Monday, February 23, 2015

Emission Trading with Blockchain Technology

Innovative blockchain services can solve rising Emission Trading Problems
Growth of Blockchain technology requires an increased usage of services, and the public trusting the reliability of those services. Blockchain technology can improve markets that are struggling with responsiveness, collaboration and consumer trust in their product. Credibility of decentralized ledgers can be established with re-imagined services that any global citizen can participate in. Combining smart contracts on custom blockchain networks can create new versions of old markets with increased transparency. One example of a service that could be remodeled with a new token economy is the Cap and Trade system.
"Cap and trade provides the private sector with flexibility required to reduce emissions while stimulating technological innovation and economic growth" EPA

Combining Emission Trading with Blockchain ledgers eliminates the need for a central authority to oversee the trading of Emission Allowances. Emissions Trading is an environmental policy tool that regulates the amount of emissions allowed and providing flexibility in for compliance. Companies provide emissions monitoring systems to ensure compliance with regulations. If a company pollutes less then their permitted amount, they may sell their extra allowances or bank them to cover future emissions.         

The Clean Development Mechanism (CDM) is a component of the Kyoto Protocol as a program for global emission reduction. Certified Emission Reduction (CER's) is the representation of a carbon credit. A carbon credit is equal to one metric ton of carbon emissions. CER's are traded on primary and secondary markets and distributed by the executive board of the CDM. CER's allow first world countries to trade with developing countries that were under their emission limits, and have extra carbon credits. The result has reduced climate change mitigation by $3.6 Billion and raised $215 Billion in green investments in developing countries. The CDM is, unfortunately, failing as time goes on.
From CER Index 2/23/15 Source
Issuance of CER's is increasing as the demand is decreasing, which is causing the price of one carbon credit to plummet today. 2014-2020 are projected to create 4.78 Billion more CER's. A decentralized system could be developed to solve the problem of over-saturation of the carbon credits markets, to an agreed limit. Participating companies in this 'Carbon Emission Reduction Network' can be in agreement of carbon emission token transactions. A Program of Activities can be paired with smart contracts that allow smaller countries to participate in reducing emissions and allowing outside investors, with no risk of a conflict of interest. Pressure from outside investors and the risk of losing investments deters the public sector from engaging in these markets. Smart Contracts create an agreed upon set of variables that must met in order to validate the transaction.

"If [the CDM] is not resurrected, we will lose the only true mechanism for reducing greenhouse gas emissions, along with a decade of experience and lessons learned."
Source - Yolanda Kakabadse President of WWF

A highly qualified panel, including Yolanda Kakabadse, held a round table discussion at the UNFCCC (United Nation Framework Climate Change Conference) in 2012. Research was collected from stockholder meetings, research programs, deliberations around the world, and public input. The report highlighted problem areas of the CDM that a decentralized system could resolve if blockchain service was created. The recommendations in bold are areas that can be impacted by Blockchain technological innovation.

1)       Urgently address the immediate crisis of demand (Page 23)
i)        Ensure access to CDM and cancel overhang and don’t expand supply
2)       Develop new approaches to enhance mitigation impact (Page 27)
i)        Develop and test sector approaches to CDM
3)       Set Robust Standards to enable linking and harmonization (Page 32)
i)        Establish a common registry that tracks outcomes and avoids double counting
4)       Support Green Climate Fund (Page 36)
i)        Facilitate activities supported by GCF (provided by allowing inputs from GCF in smart contracts)
5)       Implement Standardized Methods of accessesing additionality (Page 38)
i)        Focus of incentives to new technologies and technological change
6)       Ensure CDM projects achieve sustainable development (Page 41)
i)        Report, monitor and verify sustainable development thought the project
7)       Strengthen co-benefits and enhance scope of energy technology (Page 45)
i)        Stimulate collaborative technology development and technology innovation
8)       Encourage greater access to the CDM by under-represented regions (Page 49)
i)        Introduce new grant scheme and expand loan scheme
9)       Rethink existing governance arrangements (Page 52)
i)        Develop and Implement robust codes of conduct for all members of the CDM governance structure
10)   Improve stakeholder interactions and public engagement (Page 56)
i)        Adopt Strategic communications policy and insure community stakeholders are consulted on project activities
11)   Establish mechanisms for appeals and grievances (Page 59)
i)        Implement an appeal mechanism for registration and issuance decisions
12)   Promote Regulatory certainty and streamlining (Page 62)
i)      Digitize and automate workflows to facilitate transparency and consistency 

Creating a Smart Contract on an 'Emission Exchange Network'

Complexity of a CDM project can be automated with smart contracts and multi-sig authorization. For example: A Sri Lanka company is estimated to produce 10 metric tons of carbon emissions for a CDM Project. Any group of users can pool together 10 Emission Tokens and create a smart contract on the 'Emission Exchange Blockchain'. The 10 Emission Tokens are worth far more capital then the small company could have collected on it's own. When the financial goal of 10 tokens is met, all donations are set to deposit once the smart contract is completed. The final transaction that was signed by all parties will signify immediate compliance and the funds can be distributed directly to the Sri Lanka company.
Sri Lanka CDM Project Model
Developing countries find it difficult to comply with CDM regulations while conducting projects. Communication varies internationally; the approval process is slow, language barriers, international monetary institutions, instructions can be misinterpreted. This is the barrier for emerging markets to participate in global emission compliance. 
Smart contracts provide clarity recording data inside of transactions on blocks on that network's blockchain. Various encryption techniques have been developed already to contain sensitive information within a transaction. All of the inputs (Documents, Financial Information, Records) must be signed by the Public and Private Keys of all parties before gaining access to the information in that transaction. That creates clear objectives and trust all parties agree on. A public key exchange gives both parties access to the transaction to be verified. Both parties exchange private keys to send the transaction for approval. All parties have agreed that all documentation is correct once private keys are exchanged and require an entirely new transaction to ever change. Work can begin immediately once the transaction is verified on the ledger and how each token is spent, can be traced from that wallet to its next destination.

An incentive for participation can be created in the verification process of the 'Emission Exchange Network' blockchain peaking at a predictable rate. Any user can effectively 'mine' transactions on this hypothetical service and earn Emission Tokens to sell if they are the miner to validate the block. The exact value rewarded for solving a hash would be agreed upon at the development of the blockchain, but emission token creation would then be controlled. A limit placed on the maximum number of tokens that can ever be created will reduce supply overhang, and increase the value of a carbon credit higher than 3 Cents today. A mainstream blockchain, such as the Bitcoin blockchain, would be highly volatile and unfavorable for carbon emissions regulation. 
As a project is completed, the total emissions produced are recorded on the Emission Market Ledger. Lets continue the Sri Lanka example; 8 tons of carbon emissions were created at the end of the CDM sponsored project. Once the requirements for the smart contract are met, the output of 10 tokens to the company is verified on the ledger. This leaves 2 additional Emission Tokens that can be traded on any exchange that holds value in the emission token that are now owned by the company.

The CDM currently struggles to assist developing countries reduce carbon emissions and maximize it's own impact. By eliminating the need for strict issuance of credits, an Emission Token can be created, which allows the CDM to focus on education and policy enforcement. This restructuring of the current emissions market allows strict smart contracts to be created with Emission Tokens on a public ledger. The public keys participating in this future carbon credit market can be registered publicly to create transparency with participating parties. Emission goals can be enforced and data can be collected automatically during the entire project. This automation is great news for participants in Cap and Trade markets who want to guarantee compliance during the emission trading year.

The emergence of future decentralized markets depends on market demand and fine-tuning of blockchain services to reduce risk. Knowledge and implementation will continue to expand as more services are introduced and data is collected. For individuals monitoring the growth of this technical sector, innovation of decentralized ledgers can lead to get progress in more business sectors than just finance