The financial wealth accumulated by speculative investment in Bitcoin and other over-hyped crypto-currencies may well be short-lived. Commentators cry asset bubble, comparisons are made to the tulip mania boom in the 17th century and Nobel Prize-winning economist Robert J Shiller recently compared the Bitcoin price to a thermometer measuring the intensity of the epidemic.
But we need to separate the usefulness of the underlying digital architecture that Bitcoin is built upon – blockchain – from the frenzy that currently surrounds this dash for cash. A block is a record of new transactions and once each block is complete it is added to a chain of blocks: the blockchain.
Blockchain is a foundational digital technology that has the potential to be truly transformational. It can be applied in a number of ways in the energy and environment sector, from peer to peer trading of wind and solar power generating systems connected as micro-grids to supply chain traceability and efficient emissions trading. Incorporating the execution of smart contracts into these systems has the potential to offer lower transactional costs and scaleability. As contracts are executed automatically when certain pre-conditions are met, this reduces the need for human involvement.
There are already a number of organisations moving in to this space. For example, an Australian start-up called Power Ledger is developing a peer-to-peer renewable energy trading platform, using blockchain, which enables consumers to buy, sell, or exchange excess renewable electricity directly with each other. IBM and Energy Blockchain Labs are already working together to develop a blockchain marketplace for trading carbon assets and Arc-net tracks food products through the supply chains for food and drink producers.
Applying blockchain technology to emissions trading schemes (ETS) is one side of the carbon pricing coin, the other being carbon taxes – preferably with border carbon adjustment (BCA). For both carbon pricing mechanisms to work, there must be trust, transparency and traceability in data collection and governance structures, and this is where blockchain has potential.
Complexities of administering carbon pricing schemes
From an operational point of view, establishing an ETS or a carbon tax with BCA requires monitoring and accounting infrastructure in order to distribute the cost of GHG emissions fairly, as well as knowledge of the carbon intensity of power and embedded carbon of products that are traded across borders.
Power traded through interconnectors is a logical place to begin, especially given the UK is striving for greater interconnectivity for reasons set out in Policy Exchange’s ‘Getting Interconnected: How can interconnectors compete to help lower bills and cut carbon?’. Despite this increasing share of imported electricity, it is treated as zero carbon when calculating national emissions inventories and carbon taxes do not apply. This is not a valid route to decarbonisation and this exporting of emissions underpins arguments for a BCA.
Determining embedded carbon – the name often given to the emissions associated with the production of a product – can be a challenge because of complex supply chains. Achieving greater emissions granularity across both traded power and product dimensions will be necessary to increase the efficacy of carbon pricing policies.
Once emissions have been quantified, some form of publicly auditable record of CO2 emissions attributed to every user and component of the supply chain must be made available, which raises confidentiality issues. The effectiveness of a carbon tax with a BCA arrangement, ETS or networking of carbon markets is contingent upon building trust and transparency in the process and accountability of relevant institutions and governance frameworks. To some extent the ETS and businesses have failed in this regard.
Part of the problem with the EU ETS is the centralised way in which it is administered, making it inherently difficult to depoliticise and independently manage key issues such as the surplus of permits. Moreover, emissions are measured in a variety of ways and the devices can be subject to manipulation as the Volkswagen emissions scandal illustrates. This exposed how self reporting in the automotive sector failed and how emissions reporting can be an avenue of misrepresentation. Consequently, this created a loss of trust in existing structures of governance. Therefore, the accuracy and reliability of transaction record-keeping and accounting will be paramount to the success of global ETS and networked carbon markets aiming to achieve a more globally uniform carbon price.
Improving governance with blockchain
Research suggests some form of blockchain usage might help to overcome these barriers. It is constructed by a fundamentally different architecture to existing systems of governance. Rather than relying on a centralised network, blockchain technology is based on mutual distributed networks.
Online ledgers, referred to as the blockchain, contain information that is identically distributed across networks of computers. It is precisely this architecture that could improve governance as it avoids the current monopolistic controls over the centralised or decentralised networks which are currently exerted by old mainstream bureaucratic institutions like political parties, banks and local governments. Instead, any changes have to be agreed by consensus as the distributed file system means multiple participants keep copies of files.
All transactions are recorded and the system is constantly reconciling itself which means that it is almost impossible to corrupt transactions: if anyone tried to change the record of a transaction, the entire system would be out of balance and immediately identify the inconsistency.
Evidently this can help issues of governance. But how can it be applied to better track and report greenhouse gas emissions?
Emissions traceability with blockchain
Blockchain enables greater levels of traceability throughout a product lifecycle. This could be particularly helpful when establishing levels of embedded carbon within traded goods such as cars and steel. A number of companies are already attempting to create blockchain-based protocol to track resources and materials. During the manufacturing stage of products, data can be automatically generated by sensors to record the environmental impacts of certain processes to include how much energy, water or raw materials are used. This information can be digitalised so that overall embedded emissions can be recorded in the blockchain.
That said, lots of sensors are needed to collect, analyse and report on emissions, and any errors will be costly in brand, tax and penalties as the Volkswagen emissions scandal demonstrated.
Blockchain can be used protect device integrity
For example, the devices used to measure emissions can check that their internal configurations are correct by attempting to write a message about the state of its configuration to a device integrity blockchain application. The blockchain can accept the message if the configuration matches the configuration of other true measurement devices. A device that has been altered would find its message would not be accepted by the blockchain. A message could then be sent to company management to alert them to possible device manipulation.
Blockchain can minimise data manipulation
Devices can record the actual measured emissions by taking down parameters such as volume, location, type, source, date stamp. This would be logged to an emission blockchain application that is visible and transparent. Once this happens, the emission data can no longer be tampered with, adjusted or deleted for the reasons outlined above.
Wider application
Given that the technology can offer greater transparency and help to better track and report emissions more accurately, it has other applications. For example, it can be applied to the problem of emissions double counting – a key policy concern of Parties to the United Nations Framework Convention on Climate Change (UNFCCC).
The UNFCCC has recognised this and following the climate change agreement made in Paris, the Climate Ledger Initiative was established between the UNFCCC Secretariat, the World Bank Group and the Massachusetts Institute of Technology. It looks at opportunities to overcome areas where scepticism is high, such as transferring mitigation options in Article 6 of the Paris Agreement, which was established to foster international cooperation between parties when implementing their nationally determined contributions.
Blockchain technology is not a panacea to all global problems but its application certainly has huge potential and therefore warrants further exploration.
A version of this blog first appeared in Business Green.
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http://pubdocs.worldbank.org/en/974651467928322884/Networking-Carbon-Markets-Macinante-2016-dft-2-230616-jdm-clean-copy.pdf
Faber, N.R.; Hadders, H. Towards a blockchain enabled social contract for sustainability, Creating a fair and just operating system for humanity. In Proceedings of the First International Conference on New Business Models, Toulouse, France, 16–17 June 2016.