Transforming Climate Finance and Green Investment with Blockchains

Alastair Marke

• Publisher: Academic Press
• Year: 2018
• Print ISBN: 9780128144473
• eBook ISBN: 9780128144480
• Topic: Economics
• Subtopic: Banks & Banking
• Index: Economics

Transforming Climate Finance and Green Investment with Blockchains establishes and analyzes the connection between this revolutionary technology and global efforts to combat climate change. The benefits of blockchain come through various profound alterations, such as the adoption of smart contracts that are set to redefine governance and regulatory structures and transaction systems in coming decades. Each chapter contains a problem statement that describes the challenges blockchain technology can address. The book brings together original visions and insights from global members of the Blockchain Climate Institute, comprising thought leaders, financial professionals, international development practitioners, technology entrepreneurs, and more. This book will help readers understand blockchain technology and how it can facilitate the implementation of the Paris Agreement and accelerate the global transition to a green economy. - Provides an authoritative examination of this emerging digital technology and its implications on global climate change governance - Includes detailed proposals and thorough discussions of implementation issues that are specific to green economy sectors - Relates innovative proposals to existing applications to demonstrate the value add of blockchain technology - Covers blockchain for the smarter energy sector, for fraud-free emissions management, to streamline climate investments, and legal frameworks for blockchain-based climate finance

Interlude IV

Outline

• Section 4 Blockchain for Fraud-Free Emissions Management

Section 4

Blockchain for Fraud-Free Emissions Management

Outline

• Section 4. Blockchain for Fraud-Free Emissions Management
• Chapter 15 Central Banks and Blockchains: The Case for Managing Climate Risk with a Positive Carbon Price
• Chapter 16 Carbon Deposits—Using Soil and Blockchains to Achieve Net-Zero Emissions
• Chapter 17 Blockchain Ecosystem for Carbon Markets, Environmental Assets, Rights, and Liabilities: Concept Design and Implementation
• Chapter 18 How a Blockchain Network Can Ensure Compliance With Clean Development Mechanism Methodology and Reduce Uncertainty About Achieving Intended Nationally Determined Contributions
• Chapter 19 Networked Carbon Markets: Permissionless Innovation With Distributed Ledgers?

Section 4. Blockchain for Fraud-Free Emissions Management

In God we trust; all others must bring data.

Anonymous

Efficient mobilization of private climate finance relies on a trustworthy mechanism. To achieve the goals of the Paris Agreement, this mechanism may be a cross-border trading of carbon allowances or credits. Article 6 provides a vehicle for such trading by allowing voluntary cooperation involving “Internationally Transferred Mitigation Outcomes” (ITMOs). Talks around ITMO may be hollow unless the accounting rules for emissions reductions achieved in different carbon markets are harmonized and the risk of double counting of carbon credits minimized.

A common carbon accounting system necessitates reliable processes on which to base the greenhouse gas inventories (both national and international registers) as well as the tracking, subtraction, and addition of certified emission reductions. It means we all must bring credible data. Nonetheless, greenhouse gas “monitoring” and “reporting” are dependent on trust in an intricate web of operators or suppliers’ data which culminate into emissions data reported largely based on mathematical calculations. Independent, third-party “verification” may be helpful but unable to fully guarantee reliable monitoring and reporting of emissions data. A burning question is who can or should verify the verifiers?

A complex problem in nature, the entire monitoring, reporting and verification system of emissions management should be revisited and solidified with the help of emerging digital technologies if we are to make this potential cross-border mechanism a success in curbing global emissions. It is the prominent features of Blockchain technology which will make it a good fit for this mission. Blockchain can save a huge amount of manpower and financial resources currently devoted to paperwork or administrative procedures and hence enhance considerably the efficiency of many emissions trading schemes.

This technology, if deployed in emissions trading schemes, has tremendous potential to disrupt the current transaction system. Spring 2017 was an iconic season for Blockchain in emissions management. In March, IBM China and the Shanghai-based Energy Blockchain Lab announced the world’s first Blockchain-based carbon asset management platform based on the open-source, openly governed Hyperledger Fabric. It can streamline and accelerate the issuance of carbon credits in China’s emissions trading scheme. In the same month, the Russian Carbon Fund and Aera Group (France) pioneered the first international carbon credit transaction using Blockchain technology in DAO IPCI.

Speaking of carbon pricing, Dr. Delton B. Chen will first present a case for expanding the central bank remit to developing a Central Bank Digital Currency for rewarding climate mitigation actions in Chapter 15, Central Banks and Blockchains: The Case for Managing Climate Risk With a Positive Carbon Price. The digital currency system will demonstrate a new model for costing externalities and pricing systemic climate risk. In Chapter 16, Carbon Deposits—Using Soil and Blockchains to Achieve Net-Zero Emissions, Edward Dodge will introduce an innovative form of carbon finance—the “Carbon Deposit” system that uses Blockchain to account for and price the amount of carbon to be sequestered in soils by farmers paid to practice regenerative agriculture. With regard to emissions trading, Anton Galenovich, Alexey Shadrin, and Sergey Lonshakov will introduce the concept and design of their decentralized public Blockchain ecosystem for carbon markets in Chapter 17, Blockchain Ecosystem for Carbon Markets, Environmental Assets, Rights, and Liabilities: Concept Design, and Implementation. Probably, a constructive contribution to developing new market mechanism or even redeveloping the clean development mechanism, Chapter 18, How a Blockchain Network Can Ensure Compliance With Clean Development Mechanism Methodology and Reduce Uncertainty About Achieving Intended Nationally Determined Contributions, by Steven Dunkel will recommend a new concept for transferring digital carbon credits among different clean development mechanism projects over distributed ledgers.

Linking or unifying emission trading schemes (ETS) can, arguably, result in a single carbon price. By leveling the playing field for businesses, at least in theory, linking ETS could increase the cost-effectiveness of curbing global emissions as unlimited abatement opportunities abound for exploration while avert carbon leakage. Notwithstanding these great benefits, linking ETS of different jurisdictions with different regulations and of different development stages will prove challenging. Mutual trust among states is not apparent yet. The first and foremost hot potato is for all states to agree on a price band, which is nearly impossible. In Chapter 19, Networked Carbon Markets: Permissionless Innovation With Distributed Ledgers?, Adrian Jackson, Ashley Lloyd, Justin Macinante, and Markus Hüwener will propose an alternative, bottom-up solution based on Distributed Ledger Technology. Their proposal would enable the “networking” of carbon markets without “unifying” their legal and regulatory frameworks, but data sharing and innovative transaction management which enhance the interoperability of carbon market infrastructure.

Chapter 15

Central Banks and Blockchains

The Case for Managing Climate Risk with a Positive Carbon Price

Delton B. Chen, Center for Regenerative Community Solutions¹ 501(c)(3), Basking Ridge, NJ, United States

Abstract

A central problem of the climate crisis is a need to mobilize sufficient climate finance to generate a low-carbon transition, and to do so quickly enough to prevent dangerous anthropogenic interference with the climate system. In response to this challenge, a case is presented for a coordinated central bank policy that involves a Central Bank Digital Currency (CBDC) for rewarding climate mitigation actions. Justification for the CBDC is framed on a new model for costing externalities and pricing systemic risk. A hypothetical 100-year storyline, called “Avoiding Catastrophe,” is presented to illustrate how the CBDC could be used to mobilize trillions of dollars of new climate finance and manage climate risk. Effectiveness of the CBDC reward is appraised by comparing the 100-year storyline with a speech given by Mark Carney—the Governor of the Bank of England—titled “Resolving the climate paradox.” A technical brief is provided for a CBDC platform, including recommendations for Blockchain ledgers, smart contracts, rules, and strategies for ensuring accountability and scalability.

Keywords

Central bank; climate mitigation; systemic risk; social cost; carbon; smart contract; Blockchain; mandate; insurance; macroprudential

15.1 Introduction

15.1.1 The Paris Agreement

The main ambition of the celebrated Paris Agreement—of the Twenty-First Conference of Parties (COP21) under the United Nations Framework Convention on Climate Change (UNFCCC)—is to hold global warming to well below 2°C above preindustrial levels and pursue a limit of 1.5°C of warming, recognizing that this would “… significantly reduce the risks and impacts of climate change” (UNFCCC, 2015; Article 2). Managing climate risk is clearly a major component of the Paris Agreement in terms of the intended actions, but what is meant by “risk”? A standard definition of risk is that it is “the effect of uncertainty on objectives” (ISO, 2009) and so the Paris Agreement should be concerned with improving the certainty that unwanted levels of climate change will be avoided.

Parties to the Paris Agreement have agreed to define their voluntary mitigation actions as Nationally Determined Contributions (NDCs) on a five-year pledging cycle. The NDCs and new technologies are helping to drive a low-carbon transition, but the Paris Agreement as a whole lacks a binding mechanism to enforce the 1.5/2.0°C limits (or any other limit). According to a group called “Mission 2020”, to achieve the 2.0°C ambition, global carbon emissions will need to peak by 2020 and then decline, otherwise “… the temperature goals set in Paris become almost unattainable” (Figures et al., 2017).

15.1.2 Likelihood of a Climate Catastrophe

If the world’s greenhouse gas (GHG) emissions were to cease completely in 2017, the GHGs already in the atmosphere would produce 1.3°C (0.9–2.3°C) of “committed warming” by 2100 (Mauritsen & Pincus, 2017). When future GHG emissions are extrapolated, it becomes apparent that the 1.5/2.0°C limits will be difficult to achieve. Raftery, Zimmer, Frierson, Startz, and Liu (2017), who undertook a probabilistic assessment of future emissions, conclude that the 1.5°C and 2.0°C limits only have a 1% and a 5% chance of being met, respectively. William Nordhaus, who is well-known for developing the Dy...

Table of contents

• Cover image
• Title page
• Table of Contents
• Copyright
• List of Contributors
• About the Editors
• About the Lead Contributors
• Guest Foreword
• Guest Biography
• Editor's Prologue: Blockchain Movement for Global Climate Actions
• Interlude I: How to Read This Book
• Interlude II
• Interlude III
• Interlude IV
• Interlude V
• Editor’s Epilogue
• Index