Carbon credits suffer from a lack of transparency, and numerous global markets for carbon and greenhouse gas offsets are not integrated, leading to leakage in tracking and accounting for carbon. Using blockchain technology to tokenise carbon credits and other environmental incentive schemes enables for greater end-to-end visibility and tracking, as well as increased coordination and trading across jurisdictions to reduce the displacement of emissions from one jurisdiction to another by simply relocating where emissions take place. Tokenisation of carbon credits also enables environmental incentives to become tradeable financial assets, and allows people anywhere in the world to earn tradeable assets in exchange for participation in the reduction of greenhouse gas and carbon emissions.
In this context it is helpful to distinguish between tracking the carbon emissions and tracking the carbon credit trades.
To increase transparency and accountability actual emissions of companies should be seen on the blockchain publicly as well as the related trading of carbon credits – there is no direct need to use a private blockchain.
The blockchain needs to be able to handle many thousands or even millions of transactions per second as the carbon credit market is large and carbon credits are traded extensively. This would allow the monitoring of actual emissions and tracking trades of carbon credits to be displayed on the blockchain in real time.
The development of the blockchain should not be completely decentralized as rules for credit issuance and trading are dictated by or derived from the Kyoto’s protocol. The public community may propose changes (such as a bug solution) or additions (such as new user applications) to the source code, but approval of these should be governed by the UNFCCC as the regulator of the Kyoto protocol execution.
Connection with other blockchains and related protocols might enhance the utility of the carbon credit token, but the possibility of this depends on how the global blockchain ecosystem evolves. In the initial phase credits can be exchanged for carbon emissions or fiat. In future phases credits might be exchanged for other tokens or assets once it is possible to securitize tokens (to be compliant with securities regulation) and connect to other blockchain based exchanges that can swap various types of tokens and assets or integrate carbon credit tokens in their own blockchain ecosystem.
Nodes can be run by the public, but only UNFCCC approved nodes and trading exchanges should have writing rights on the blockchain. The nodes run by the UNFCCC certifying entities append the data about carbon credits to the blockchain as this is a responsibility of UNFCCC and data submitted by carbon emitters to UNFCCC are non-public. The nodes run by the trading exchanges write trading transactions to the blockchain as they manage the infrastructure for trading credits. Other nodes can verify transactions, but not append new ones.
To allow the tokenization of carbon credits the writers on the blockchain (carbon credit certifiers and credit trading exchanges) should make the necessary changes to their current systems to integrate with the blockchain. The credit certifiers need to ensure that their systems once approved automatically write newly issued or terminated credits to the blockchain in real time. For the trading exchanges instead of recording transactions in their own system, they will have to write new transactions directly and in real time on the blockchain.
Applications need to be designed with the end-user in mind: the governments that need to reach their greenhouse gas emission reduction targets and carbon emitters that want to sell or purchase carbon emission rights.
These stakeholders have viewing rights only and should have the option to retrieve data from the blockchain automatically (e.g. using an API) or to log in a customized portal. A dashboard functionality could help the stakeholders in managing their emission targets.
For the carbon emitters it is important that they can see the number of carbon credits awarded and have the possibility to trade credits. They update their data to the credit certifier and not to the blockchain directly, so they only need viewing rights for their certified credits on the blockchain.
Governmental bodies should be able to aggregate and filter data based on jurisdiction using the blockchain and without retrieving that information from UNFCCC necessarily anymore. Governments need to be able to track their progress to reaching greenhouse gas emission reduction targets and to compare with progress of other governments. In addition to that, they need to be able to control carbon emitters and steer their progress towards reaching emission reduction targets.
In addition to the aforementioned end-users, it should be possible for developers and entrepreneurs to build other applications on top of the blockchain, such as applications that retrieve information from the blockchain for carbon credit research and development of ‘carbon-friendly’ energy projects.
What are the implications if government decides to outsource the identity management of their citizens to the blockchain? What is our responsibility versus the role of the government?
Owning your own identity data using blockchain is more efficient, targeted and secure, but also requires you to be more responsible and to be protected by government against influences outside your control.
As the blockchain has already verified one’s identity there is no need for organizations to have their own identity check procedures – they simply ask the citizen for permission to access the blockchain based proof of identity. The citizen can be selective in which information to provide to whom for his own benefit. For example, he can customize his online shopping experience by sharing selective personal information (e.g. age, income, education) anonymously. Any further updates to one’s identity can be verified following specific rules governed by the blockchain (e.g. smart contracts for moving houses to update the citizen’s address).
Even though the data stored on the blockchain is more secure than in traditional identity management systems, a hack is not impossible (Buterin, 2017) and the citizen’s private keys to access the data can be lost or stolen. Even when the data is legally obtained, citizens are exposed to the risk that their privacy is not guaranteed by organizations who use the data. Apart from this, some amendments of the identity data still need to be verified outside the blockchain (e.g. when the citizen is born).
Therefore, the role of government in identity management remains important in order 1) to have a nation-wide backup plan in case of a major blockchain attack, 2) to ensure technologies are used to access the blockchain that minimize risk of loss or theft (e.g. using fingerprint), 3) to have privacy legislation in place for the use of blockchain data and 4) to check amendments to data that cannot be handled by smart contracts.
You (a "node") have a file of transactions on your computer (a "ledger"). Two government accountants (let's call them "miners") have the same file on theirs (so it’s "distributed"). As you make a transaction, your computer sends an e-mail to each accountant to inform them.
Each accountant rushes to be the first to check whether you can afford it (and be paid their salary "Bitcoins"). The first to check and validate hits “REPLY ALL”, attaching their logic for verifying the transaction ("Proof of Work"). If the other accountant agrees, everyone updates their file…
This concept is enabled by "Blockchain" technology.
Surely it's more complicated?
Yes - but as a concept, not much more. Complexities come in the implementation and the journey to realize value from such implementations. The above example will, of course, be overly simplistic for some – but may be a starting point for others.
In a traditional environment, trusted third parties act as intermediaries for financial transactions. If you have ever sent money overseas, it will pass through an intermediary (usually a bank). It will usually not be instantaneous (taking up to 3 days) and the intermediary will take a commission for doing this either in the form of exchange rate conversion or other charges.
The original Blockchain is open-source technology which offers an alternative to the traditional intermediary for transfers of the crypto-currency Bitcoin. The intermediary is replaced by the collective verification of the ecosystemoffering a huge degree of traceability, security and speed.
In the example above (a "public Blockchain"), there are multiple versions of you as “nodes” on a network acting as executors of transactions and miners simultaneously. Transactions are collected into blocks before being added to the Blockchain. Miners receive a Bitcoin reward based upon the computational time it takes to work out a) whether the transaction is valid and b) what is the correct mathematical key to link to the block of transactions into the correct place in the open ledger. As more transactions are executed, more Bitcoins flow into the virtual money supply. The "reward" miners get will reduces every 4 years until Bitcoin production will eventually cease (although estimates say this won't be until 2140!). Of course, although the original Blockchain was intended to manage Bitcoin, other virtual currencies, such as Ether, can be used.
Why do I need to know about Blockchain?
There are three reasons why you need to know about Blockchain: