Will blockchain fix the carbon credit market?

Growing up, a passion for problem-solving helped me obtain a master’s degree in engineering and fostered my desire in learning new things. Two topics that in recent years have grabbed my attention are blockchain and sustainability policies — particularly in the area of carbon credits. Both blockchain and carbon credits are complex subjects and when you combine them the difficulty squares. 

How Does the Carbon Market Work?

For most organisations, reducing emissions is challenging and preventing any carbon emissions is currently impossible. Buying carbon credits compensates for the unavoidable emissions that these organisations create. Carbon credits can be earned by financing projects that reduce or absorb carbon emissions anywhere around the world.

This happens through a voluntary market. There is also an involuntary market or “compliance market” where governments set limits for the quantity of emissions that each industry sector can create. If a company goes beyond the defined limits, it must purchase credits from virtuous companies. This mechanism goes by the name of Cap and Trade.

What Are the Limitations of the Voluntary Carbon Market?

Right now, several limitations exist within the voluntary carbon market.

The voluntary markets lack transparency. These markets rely on brokers and retail traders to link supply from project developers and demand from end-users. Retail traders purchase large amounts of credits directly from the supplier and sell those bundles to the end buyers, typically with some commission. Most of the transactions are currently happening in private conversations.

Retail traders and brokers own, administrate and control centralised databases with information on clients and their transactions. The administrator decides who can access the data and who can modify it, being responsible for the data’s security and integrity. The current system restricts the disclosure of information to the public. Information is only available to the market participants.

Additionally, the carbon markets are usually structured as centralised silos and operate specific standards and carbon-pricing instruments. The lack of unified standards and governance makes it difficult for market participants to check the quality of given carbon credit and limit the possibility to connect markets in different jurisdictions.

Finally, these structures are associated with high levels of bureaucracy and elevated operation and maintenance costs, making it difficult to promote carbon markets as an optimal solution for emission reduction.

What Does Blockchain Offer?

Gartner defines blockchain as a distributed, write-only ledger that records transactions between participants. It is designed to record transactions or digital interactions and bring much-needed transparency, efficiency and added security. This technology has already started to revolutionise ways of doing business across different areas and surely has the potential to improve the effectiveness of tracking and certifying carbon credits.

Public and private organisations and individuals looking to enhance transparency around carbon credits will most likely engage with blockchain solutions in the future if they have not already. In fact, a few developers are introducing blockchains specifically to support multiparty collaboration in this field. These solutions aim to improve the operational efficiency of carbon-credit trading and to stimulate climate actions from institutions, individuals and private organisations.

Tokens are used to represent and exchange carbon credits, meaning that carbon credits have been coded in the blockchain. The intrinsic properties of blockchain technology make data transparent and traceable, provide security and avoid double-spending. These properties will help improve carbon markets by increasing trading efficiency and market regulation and reducing the costs of carbon credit validation, carbon credit transactions, market-entry and market operation.

Closing thoughts

Blockchain does have a great potential in optimising the delivery of energy projects — and, more generally, supply chain initiatives — by offering end-to-end traceability, security and coordination. However, all that glitters is not gold. The technology is too complex to be easily understood by the public and it often requires changes to traditional processes, changes which may be hard to justify and implement. Additionally, the decentralisation of energy and carbon markets requires harnessing a combination of various technologies, where blockchain solutions must integrate with artificial intelligence and the Internet of Things. These technological advancements eventually require substantial investments to develop digital literacy, build infrastructures and introduce enabling capabilities.

Supply chain professionals must start exploring and experimenting with these new technologies, review their current ways of working, invest time to expand their knowledge and eventually find the courage to launch dedicated pilots. No one says this is going to be easy, however, blockchain surely is an innovative trend that cannot be overlooked.