Betting on blockchain to simplify carbon trading

Climate change has become one of the most urgent issues facing the entire planet. It has become increasingly clear to the majority of nations that further delaying action to mitigate the rise of global temperatures will cause irreversible impacts to ecosystems and populations. Carbon trading is one of the most efficient ways for nations to reduce their levels of greenhouse gas emissions, according to the International Emissions Trading Association (IETA).

However, the global carbon market is very fragmented. In the absence of a unified platform to purchase and sell carbon credits, regional markets have adopted different standards and policies. Trading costs are high because buyers and sellers rely on intermediaries to handle the often complex and cumbersome process.

Last year, a Beijing-based team of environmental advocates founded Synergy Blockchain Technology with the goal of stimulating China’s carbon economy through blockchain-based trading. Their platform is designed to lower the cost of carbon trading and reduce friction for buyers and sellers.

“The government is ambitious in terms of controlling overall carbon emissions,” said Neo Lin, Synergy co-founder and a United Nations-certified expert in the field. “In terms of taking specific steps to stimulate the carbon trading market, the government is rather conservative.”

Lin believes market-based initiatives have an important role to play. Synergy’s carbon credit trading platform VER, currently in its testing phase, is set to launch in March. The company also launched its own carbon credit-backed cryptocurrency ECO2, which is already trading on two cryptocurrency exchanges, to enable companies and individuals interested in purchasing and trading carbon credits to engage with more efficiency and transparency.

In layman’s terms, Synergy’s carbon trading platform will be similar to Alibaba’s e-commerce platform Taobao in that it matches consumers to sellers, said Rich Huang, the company’s other co-founder. Meanwhile, the ECO2 cryptocurrency will serve as a trading tool for payments and cross-border transactions, akin to Alibaba’s Alipay.

Synergy is engaged in advocacy work in China and other parts of Asia. It is a member of the Climate Chain Coalition (CCC), an initiative launched by the United Nations Framework Convention on Climate Change (UNFCCC) to advance blockchain applications in mitigating climate change.

China in the spotlight

Carbon trading can be divided into two types: the compliance market (aka cap-and-trade), where entities can purchase carbon credits in order to meet regulatory targets; and the voluntary market, where companies and individuals voluntarily decide to purchase carbon credits to “neutralize” or offset their emissions. In China, the world’s largest emitter and exporter of carbon, both the compliance and the voluntary markets are still in their infancy.

Despite the fact that its emission reduction efforts have been in the spotlight in the past few years, China still yet to establish a fully functional nationwide carbon emissions trading scheme (ETS), yet another name for cap-and-trade. A recent survey suggests that the country will only be able to achieve a fully functional ETS by 2025.

Even so, by the end of last October, the accumulated trade volume from China’s seven regional carbon trading pilot schemes still reached RMB 6 billion ($863.9 million), a significant increase from the previous year’s RMB 4.7 billion; a total of 250 million metric tons of carbon dioxide had changed hands within the regional pilot schemes. 

Stian Reklev, co-founder and Asia Pacific director at Carbon Pulse, an online publication focusing on carbon initiatives and climate change policy, told TechNode that a key factor holding back development of China’s carbon market is the complexity involved—for example, in calculating the reasonable allocation of emissions allowances within the system. If underallocated, carbon credits would be too expensive for companies to purchase; on the other hand, overallocation of carbon permits could lead to dramatic price drops and possible market collapse—indeed, that was the main cause of the EU’s carbon market price crash in 2007.

To properly calculate allowance allocation, the government needs historical emissions data from companies, but Reklev pointed out that the reliability and accuracy of data reporting in China can be difficult to ascertain.

Blockchain might help solve some of the issues that have long plagued the carbon markets, such as fraud and double counting. According to Synergy, their blockchain-based platform could help with tasks such as carbon accounting or tracking emission-related data.

Individuals matter

Whether we admit it or not, everyone bears some responsibility for generating carbon emissions, whether it’s in the products we buy, the electricity we use, or the fuel that powers our businesses, factories, and transportation.

“Although climate change is affecting every single person living on this planet,” said Lin, when it comes to taking actions to reduce emissions, “the efforts take place often on the national level rather than individual.”

Personal carbon trading schemes have been proposed and tested, yet none have yet taken hold at scale. As things currently stand, individuals cannot directly participate in the global carbon economy.

Lin hopes to engage more individuals in the carbon market. Although Synergy currently specializes in the much smaller voluntary emissions reduction trading market, the company’s founders believe that by offering an easier way for individuals—as well as companies—to engage in the buying and selling of carbon credits, the concept could take root and become more prevalent in China.

Synergy’s next step, Lin said, will be implementing a standard for decentralized carbon emission trading. Currently, transaction of carbon credits must go through centralized organizations such as the Verified Carbon Standards (VCS), a voluntary program for the certification of greenhouse gas emissions reduction. Lin’s vision for a decentralized standard eliminates the need for a single entity to approve each transaction, just as Bitcoin renders unnecessary a centralized bank to process the transfer of money.

Still a long way to go

Over the past two years, Reklev of Carbon Pulse said he has witnessed the emergence of numerous blockchain projects, though he questions how many actually thrive.

The most viable ventures tend to rely on the backing of large corporations, such as when IBM teamed up last year with blockchain startup Veridium Labs to launch a carbon trading platform that records and tracks transactions on blockchain.

Moreover, in China, the voluntary carbon market is still small in comparison to the compliance market because awareness among companies and consumers is still low, said Reklev. “One of the biggest challenges for the voluntary market would be to find the interested buyers,” he said.

The demand for voluntary carbon markets will likely rise as the economy improves and people become more environmentally aware, he added.

Although the concept of neutralizing emissions hasn’t yet taken off in China, some Chinese tech companies are beginning to see value in participating in the carbon economy. Alibaba’s Ant Financial launched the Ant Forest app on the Alipay platform in 2016, providing some 700 million users with an online carbon account to measure the carbon footprint of their daily activities.