Does blockchain technology have a role in climate policy?
Blockchain and climate change are 2 key drivers that have only grown in relevancy over 2021. Sparking intuitively unrelated debate, interest in these topics has common drivers: tech celebrities expressing concern over the integrity of our current financial and climate system and the Covid-19 pandemic presenting an opportunity for societal change. Felix Wallis and Risa Kazui investigate key issues at the intersection of blockchain and climate change.
The linked salience of blockchain and climate change raises a novel question: does blockchain technology have a role in climate policy? Our article attempts to answer this question by exploring what blockchain is, how it can improve carbon offsetting and prosumer (individuals that produce and consume energy) energy trading schemes, and the hurdles that may prevent its near term application in a climate setting. We conclude that blockchain technology can be a valuable asset to climate policy. However, there remain significant challenges to overcome before blockchain is featured at scale in climate initiatives.
What is blockchain technology, and what role could it play in climate policy?
Blockchain technology describes distributed and immutable electronic databases. Databases built using this technology are distributed as they store data across multiple sites, locations or institutions. Their data is immutable as it is encrypted into ‘blocks’ of information mathematically linked to each other. If data is tampered with, the blockchain will break in an obvious and traceable way. The distributed and immutable characteristics of blockchain allow its wide range of applications, including ‘government record-keeping, tracking the flow of goods and services along supply chains, voting, and verifying the identity of citizens.’ Such characteristics are core to its role in climate policy.
Developing effective international climate policy has been described as a ‘global collective action problem’: all countries would be better off cooperating to address climate change. However, they do not due to conflicting interests such as maintaining low tax rates. Blockchain technology can address such conflicting interests by improving the accountability, transparency and efficiency of carbon offset trading and peer-to-peer energy trading. We explore these capabilities below.
Carbon offset trading
Carbon offset trading allows individuals, businesses and governments to invest in environmental projects, including developing clean energy technologies or afforestation and ecological stewardship initiatives, to offset their carbon footprints. Actors may support such projects by buying carbon offsets via a carbon market, in which blockchain can aid liquidity and participation. Terrapass Coin is a nascent example of this use case. The digital currency allows individuals to buy a quantifiable amount of carbon offsetting, with a single Terrapass Coin equivalent to reducing greenhouse gas emissions by a tonne. Terrapass highlights that the strength of its crypto offering lies in its transparency. Using blockchain allows individuals, companies, and governments to easily quantify their carbon offsetting in a way that can be externally validated and remains open to public inspection.
Initiatives, such as Carbon Coin ($CBC) and Climatecoin, pursue a similar approach to Terrapass, providing accountable carbon offsetting enabled by blockchain. Currentinterest in such digital currencies, and their well-enforced principles of transparency and accountability, suggest an opportunity for policy innovation. Policy may solidify regulatory standards for blockchain-based carbon offset exchanges and integrate carbon offset exchanges into emissions taxation and business rebates. Such initiatives would facilitate carbon offsetting from individuals and businesses, highlighting the significant role blockchain technology could play in this area of climate policy.
Peer-to-peer energy trading
Peer-to-peer (P2P) energy trading allows prosumers to trade energy directly on an online marketplace without the need for an intermediary. Figures 1 and 2 contrast the differences between a traditional utility model and a P2P electricity trading model. The P2P electricity trading model outlined in Figure 2 is based on research by Liu et al. that builds methods to optimise excess energy generation from renewables. This model allows prosumers to sell extra energy at its actual market value rather than settling for lower prices offered by utility companies through power purchase agreements. In the case of electric utilities, P2P energy trading benefits include improved balancing and management of electricity supply within local communities and regional power grids, provision of ancillary services to main power grids, and improved energy access for consumers in rural communities. P2P energy trading platforms are most effective when implemented using blockchain technology to automate high volumes of microtransactions whilst avoiding intermediaries.
Blockchain-enabled P2P energy trading is being trialled globally. For example, P2P blockchain developer LO3 Energy operates the Brooklyn Microgrid, designed to augment the traditional energy grid by letting prosumers contribute and access community resources to buy and sell energy within their local communities. Similarly, in Australia, Power Ledger has developed a blockchain-based platform that allows consumers and prosumers to trade energy credits (‘Sparkz’) exchanged at fixed rates for local energy. The success of such projects highlights the opportunity for government regulation to facilitate blockchain-focused climate mitigation at scale. Such regulation can ensure the competitiveness of P2P energy trading against traditional utility providers. It can also integrate P2P energy platforms into national power grids, dramatically increasing their impact. Thus when considering carbon offsetting and prosumer energy trading, blockchain is shown to have a clear and exciting role in climate policy.
Traditional trading model of residential consumers and prosumers with utilities
Structure of P2P electricity trading model
N.B.: Owners of electric vehicles can generate electricity as their batteries can shift electricity spatiotemporally.
Limitations of Blockchain Technology
Whilst blockchain technology is closely attributed to solutions that grant transparency, accountability, and efficiency in emerging sustainability-driven markets, the sustainability of the technology itself is unclear. Blockchain is notorious for its high energy consumption, particularly in its application of cryptocurrency. For example, a study conducted by the University of Cambridge revealed that Bitcoin’s annual energy consumption is greater than the whole of Sweden, and around half of the UK. This alleged characteristic of blockchain technology appears to be the main reason for sceptics’ claim that it does not prevent but accelerates climate change.
Blockchain’s Energy-Intensive Reputation
Blockchain’s high energy consumption is a result of the proof-of-work (PoW), a system used in cryptocurrency for coin ‘mining’ and transaction validation. Blockchain enabled transactions are recorded by large batches of specialised computers solving cryptographic puzzles, with the first computer to solve the puzzle receiving a reward, usually a denomination of the cryptocurrency being mined. Hence, the more computational power the network has, the more likely a miner is to receive a reward, incentivising the creation of large, energy intensive, mining systems. This incentive can often undermine the energy efficiency advantages promised by decentralised carbon exchanges and peer-to-peer trading networks that rely on blockchain, posing a significant challenge for its implementation within climate policy. An additional concern is the type of energy that is being used to power solutions that rely on blockchain technology. Studies showed that in 2020, out of the total energy consumption by cryptocurrencies, only 39% came from renewables. The increase in bitcoin value is also inviting more first-timers, meaning that major investments to efficient computers would be less likely. Such energy efficiency problems currently pose a significant obstacle to blockchain’s role in climate policy.
However, whilst many implementations of blockchain have high energy consumption, this is not inherent to blockchain technology itself. Indeed, it is only Bitcoin (and some other PoW cryptocurrencies) that rely on high amounts of energy intensive computation to complete transactions. In fact, as long as a blockchain transaction is not legitimised with the PoW mechanism that cryptocurrency most commonly uses, there is little evidence to suggest that the technology’s high energy consumption should be a concern.
The Alternative: Proof-of-Stake (PoS)
One alternative to PoW is the Proof-of-Stake (PoS) consensus mechanism. With its energy consumption 99.99 percent lower than PoW, PoS block authentication is not conducted by miners, but by validators. Those who aspire to become a validator deposit a certain amount of coins into the network - the stake - where the highest bidder is then selected to become the validator. The validator combs through the block checking the transactions, and then adding it to the blockchain. The reward is the fees from each transaction within the block. The cost? Validators lose some of their stake when their transactions are not valid.
PoS is less energy intensive because unlike PoW, it only asks for the validator to mine new blocks, instead of everyone. Notably, Ethereum announced its ‘London Hard Fork’ upgrade in August of 2021, where a complete transition to a PoS system is set to finish in early 2022. This change was incentivised by ushering in a more inclusive mining environment that avoids PoW arenas with mining pools and big player miners dominating the network. Ethereum can play a significant role in climate policy due to its wide implementation within smart contracts. Smart contracts allow members to stake resources on the blockchain, which enforces countries’ commitments as when they don’t uphold their commitments to climate change action, their deposits made through the PoS system would be redistributed to those who have follower through. Hence, whilst blockchain technology has some implementation hurdles within a climate policy setting, these limitations are less distinct, and easier surmounted, than commonly perceived.
In conclusion, blockchain technology can play a significant role in improving the participation and liquidity of carbon offset markets and the efficiency of utilities provision through P2P energy trading. There is a clear opportunity for climate policy to reflect blockchain’s role in these areas through regulatory improvements or explicit provisions for the technology in legislation. Whilst blockchain continues to face scepticism, it is capable of providing the solutions to transparency, accountability, and liquidity that the climate change movement so desperately calls for. Our world is facing a climate crisis requiring a system that sufficiently synthesises those who produce and those who take on the burden of decarbonisation. Blockchain technology appears to provide exactly that.