Building the potential of blockchain in voluntary carbon markets
The world continues to depend on fossil fuels and emit greenhouse gases at a rate not aligned with meeting the Paris Agreement temperature targets. Given this stark reality, is a bigger role for voluntary carbon markets needed as one mechanism to put economies on the path to net zero, asks Karlygash Kuralbayeva, and how might blockchain create potential in this space?
When the energy crisis first hit the global economy last year, it complicated the shift away from fossil fuels. Demand for oil, coal and natural gas had skyrocketed around the world due to energy shortages and the economic recovery from the COVID-19 pandemic. In Europe, coal use rose 18% in 2021, the first increase in almost a decade. Agreement was reached at COP26 in Glasgow on reducing fossil fuel production, but only after fierce discussion about whether coal should be phased ‘down’ or phased ‘out’. More recently, a surge in petrol prices and a global energy supply crunch have further shaped the conversation by softening the tone on oil and gas production, especially in the United States.
The transition to net-zero is looking increasingly challenging
The stark reality is that fossil fuels still accounted for about 80% of total energy consumed in 2020. Global electricity demand was expected to grow by about 5% in 2021 and 4% this year, after falling by 1% in 2020, according to the International Energy Agency’s report published in July 2021. Unfortunately, this growing demand is not being filled by green energy despite the unprecedented growth in both the scale and speed of deployment of those sources in the last two decades. The share of renewable energy in the global energy mix increased by just 1.1% between 2000 and 2010, and by 3.5% between 2010 and 2020, but only in 2019 and 2020 did its growth outpace the rest of the electricity sector.
Government officials and policymakers need to focus on how to achieve climate change objectives while at the same time maintaining viable energy supply and affordable energy access. The answer is to massively step up investment in clean energy, including renewables and energy efficiency. There are, however, political and often technical constraints to doing so quickly. Therefore, if the world economy continues to emit too much in regions that could be decarbonising more quickly, we will need a greater emphasis on carbon dioxide removals, as well as faster reductions in other regions. One way to facilitate and finance those activities is through voluntary carbon markets (VCMs).
Current issues with voluntary carbon markets
In VCMs investment into projects and purchases of carbon offsets occur on a voluntary basis, as the name suggests. VCMs thus operate outside governmental regulatory schemes, which naturally raises concerns about the validity and the quality of carbon credits sold. A carbon offset is essentially a certificate, which is reviewed by experts and contains information about how emissions will be offset. For such a credit to be credible a lot of information needs to be put on that certificate and that information needs to be transparent to all market participants, especially buyers. Currently, offsets are legitimised by accredited independent third-party bodies, while carbon credit registries record the carbon offset’s retail chain to track the existence of the credits.
Existing technical issues associated with recognising carbon credits, in combination with issues pertaining to forestry – such as permanence, verifiability, additionality and leakage – explain why forestry projects have played a larger role in voluntary than in compliance markets, despite their recognised importance in global climate mitigation. In other words, the emissions reduced, avoided or sequestered via forestry activity must happen beyond what would have been under a business-as-usual scenario (additional), to be verifiable (real and measurable) and permanent (expected to generate offsets for decades). Forestry projects, especially those which sequester carbon by curbing deforestation, could shift logging to another, less regulated location, presenting a risk of leakage. New technologies, notably blockchain, however, have started entering the forestry space, and could address some of these issues.
A growing role for blockchain?
Blockchain has the potential to improve verifiability and reduce transaction costs, and to a lesser degree address the additionality and permanence concerns of forestry projects.
Currently, existing blockchain-based projects seem to operate outside of existing VCM actors in the sense that even though they offer carbon credits, it is unclear if there are any formal procedures and what third-party bodies are legitimising those carbon credits for use against net-zero targets. The accreditation and verification of those credits, however, should be easier than with traditional ones, given the nature of blockchain-based projects. Technically, though, another innovation could be required to facilitate the ‘linking’ of carbon markets to seamlessly transmit value across different blockchain platforms. ‘Traditional’ blockchain solutions already have this ability built into their design, allowing multiple blockchains to be connected.
Existing blockchain-based projects vary in scale and objectives, with some offering carbon offsets, while others focus more on ecosystem restoration. For instance, blockchain-based platform Veritree offers various projects with different impacts on climate change, from Nepal (habitat and soil restoration) to Madagascar (carbon sequestration with mangrove trees) and Indonesia (carbon sequestration and coastal erosion). Veritree is partnering with Samsung and Cardano. Another example is a massive reforestation programme, Treecycle, which has the aim of planting 10 million trees on fallow land in Paraguay. Treecycle sells tokens, ‘TREE’, tied to actual trees, built on a proof-of-stake blockchain. It is not currently offering offsets but is monitoring the evolution of the market and may adjust its business model. And since its launch in October 2021, KlimaDAO has already bought 17.3 million carbon credits, which is equivalent to 86,115 hectares of forest.
Blockchain complements REDD+ projects, too
Not only do blockchain projects pay farmers to plant trees and enhance other ecosystem services, but the technology also has a wide range of further applications, among them the integration of renewable energy into grids as well as promoting regenerative agriculture.
The use of tokens for trees by farmers in developing countries can empower local communities and unlock their ability to own, store and transmit value across the internet. It is open to anyone with an internet connection and without the inefficiencies and centralised control of traditional middlemen. Many local communities have the capacity to utilise this new technology as many of them already have been using GPS software, tablets and smartphones to map customary lands and resources within REDD+ projects. And this is occurring within a larger trend of increased adoption of mobile phones, a surge in digital payments and the emergence of blockchain-based remittance infrastructure in developing countries. While many blockchain-based projects and products were originally driven largely by hype and speculation, it is hard to ignore the future implications of such a technology and in particular in the forestry space.
Governmental support would help keep options open
Overall, the drive to net-zero by corporations has increasingly brought attention to VCMs. Voluntary corporate action is complementary to strong green policy, as VCMs are going for a decentralised and collaborative approach to addressing the existing shortcomings and inefficiencies in the existing state of voluntary markets. Ideally, we would see governments giving their support to catalyse and deploy the same technologies that VCMs are investing in. That would help us keep our options open and stall the damage from political inertia on climate action.
The author would like to thank Rob Macquarie for his comments on an earlier draft of this commentary. The views in this commentary are those of the author and do not necessarily represent those of the Grantham Research Institute.