Blockchain-Based Accounting and Crediting of Greenhouse Gases for Sustainability

On January 20th the United States joined over 190 nations to officially re-enter the Paris Agreement. The agreement sets emission standards and allows for emissions trading. Signers of the agreement are committed to reducing emissions for a more sustainable world by 2050. It's not just regulators, up to 68% of consumers consider sustainability during their buying process.

Reducing your carbon footprint is good for businesses and the planet but a few questions remain. How do businesses avoid a major disruption in their supply chain while implementing new measures aimed at carbon reduction? How do we get accurate accounting? How will businesses profit from the new opportunities that arise? And can we create new sustainable job opportunities beyond the climate transition?

Although there are both regulatory and social initiatives to reduce our carbon footprint, in this article we focus on the accurate reporting on carbon emissions and business opportunities as carbon credits spur innovation creating new marketplaces.

The primary goal for these new marketplaces is to increase liquidity and accessibility for reselling excess carbon credits to other companies. Let's break down what carbon credits are, how we account for them, how the market works, and where blockchain comes into play.

What Are Carbon Credits?

A carbon credit can be seen as a license, permit, or certificate. The permit is given to a company to emit a limited amount of carbon dioxide (CO2) or other greenhouse gasses (GHG) into the atmosphere. A set of standards on the accounting and reporting for seven greenhouse gases as covered by the 1997 Kyoto Protocol:

carbon dioxide (CO2)
methane (CH4)
nitrous oxide (N2O)
hydrofluorocarbons (HFCs)
perfluorocarbons (PCFs)
sulfur hexafluoride (SF6)
nitrogen trifluoride (NF3)

A single carbon credit can be used to emit a total mass of one ton of carbon dioxide. If companies exceed the cap, they may be fined or risk paying higher taxes. Carbon taxes are intended to deter individuals and businesses from using excessive amounts of CO2 by decreasing the demand for goods and services. Alternately, many nations, including the US and the UK, provide tax credits to taxpayers who capture, store, and/or use greenhouse gases responsibly. For businesses, it's best to reduce emissions and work towards a sustainable economy, preferably net zero.

In A Blockchain-based Carbon Credit Ecosystem, published on January 15th, 2021, Dr. Soheil Saraji and Dr. Mike Borowczak from the University of Wyoming identified two types of carbon credits:

Voluntary emissions reduction (VER): a carbon offset exchanged in the over-the-counter or voluntary market for credits.
Certified emissions reduction (CER): emission units (or credits) created through a regulatory framework to offset a project's emissions.

Carbon offsets and credits work in tandem. Carbon offsets are projects beyond a specific company. Offsets include the building of wind farms, preserving forests, or planting new trees. Unlike carbon credits, carbon offsets are not mandated by any regulatory requirement, but when these types of projects produce a reduction of carbon dioxide emissions they result in a carbon credit. Carbon offsets fund projects in other areas such as forestry or renewable energy, but they don't stop pollution at the source. However, it should be seen as a step in the right direction.

Carbon Marketplaces and Net Zero Incentives

When companies reduce their emissions, they will have extra carbon credits which they are legally* allowed to sell. Analysts project the carbon credit market to be worth $50 billion by 2030. Carbon marketplaces will allow for the trade, speculation, and resale of unused credits. The speculation adds another dimension to climate initiatives, one that climate-aware blockchain and crypto experts are currently innovating.

Businesses will continue to speculate on the upside potential and demand for carbon credits. Some will hold their carbon credits to sell for a profit in the future. Others will purchase additional credits on the open market as a long-term investment.

Carbon credits and the exchange of these credits are, for a large part at least, temporary. The end goal is a net-zero world with no pollution from innovation, investments in research and development, and manufacturing. Companies are therefore incentivized to reduce their footprint quickly to recoup some of the expenditures of implementing climate initiatives.

While at Disney, Dragonchain quickly realized that incentives change behaviors. Marketplaces as a means to drive the value of a scarce item with utility are the perfect avenue for providing those incentives to reduce one's carbon footprint. Dragonchain takes it a step further by using multiple blockchains for proof so that businesses can now prove carbon offsets are legitimate.

Blockchain adds a layer of trust and makes the exchange of information and value seamless across the entire value chain. Dragonchain allows for measurable proof and verified transparency to track and record data from start to finish. Dragonchain can track measurable carbon emissions from businesses and consumers to ensure the level of emissions aligns with the number of carbon credits used.

For example, through sensors, emission readings directly from a residential HVAC system would be recorded on-chain for measurable proof and verified transparency. If all emissions are recorded, it becomes easy to deduce what businesses and consumers did not use and is therefore available for resale.

Cap and Trade

A cap-and-trade system caps the total levels of carbon and other greenhouse gas emissions. Caps are increasingly reduced yearly to create scarcity. Companies with low GHG emissions can sell the carbon credits they didn't spend to other companies who emit more than they were allowed to. This creates the supply and demand of the carbon market and determines the pricing of carbon and other GHG credits on the open market.

Carbon Accounting

Last year climate risk disclosures surged as businesses expected an increase in regulations and consumer demands for carbon reductions. The Securities and Exchange Commission (SEC) has made corporate disclosures on climate-related matters a top priority.

Because climate matters may affect a company's finances, it is critically important that financial reports include climate-related disclosures that are accurate and verifiable. To ensure auditors can sign an audit, disclosures should be structured in a way that provides for uniform information. Technology-savvy businesses understand blockchain may provide a solution.

For businesses, maintaining compliance in the reporting of their carbon footprint is a task that contains a lot of moving parts. For instance, a simple product will have a carbon footprint that spans the source materials, the manufacturing, and the shipping. The ability of all these parts to "talk" is a crucial element in determining the overall carbon footprint of a product. In all reality, maintaining compliance in carbon accounting is an interoperability and supply chain inventory management issue.

Implementing the proper reporting is an important first step for overall carbon footprint reduction.

Fraudulent Carbon Credits

Unfortunately, as in any industry, carbon credits and carbon offsets are also attracting companies who commit fraud either intentionally or mislead and deceive, unintentionally. On April 5th, 2021 The Nature Conservancy made headlines following concerns that they might have facilitated the sale of meaningless carbon credits to clients including JPMorgan Chase & Co., BlackRock Inc., and Walt Disney Co.

The Nature Conservancy announced an internal review led by scientists with a team of experts that have deep project knowledge, as it aims to meet the highest standards with their carbon projects.

Corporations can purchase credits that can be used in their publicly reported emissions, falsely claiming large reductions of carbon. "Selling credits for well-protected trees potentially undermines the sustainability efforts of some of the world's biggest companies. Each carbon offset is supposed to represent the reduction of one ton of planet-warming emissions that would have otherwise spewed into the atmosphere without intervention", Bloomberg noted.

Brazil faces similar challenges, where the unregulated voluntary carbon credit market is booming. REDD+ projects issue carbon credits for reforesting or to avoid deforestation. However, protecting one area in Brazil is more likely to result in deforestation moving to another area. Ultimately, Brazil will probably become regulated much like other cap-and-trade systems like the Regional Greenhouse Gas Initiative (RGGI) in the US.

Enterprise NFTs Carbon Credits

Enterprise NFTs will revolutionize asset management and ownership. Dragonchain can tokenize these permits or licenses into Enterprise carbon credit and offset NFTs for authenticity. These functional NFTs can provide access controls to carbon credits and track carbon offsets. The immutable data can offer selective transparency to address issues with fraud.

For example, if Company A uses less carbon than their allotted cap, a single use NFT containing the actual record of use can be minted. The NFT can then be sold to Company B who will then turn around and use the credit. With the NFT, Company B knows exactly what Company A already used and what is available for use now. Once Company B brings the credit to zero, the NFT will be burned but proof of Company A and Company B's use remains secured to Bitcoin and Ethereum.

As an added bonus digital ownership of physical carbon offsets with Enterprise NFTs can increase your brand's reputation, loyalty, and engagement by providing authenticity to consumers.

Tokenized Carbon Credits

If a business requires tokens to be fungible, carbon credits can be tokenized by joining existing consortiums or creating new Enterprise tokens. Blockchain-based tracking will help ensure the carbon offset really happens by keeping it under tight control. Businesses can keep carbon offset projects recorded internally by tracking projects. When businesses resell credits and certificates or purchase land and forestry they can provide proof to customers, clients, and regulators.

From coins representing a certified mass of CO2 to verifiable badges of honor proving ownership of your own forest, there are endless possibilities with Dragonchain and tokenizing carbon.

What are your goals for tomorrow and how may we help achieve them today?

Blockchain is ready to meet the challenge

On April 8th, 2021, The Crypto Climate Accord announced its formation and initiative to make the cryptocurrency industry 100% renewable by 2025. According to the announcement, the accord intends to "employ a 'big tent' approach and act as a coordinating framework to decarbonize all aspects of the industry." A framework that, also according to the announcement, includes:

Enabling all of the world's blockchains to be powered by 100% renewables by the 2025 UNFCCC COP Conference
Developing an open-source accounting standard for measuring emissions from the cryptocurrency industry
Achieving net-zero emissions for the entire crypto industry, including all business operations beyond blockchains and elimination of historical emissions, by 2040

While the Crypto Climate Accord focuses on the framework for carbon reduction in blockchain technology, it is important that we use the correct methods for recording and tracking carbon emissions. A blockchain-based carbon credit marketplace or service is only part of the solution.

Solutions must also include assurance that a blockchain transaction of 50 tons of carbon offsets is met with proof that the offset is happening and is legitimate.

Because Dragonchain is a hybrid blockchain platform, it allows for the selective exposure of information on public blockchains while also protecting sensitive information that you don't want to expose. Information remains on a business's private business blockchain while the proof is decentralized to Bitcoin and Ethereum.

What kind of application, service, or solution do you want to build while using blockchain technology?

Dragonchain can interop with IoT devices and sensors to record emissions to ensure a reliable and safe issuance and tracking system for carbon credits. The measurable proof can be supplied to regulators, climate-aware customers, or the business's records.

We use smart contracts to mint, burn, transfer, automate or verify pretty much any type of value and/or information needed. Written in any coding language, businesses can quickly implement solutions to record and prove they are reducing their carbon footprint.

*Subject to your National/state/local laws and regulations.