Crypto currencies such as bitcoin are based on blockchain technology. Recently, the blockchain technology has also been gaining momentum in the energy, climate, and development sector. Blockchain’s specific characteristics as an internet protocol blur the known borders between asset classes such as currencies, financial assets, and for example carbon credits. It is when these borders disintegrate where blockchain’s disruptive potential lies.
Environmental change and digitalization are two major developments characterizing the 21st century. Increasingly, the climate change community is recognizing the potential of digitalization and new technologies for addressing climate change. Recently, Blockchain has been receiving growing attention as a tool to enhance transparency, climate finance and carbon markets. In parallel to this year´s Conference of the Parties (COP23 ) of the United Nations Framework Convention on Climate Change (UNFCCC) the hackathon #Hack4climate will take place. The latter recognizes this potential, in particular due to its transparency, cost-effectiveness, efficiency, greater stakeholder integration and enhanced creation of global public goods.
How does blockchain work?
The blockchain technology enables the exchange of information through a cryptographic protocol that is continuously updated and verified by its users. Each added block of data is “chained” and becomes part of a growing list of records, under the surveillance of network members. “At its heart, blockchain is a self-sustaining, peer-to-peer database technology for managing and recording transactions with no central bank or clearinghouse involvement. ”
The process consists of a series of steps that together constitute the blockchain as a whole. Firstly, a transaction in which two individuals decide to exchange a unit of value is initiated. Secondly, the transaction is sent to the blockchain system network of participating computers. They evaluate and verify the transaction based on agreed-upon rules. Fourthly, the transaction is stamped with a cryptographic hash that certifies its authenticity, which also contains information of the previous block’s hash, thus creating a chain of records supposedly impossible to counterfeit. Finally, the value unit reaches its destination.
Blockchain´s potential for carbon trading
Blockchain could be used to improve the system of carbon asset transactions. For example, IBM and Energy Blockchain Lab are currently working together to develop a Blockchain platform for trading carbon assets in China. Recording carbon assets on a public Blockchain would also guarantee transparency and ensure that transactions are valid and settled automatically.
Blockchain´s potential for climate finance
Blockchain technology could help develop crowdfunding and peer-to-peer financial transactions in support of climate action, while ensuring that financing is allocated to projects in a transparent way. Apart from tracking the money, blockchain could define rules specific to these type of financial flows like attaching it to a specific purpose, having an expiry date or being released when project milestones are met.
Blockchain´s potential for progress tracking
Blockchain could provide enhanced transparency of greenhouse gas emissions emissions and make it easier to track and report emission reductions, thereby addressing possible double counting issues. It could be used as a tool for monitoring progress made in implementing the Nationally Determined Contributions under the Paris Agreement, as well as in company targets.
Application to sustainable development is still at a very early stage but has large potential
Apart from directly supporting carbon trading, climate finance and transparency, blockchain is especially recognized for its potential to support renewable and peer-to-peer energy trading. Also other areas, such as sustainable supply chain standards, payments for ecosystem services and REDD+ could be supported by blockchain technology.
However, in order to really make a difference for climate change action, more research on the potential of blockchain and more pilot projects are needed. Legal, privacy and anonymity issues are yet to be considered. There is also opposition from some governments and financial private institutions. While Blockchain may still have to prove its value in the coming years, the potentials are clearly worth further investigation.
“Every informed person needs to know about [blockchain] because it might be one of the world’s most important developments.” Leon Luow, Nobel Peace prize nominee
“Blockchain could contribute to greater stakeholder involvement, transparency and engagement and help bring trust and further innovative solutions in the fight against climate change, leading to enhanced climate actions,” Alexandre Gellert Paris, Associate Programme Officer at the UNFCCC.
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