Can blockchain fix carbon credit markets?

CHENNAI: Over 190 nations attended the Conference of Parties of the United Nations Framework Convention on Climate Change recently, where stakeholders are in pursuit of keeping global warming to less than 2 degrees Celsius above pre-industrial levels.

Global initiatives to reduce carbon emissions benefit from the use of economic instruments like carbon markets, both voluntary and compliant, carbon credits, green bonds, and other green assets linked to beneficial environmental impact. But, small and medium-sized businesses from underdeveloped nations can’t access them frequently. The primary causes are exorbitant up-front costs and challenging structure procedures that adhere to international green standards.

However, there are currently a number of restrictions on the voluntary carbon market. Forecasting and describing positive and negative environmental impacts must follow recognised techniques. This data is verified by assurance providers and used for upcoming monitoring and reporting. That is where greenwashing or false environmental claims may take place.

Markets that are voluntary lack transparency. To connect supply from project developers with demand from end users, these markets rely on brokers and retail dealers. Large bundles of credits are purchased by retail traders straight from the source and then sold to end users, usually with a commission.

Centralised databases containing data on clients and their transactions are owned, managed, and controlled by retail traders and brokers.

The carbon markets typically operate under specified rules and carbon-pricing instruments and are organised as centralised silos. Market players find it challenging to evaluate the quality of provided carbon credits, and the ability to link markets across different countries is constrained by the absence of consistent rules and governance. It is also challenging to advocate for carbon markets as the best way to reduce emissions because these systems are associated with high levels of bureaucracy and high operation and maintenance expenses.

Enter Blockchain. This technology is already changing how several industries conduct business, and it undoubtedly has the potential to enhance the efficiency of tracking and certifying carbon credits. Organisations aiming to increase openness surrounding carbon credits, will pivot towards blockchain technologies. In fact, some developers are putting out blockchains particularly to allow multi-party collaboration in this area. These ideas attempt to increase the operational effectiveness of carbon credit trading and to encourage institutions, people, and private organisations to take climate action.

Since carbon credits are represented and traded using tokens, they are encoded on the blockchain thereby enabling security, preventing double spending, and making data transparent and traceable. Through boosting trade efficiency and market regulation and decreasing the costs of carbon credit transactions, carbon credit validation, market entry, and market operation, these qualities will contribute to the improvement of carbon markets.

A small downside - the technology is too complicated for the public to understand, and it frequently necessitates adjustments to established procedures. Also, harnessing a variety of technologies is necessary for the decentralisation of the energy and carbon markets. Blockchain solutions must work in conjunction with AI and the Internet of Things.

To establish infrastructure, offer enabling capabilities, and develop digital literacy, these technological breakthroughs eventually call for large investments. But it is a small price to pay for a better sustainable future.

​(The writer is founder, India Blockchain Alliance)