How Distributed Ledger Technology Can Accelerate the Transition to a Low-Carbon Economy
Introduction
Climate change is one of humanity’s most significant global challenges, causing severe environmental, economic, and social impacts.
According to the Intergovernmental Panel on Climate Change (IPCC), to limit global warming to 1.5 0C above the pre-industrial levels and avoid hazardous climate change impact, there is a need to reduce global greenhouse gas emissions to 50% by 2030 and aim to reach net-zero emissions by 2050. To achieve this, there is an immediate need to transition to a low-carbon economy, where greenhouse gas emissions are significantly reduced or eliminated through renewable energy, energy efficiency, and sustainable land use practices.
According to the World Economic Forum, there is a need for global climate infrastructure, tools, and coordination technologies to keep pace with the changing planetary ecosystem, transcend borders, and span social, economic, cultural, and governmental domains with the support of blockchain technology. 
Blockchain technology (distributed ledger technology) has emerged with the potential to provide solutions for scaling climate action by enabling greater transparency, accountability, and efficiency in climate finance and carbon markets.
The distributed ledger technology can create a more transparent and efficient system for tracking and trading carbon credits. This helps to facilitate the transition to a low-carbon economy. However, there are challenges and limitations to using blockchain for climate action, which include the need for a regulatory framework and clarity and the potential for blockchain to perpetuate existing power imbalances in the climate finance system.
Nonetheless, we can harness the power of blockchain to tackle the urgent global challenge of climate change by working collaboratively and innovatively.
Blockchain and Climate Action
Blockchain technology is a decentralized, distributed ledger that records transactions securely and transparently. It is characterized by decentralization, immutability, and transparency. These features can be leveraged to increase the effectiveness of climate action initiatives.
Blockchain technology can create a trusted and secure platform for tracking and verifying emissions reductions, facilitating carbon markets, and increasing transparency and accountability in climate finance.
According to United Nation in a statement by Massamba Thioye, blockchain has the potential to enhance climate action and sustainability.
Blockchain technology could;
- strengthen monitoring, reporting and verification of the impacts of climate action,
- improve transparency, traceability and cost-effectiveness of climate action,
- build and strengthen trust and ambitions in climate negotiation among climate actors,
- make incentive mechanisms for climate action accessible to the poorest, and
- support mobilization of green finance.
One of the most promising applications of blockchain in climate action is tracking and trading carbon credits; it helps create a more efficient and transparent system.
What is a carbon credit?
Carbon credit is a tool used to incentivize emissions reduction. It is the right to emit one tonne of CO2 equivalent. The carbon market operates a centralized system with high costs of transactions and low liquidity.
Blockchain technology makes it easy to track carbon credits and makes verification secure and transparent. It helps to reduce the cost of transactions and increase liquidity, thereby improving the integrity of the carbon market.
Blockchain technology also helps to enhance and create accountable climate finance mechanisms.
Climate Finance
Climate finance is one of the significant factors in transit to a low-carbon economy and addressing the impacts of climate change. However, climate finance faces several challenges, which include a need for more transparency and accountability in the distribution of funds, high transaction costs, and the difficulty of verifying project outcomes.
With a decentralized system, we can conveniently achieve an accountable financial mechanism. It helps to track and verify the use of funds and project outcomes. It reduces transaction costs, thereby making funds available for small-scale projects.
Challenges Faced by Implementing Blockchain in Climate Action
There are several challenges faced by implementing blockchain technology in climate action. These challenges include:
Lack of regulatory framework
The lack of a clear regulatory framework for blockchain and cryptocurrency creates uncertainty for the sectors’ stakeholders ( investors, developers, and regulators). This can impede the adoption of blockchain-based solutions for climate action.
Therefore, the development of clear regulatory frameworks is essential to ensure the stability of blockchain-based solutions for climate activities.
Scalability
Another challenge is scalability. Blockchain can only handle a few numbers of transactions per second and thus faces scalability issues, particularly in terms of transaction processing speed and energy consumption. If blockchain is to be adopted for climate actions, it should process more data faster and accommodate more users while maintaining a low transaction cost. The high energy consumption associated with proof-of-work blockchain protocols, such as those used in Bitcoin and Ethereum, is a concern for the environment, as it contributes to greenhouse gas emissions.
Developers are currently working to overcome these challenges by creating consensus mechanisms and scalability solutions that are more energy-efficient. Some blockchain protocols have been designed to enhance transaction processing speed and decrease energy consumption. For instance, proof-of-stake (PoS) protocols used in blockchain networks like Cardano and Polkadot consume significantly less energy than proof-of-work protocols. These protocols make use of a different consensus mechanism that relies on validators to authenticate transactions instead of miners who use computational power to solve intricate mathematical problems.
Interoperability
Moreover, interoperability is another challenge for implementing blockchain in climate action. The lack of standardization and interoperability among different blockchain networks makes ensuring seamless communication and data sharing between stakeholders challenging. There are numerous blockchain networks, each with its protocols, standards, and governance structures. This lack of interoperability can create barriers to collaboration, inefficiencies, redundancies, and a lack of transparency in the system, thus limiting the potential benefits of blockchain technology for climate action.
To address this challenge, efforts are underway to develop standards and protocols that enable the interoperability of different blockchain networks. For instance, the InterWork Alliance is a global consortium developing interoperability standards for blockchain networks.
The United Nations Development Programme (UNDP) has called for interoperable and open-source climate-focused digital public infrastructure (DPI) to enable transparent measurement, reporting and verification (MRV) and aggregation of nationally determined contributions at scale across countries.
This could lead to reduced carbon emissions by 2030, at least 3-4% of low and middle-income countries’ targets, using Web3 tools like blockchains and decentralized data systems providing the underlying data infrastructure and interoperability standards needed to build such.
Governance structure
The governance structure is also another critical challenge for implementing blockchain in climate action. The decentralized nature of blockchain technology raises questions about who is responsible for ensuring compliance with regulations and standards, protecting user privacy and data, and resolving disputes.
To address these challenges, various governance models are being developed, such as decentralized autonomous organizations (DAOs), which uses smart contract to automate decision-making processes and enable stakeholders to participate in the governance of the network.
Examples of Blockchain-based Solutions for Climate Action
Blockchain technology holds significant potential for climate action. By utilizing the unique features of blockchain, such as transparency, immutability, and decentralization, we can create a more efficient and secure system for tracking and trading carbon credits, promoting renewable energy, and advancing sustainable development.
There are several examples of blockchain-based solutions for climate action, including carbon credit trading, renewable energy certification, and climate finance.
Carbon credits trading, for instance, leverages blockchain technology to track and authenticate the transfer of carbon credits between parties. The Climate Trade platform is one such platform that facilitates transparent and efficient carbon credits trading by utilizing blockchain technology.
Another application of blockchain in climate action is renewable energy certification. Here, blockchain can create a tamper-proof system for verifying the origin and sustainability of renewable energy sources, promoting their adoption and advancing sustainable development. Platforms such as the Renewable Energy Certificate (REC) trading platform use blockchain to enable the trading of renewable energy certificates between producers and buyers.
Blockchain is also being used to enhance climate finance mechanisms, which provide funding for initiatives that aim to reduce greenhouse gas emissions and promote adaptation to the impacts of climate change. Utilizing blockchain allows climate finance initiatives to be more transparent and efficient, reducing the risk of fraud and corruption and improving their overall effectiveness.
According to Hugh Salway, a Senior Director at Market Development and Partnerships Gold Standard, “Blockchains provide the ability through smart contracts to pull revenue from secondary market transactions back to project developers in a way that just doesn’t happen in the typical carbon market.”
Finally, blockchain technology can promote supply chain transparency and traceability besides its applications in carbon credits, renewable energy certification, and climate finance. By creating an immutable and transparent record of the supply chain, blockchain can help identify and address environmental issues, such as deforestation, pollution, and waste.
One example of a blockchain-based supply chain platform is Provenance. By utilizing blockchain technology, the platform enables consumers to trace the origin and impact of the products they purchase, providing a transparent and tamper-proof record of the entire supply chain. This empowers consumers to make more informed and sustainable purchasing decisions.
The Future of Blockchain in Scaling Climate Action
Blockchain technology can transform how we approach climate change significantly. It can facilitate greater transparency, efficiency, and collaboration in climate finance and carbon markets, thereby accelerating the transition to a low-carbon economy and mitigating the effects of climate change.
However, unlocking the full potential of blockchain for climate action will require collaboration and innovation among all stakeholders, including policymakers, climate finance professionals, carbon market stakeholders, and blockchain enthusiasts. It will also require addressing the challenges and limitations of using blockchain for climate action, such as regulatory clarity, scalability, interoperability, and governance.
Innovations like decentralized finance (DeFi) and non-fungible tokens (NFTs) could further enhance the potential of blockchain in advancing the transition to a low-carbon economy.
Decentralized finance could democratize access to financial services, including climate finance, and reduce reliance on traditional financial institutions. Meanwhile, NFTs could be utilized to create unique digital assets representing environmental or carbon offsets, leading to more efficient and transparent tracking and trading of these assets on blockchain platforms. These emerging trends provide exciting possibilities for collaboration and innovation in addressing the challenges of climate change.
Importance of Collaboration and Innovation to Harnessing Blockchain’s Potential for Climate Action
Collaboration and innovation are vital to harnessing the power of blockchain for climate action. To achieve this, there is a need for stakeholders from across the climate finance system, including policymakers, finance professionals, carbon market stakeholders, and blockchain enthusiasts, to come together to develop new and innovative solutions that leverage the power of blockchain to tackle the urgent global challenge of climate change.
An example of this is evident from the convergence and collaboration of blockchain and climate action in the Climate Chain Coalition.
Climate Chain Coalition is a global initiative that brings stakeholders from across the blockchain and climate communities together to promote the development and adoption of blockchain solutions for climate action.
Effective coalition will bring about positive innovation to fully harnessing the potential of blockchain technology for climate action. This helps through knowledge sharing and initiative to drive innovation and accelerate the transition to a low-carbon economy.
As blockchain technology continues to evolve with new applications and use cases, It is essential to stay current and leverage blockchain technology to address the global challenge of climate change urgently.
In Closing:
Blockchain technology can potentially revolutionize how we tackle climate change by enabling greater transparency, efficiency, and collaboration in climate finance and carbon markets. By leveraging the power of distributed ledger technology, we can create a more transparent and efficient system for tracking and trading carbon credits, facilitating the transition to a low-carbon economy.
There is a continuous effort by developers, regulators, and investors to address and develop a lasting solution to the challenges associated with using blockchain for climate action.
However, as the world faces an ever-increasing urgency to address the impacts of climate change, we must explore all possible avenues for scaling climate action. Blockchain technology provides a promising avenue for achieving this goal.
With continued effort, thoughtful coordination, investment and meaningful actions among blockchain enthusiasts, advisors, consultants, investors and stakeholders in the climate sectors, from policymakers and entrepreneurs to climate finance and carbon market professionals, we can harness the power of blockchain to accelerate the transition to a low-carbon economy, create an equitable system of financing and mitigate the impacts of climate change.
About the Author
Ian Scarffe is a serial entrepreneur, investor, key opinion leader and Blockchain consultant with business experience from around the world.
An expert in Startup, Investment, Fintech, Web3, AI, and Blockchain industries. Ian currently consults and advises for a range of multi-million dollar companies.
Ian’s overall mission is to foster a society of economically independent individuals who are engaged citizens, contributing to the improvement of their communities across the world.
Follow Ian Scarffe:
https://uk.linkedin.com/in/ianscarffe
