How Blockchain Provides the Missing Links in Climate Action

By Si Chen, President, Open Source Strategies, Inc.

Si Chen has a background as a hedge fund manager and open source software developer. Si is working on leveraging finance and open source software to make clean energy a reality everywhere.

Aug 3, 2020 | Resources, Technology | 3 comments

Imagine Steve Jobs getting on stage to show us the first iPhone. But for lack of transparency into the supply chain and reporting about the product, nobody in the audience believes that the features he touts are real. Imagine if Apple had no way to get its supply chain partners to follow along and make parts for the iPhone, and if investors had no way of knowing if the iPhone was really any different from competing products.

Unfortunately, that’s exactly where we are today with climate change. Companies like Microsoft, Kering (parent of Gucci), IKEA, and Amazon are taking world-changing actions on climate change. But are we rushing out to buy their low carbon products? Are their suppliers following through and reducing their carbon footprints? Do their investors really know how well their carbon reduction plans are working? The answer to all is, no.

When it comes to climate change, we’re missing the signals that link consumers, businesses, and investors in a functioning marketplace. Normally, functioning markets depend on being able to verify claims about products by experiencing them; you could verify what Steve Jobs said by going to an Apple store. They depend on supply chains to “follow the leader” and make parts for new products. Finally, markets depend on investors and competitors being confident about the success of new products. None of these exist, though, when it comes to climate change and carbon emissions. Instead, we have consumers who don’t trust corporate climate action, companies that can’t get supply chains to follow through, and investors who don’t know who to trust.

The blockchain could be the missing link that brings consumers, businesses, and investors together on climate change. Built for peer to peer collaboration around shared, yet immutable ledgers, it lets us account for carbon emissions and transfer verifiable climate action through the supply chain.

Verifying Emissions at the Business Level

Verifying carbon emissions of a business is nothing new. The Greenhouse Gas (GHG) Protocol has been around since the 1990’s and specifies how to account for emissions from direct energy used (Scope 1), purchased energy (Scope 2), and all other activities (Scope 3).  The problem, though, is that an emissions audit requires gathering data from many different sources. Some data, such as utility bills and travel records, could be tedious, while others, such as emissions from purchased goods and services, are simply unavailable. The whole process usually involves manual data entry, surveys, and spreadsheets. Nor has it been practical to set up all the point-to-point integrations between these different sources. No wonder that even after twenty years, only 8,400 companies plus 920 cities worldwide are participating in the Carbon Disclosure Project.

The blockchain could drastically improve this process. Each member of the supply chain could encode their emissions as tokens tied to the quantities of purchase, which could then be passed down to their customers. Companies whose service is primarily energy-driven, such as data centers, utilities, transportation, or freight, could do this relatively easy based on their energy input and product output. Devices such as solar inverters could record the amount of renewable energy generated as tokens. Finally, apps could integrate with enterprise software such as ERP and payroll to calculate the emissions from products purchased or employee commuting. To keep confidential business information private, these tokens could all be transferred on a permissioned ledger, such as Hyperledger Fabric.

Auditing software could then review the data and calculate the overall carbon emissions of the company. The auditing software could come from trusted third-party emissions auditing services, and perform independent verification of company emissions, without disclosing sensitive business information. In fact, since there is little marginal cost to run more auditing programs, multiple auditing services could be run to increase our confidence in the results, just like multiple credit rating agencies are routinely called upon to rate corporate creditworthiness in the capital markets.

Automating Emissions Audits with Tokens on a Permissioned Blockchain

Transferring Carbon Emissions through the Supply Chain

Once the results of corporate emissions are calculated, they should be made available to supply chain partners, who could then factor in the emissions cost of different products in their purchasing decisions. As major corporations look to reduce their carbon footprints, they should naturally shift towards vendors whose products have lower or even zero emissions.

Unfortunately, such a system simply does not exist. While Life Cycle Assessment (LCA) could be used to make environmentally conscious purchasing decisions, they are either proprietary and expensive or very general and of questionable value. The results are not passed down through the supply chain, so each LCA starts with estimates or models of emissions, rather than actual data. Finally, because LCA calculations are based on proprietary data sets, results for the same product could vary significantly, and there is no transparency for third parties to verify the analyses.

Blockchain allows calculated emissions from each business to be tokenized and passed through to its supply chain partners to use in their emissions calculations. For example, a token could be issued based on the dollar amount, unit quantity, or volume of the company’s products. This would allow emissions calculations to be passed through the supply chain, so that the effects of a company’s emissions reductions and climate actions would be transparent. As we shift toward a zero carbon economy, companies that are proactively reducing their products’ emissions should find a competitive advantage with verified low emissions products.

Do We Really Need the Blockchain?

Perhaps not. Carbon emissions and climate action are part of a full-blown industry of Environmental, Social, and Governance (ESG) reporting companies, protocols, and standards that has existed without the blockchain for decades.

Yet after over 20 years, the result is various standards and surveys, relatively few companies reporting, and no tangible international standards. Is it because the costs are too high? Or that there are too many disparate organizations, each with their own data silos? Or the lack of interoperability across companies?

These are exactly the problems with carbon emissions and climate actions today, and they are also the same problems that blockchains are solving in fields such as supply chain and trade finance. Blockchain is able to weave together new connections between many distributed parties around standards and data sharing, in the same way the internet did. In doing so, it has the potential not only to improve the existing mechanisms, but also to open up new possibilities.

Linking Climate Actions Together

In some ways, the blockchain, like the internet itself, is nothing new. What it offers is a way to link many disparate parties together. If we’re fully confident that our governments, utilities, and major corporations could solve the climate problem, then we wouldn’t need it. But if we feel that we need greater trust, greater collaboration, and fresh thinking and innovation, then perhaps it is time to give the blockchain a try.

There’s no better time to do so than now. Although most of the world’s population now believes that climate change is real and action is needed, the lack of proper accounting is causing a new wave of doubt. On one hand, films like “Planet of the Humans” try to cast doubt on whether renewable energy is really better than fossil fuels. On the other hand, climate denial has become climate delayism, throwing up everything from ‘nuclear power will save us,’ to, ‘nothing will save us.’ But these claims need not cause any concern or delay. They are easy to address and clear up, once we have the data we can trust.

Discussion

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3 Comments

  1. This is a great idea and I hope something like it is implemented soon. Blockchain has a lot of potential use cases and this particular one could help slow or reduce climate change.

    Reply
    • Thanks, Alex. We’re working on it as part of the Hyperledger open source project, under the Climate Action and Accounting Special Interest Group. We hope to start releasing some code shortly!

      Reply
  2. I’ve had some comments about blockchain being “energy hogs” and would like to clear this up: Bitcoin and ethereum, which use proof of work consensus mechanisms, are energy intensive, but in general blockchains are moving away from these into faster and less energy-intensive consensus mechanisms. The Hyperledger Fabric blockchains, for example, do not use proof of work and do not consume much energy.

    Reply

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