Transparency in Emissions Reduction – Can Blockchain Improve Sustainability?

There are many areas where the digital transition could help utilities reduce carbon emissions and fulfil their obligations to governments and regulators. A particular issue is trust and verification. A company might have achieved a carbon reduction target on paper but unless this is verified by a method with sufficient probity, there will be doubts about whether the reduction was actually achieved. For example, in various carbon trading markets, fraud has often been discovered. The EU Emissions Trading Scheme (ETS) was a victim of numerous VAT frauds by professional criminal gangs, which undermined its effectiveness.

Carbon credits and Voluntary Emission Reduction (VER) certificates are often validated by “voluntary” certification which involves a wide range of bodies and different quality standards that often are not recognized by major industry or financial organizations. With most Western companies expected to provide high levels of ESG (environmental, social and governance) capability, this is a serious challenge.

Besides deliberate fraud, data could also be inadequate or not verified properly. Paper record-keeping is notoriously prone to error, which is why automated sensor systems are becoming widely used in the utility industry.

The issues are:

• Lack of transparency

• Poor traceability

• Improper accounting procedures

• Trust issues

• Flawed or incomplete data

The pathway to net-zero emissions includes the requirement for each organization's upstream and downstream suppliers to decarbonize as well. However, this is not an easy endeavor for large global corporations that often have thousands of suppliers.

Could blockchain technology make a difference?

As part of the drive for sustainability, the distributed ledger technology that is the heart of cryptocurrencies could be beneficially utilized. Blockchains can simplify and lower costs of ESG reporting, build trust in acquired data, develop new energy-related trading markets, and create innovative new products, like green investment bonds.

Earlier this year Volkswagen unveiled new blockchain technology to help ensure that electric vehicle charging stations were using sustainable sources to recharge their electric cars. The incentive is to acquire consumers who insist on validation that the energy being used to recharge their vehicles is clean and green, and not being generated by dirty coal power plants.

It is possible that blockchain systems can improve ESG-related markets, including the rapidly-expanding Voluntary Carbon Market, or VCM, where users exchange carbon credits that represent certified carbon removals or reductions of greenhouse gases (GHGs). Companies often purchase carbon credits to meet their carbon neutrality commitments. By using blockchain, and also creating or “minting” NFTs (non-fungible tokens, i.e. immutable certificates that can't be tampered with) that represent the carbon credits, both issuer and purchaser, as well as any supervisory bodies, could be certain that the stated amount of carbon was neutralized. This will create a more efficient marketplace.

Another factor is that investors are also putting sustainability as one of their criteria for investing in companies. With the sector in need of finance from many sources to complete the green transition, effective, transparent and accountable ESG systems will assist in the quest for investment funding.

Of course, blockchain is an emerging technology, which is not fully mature. Many people are very suspicious of the “wild west” unregulated nature of cryptocurrencies. This was not helped by the price shock as the market plummeted earlier this year. Two major alt-coins: Celsius and TerraLUNA collapsed, losing investors large amounts of money.

Most utilities have sustainability goals, and as the energy market becomes more complex, with EVs and DERs needing to be incorporated, blockchain could well have a part to play in facilitating a transparent, tamper-proof and verifiable ESG protocol available to consumers, management, stakeholders and regulators alike.