Gartner: Will Blockchain fix the carbon credit market?

As a child, I spent hours fiddling with old objects I found at home. I took apart and put together old toasters, remote-controlled vehicles, alarm clocks and later even a moped. Growing up, this passion for problem solving helped me get my master’s degree in engineering and fostered the desire to learn new things. Two topics that have caught my attention in recent years are blockchain and sustainability policy – especially in carbon credits. Both blockchain and carbon credits are complex topics, and when you combine them, the difficulty squares. … Perfect for me!

How does the carbon market work?

For most organizations, reducing emissions is challenging, and it is currently impossible to prevent carbon emissions. Buying carbon credits compensates for the inevitable emissions that these organizations create. Carbon credits can be obtained by funding projects that reduce or absorb carbon emissions anywhere in the world. This is done through a voluntary market. It is also an involuntary market or “compliance market” where governments set limits on the amount of emissions that each industrial sector can create. If a company goes beyond the defined limits, it must buy credits from good companies. This mechanism is known as Cap and Trade.

What are the limitations of the voluntary carbon market?

Right now, there are several restrictions within the voluntary carbon market.

The voluntary markets lack transparency. These markets rely on brokers and retailers to link supply from project developers and demand from end users. Retailers buy large amounts of credit directly from the supplier and sell these packages to the end buyers, usually with a little commission. Most transactions currently take place in private conversations. Retailers and brokers own, manage and control centralized databases with information about customers and their transactions. The administrator decides who has access to the data and who can change it, and is responsible for the security and integrity of the data. The current system limits the disclosure of information to the public. Information is only available to market participants.

In addition, the carbon markets are usually structured as centralized silos and operate with specific standards and carbon pricing instruments. The lack of uniform standards and governance makes it difficult for market participants to control the quality of a given carbon credit and limit the possibility of linking markets in different jurisdictions.

Finally, these structures are associated with high levels of bureaucracy and high operating and maintenance costs, making it difficult to promote carbon markets as an optimal solution for emission reduction.

What does Blockchain offer?

Gartner defines blockchain as a distributed, read-only ledger that records transactions between participants. It is designed to record transactions or digital interactions and provide much-needed transparency, efficiency and extra security. This technology has already begun to revolutionize ways of doing business across different areas and clearly has the potential to improve the efficiency of carbon credit tracking and certification.

Public and private organizations and individuals who want to increase transparency around carbon credits will most likely engage with blockchain solutions in the future, if they have not already done so. In fact, a few developers are introducing blockchains specifically to support multi-party collaboration in this field. These solutions aim to improve the operational efficiency of carbon credit trading and to stimulate climate action from institutions, individuals and private organizations. Tokens are used to represent and exchange carbon credits, which means that carbon credits are coded in the blockchain. The inherent properties of blockchain technology make data transparent and traceable, provide security and avoid double consumption. These properties will help to improve the carbon markets by increasing trading efficiency and market regulation and reducing the costs of carbon credit validation, carbon credit transactions, market entry and market operation.

Concluding thoughts

Blockchain has great potential for optimizing the delivery of energy projects – and more generally, supply chain initiatives – by providing end-to-end traceability, security and coordination. But all that glitters is not gold. The technology is too complex to be easily understood by the public, and it often requires changes in traditional processes, changes that can be difficult to justify and implement. In addition, the decentralization of the energy and carbon markets requires the use of a combination of different technologies, where blockchain solutions must be integrated with artificial intelligence and the Internet of Things. These technological advances ultimately require significant investment to develop digital skills, build infrastructures and introduce enabling capabilities.

Supply chain professionals need to start exploring and experimenting with these new technologies, reviewing their current ways of working, investing time to expand their knowledge and eventually finding the courage to launch dedicated pilots. Nobody says this is going to be easy, but blockchain is certainly an innovative trend that cannot be overlooked.

Marco Sandrone
Senior Director Analyst
Gartner Supply Chain
[email protected]

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