon credits, launched a carbon marketplace which is blockchain-enabled, transparent and third-party verified.

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The powerful blockchain technology underpins more than just cryptocurrencies like bitcoin. The technology, which is essentially a decentralised publicly distributed ledger made up of blocks that record transactions, is also being viewed as a key tool in the management of carbon markets.

The overwhelming reason is that technology brings transparency and safety.

While many elements of the carbon market are comparable to the blockchain mechanism, a 2019 research paper titled "Application of Blockchain In Carbon Trading" stated that the technology can make carbon trading "secure and dependable, efficient and convenient, and open and inclusive."

Thanks to the just finished COP26 Summit, "carbon markets" has become the latest buzzword. At the COP26 meeting, a deal outlining the regulations for carbon markets was struck after years of discussions. The agreement will aid in "unlocking trillions of funds" to address climate change.

Carbon markets allow the buying and selling of "credits" that allow an entity (businesses or governments) to release specific amounts of carbon dioxide, with the goal of gradually reducing greenhouse gases that cause global warming. To put it another way, the market permits developing countries like India to sell carbon credits that they have earned by switching to less-polluting technologies, while affluent countries can buy credits to offset their own emissions.

"This (usage of blockchain) has potential since blockchain can provide transaction transparency." "There have been issues about duplicate counting, which it can address," says Manjari Chandra, VNV Advisory Services' Climate Offset Projects Portfolio Manager. Chandra is referring to a circumstance in which two countries in a transaction claim the same reduction in emissions to meet their respective climate targets.

"Blockchain technology can also make tracking and reporting carbon reductions easier," says Raj Kapoor, founder of the Indian Blockchain Alliance.

SDG Exchange, a worldwide carbon credit exchange, recently announced the introduction of a global carbon marketplace that is blockchain-enabled, transparent, third-party verified, and consistent with Article 6 of the 2015 Paris Agreement. Through an immutable distributed ledger, all kinds of transactions in the system are recorded in public records that can't be modified. Surprisingly, the marketplace's transactions can be performed using fiat currency, Bitcoin, or Ethereum (cryptocurrencies).

The usage of blockchain provides a number of theoretical benefits, including the potential to enforce commitments on businesses via "smart contracts." The reality, however, is more complicated.

"While blockchain assures that data once recorded is tamper-resistant, it can do little to ensure that data transferred onto the blockchain can be trusted," Kapoor writes, adding that powerful countries or organisations may be hesitant to participate in a system that makes failed commitments apparent.

Another key concern, as Chandra points out, is that blockchain technology is energy-intensive, making it ineffective "for a system that is used for trade in emission reduction units."

However, as compared to Ethereum or Bitcoin, some blockchain platforms such as Corda and Fabric are deemed energy-efficient, owing to the fact that the former two confirm transactions using a consensus process (digital signatures) rather than mining.