The role of blockchain in today’s carbon credit market
In recent years, two subjects have caught my attention: blockchain and sustainability policies, particularly in relation to carbon credits. Both blockchain and carbon credits are complex subjects and when you consider them in combination, the difficulty multiplies.
For most organizations, reducing emissions is challenging and preventing any carbon emissions is currently impossible. By participating in the carbon market through the purchase of carbon credits, organizations can offset unavoidable emissions that they create. Sounds like an ideal solution, right? While the carbon market presents many opportunities for organizations, challenges exist with the structure today. Challenges that perhaps blockchain technology can help alleviate.
Understanding the carbon market
Carbon credits can be earned by financing projects that reduce or absorb carbon emissions anywhere around the world. This happens through a voluntary market, which in its current form, has many limitations and an overall lack of transparency. There is also an involuntary market, also known as a 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.
The voluntary carbon market relies 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 centralized 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.
The carbon markets are also usually structured as centralized 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 a given carbon credit and limit the possibility to connect markets in different jurisdictions.
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.
The role of blockchain
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 revolutionize 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 organizations as well as 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 multi-party collaboration. These solutions aim to improve the operational efficiency of carbon-credit trading and to stimulate climate actions from institutions, individuals and private organizations. 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.
Implications for supply chains
Blockchain does have a great potential to optimize the delivery of energy projects — and, more generally, supply chain initiatives — by offering end-to-end traceability, security and coordination. However, 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 decentralization 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.
As organizations look for opportunities to meet current and future sustainability policies, supply chain leaders must become familiar with these new technologies and review their current ways of working. Now is the time to experiment, expand their knowledge and work their way towards piloting programs that can have a meaningful impact for their organization.
Marco Sandrone is a senior research director in the supply chain operations, industrial and high tech team of Gartner Supply Chain. His research interests include supply chain performance management and metrics, cost-to-serve, supply chain segmentation, integrated business planning (S&OP) and working capital optimization. Sandrone advises end-user clients on performance management best practices, using metrics and benchmark data, to drive organizational performance, shape outcomes and make conscious trade-off decisions.