Abstract

The rise in economic growth of the world has also led to a significant and an almost perilous rise in the carbon emission. This carbon and GFG emissions further contribute to the global warming and puts the world in an infinite loop of development and disaster. The debate of development and environment has been relentless and unremitting. It is at this juncture that initiatives like the Sustainable Development Goals find its way. Economies, in specific the emerging and developing economies like India and China must pay heed to sustainable methods of development. Many a environmental hazards can be avoided by reducing or maintaining a sustainable level of carbon emissions. The question is how can this ensured.

The answer to this question lies in this article. This article aims to discuss the ever-growing issue of carbon emission and analyse the effectiveness of sustainable solutions to tackle the same. One such solution is Carbon Emission Trading as recommended in the Kyoto Protocol. This paper investigates the possibility and viability of integrating blockchain technology with the various carbon trading systems of the world like ETS, Cap and Trade system among many more in order to assess the efficacy of these solutions when integrated with the blockchain technology. The paper further deliberates upon the position of carbon emission trading in India and the feasibility to introduce blockchain into the same and suggests a plausible way forward.

Keywords: Blockchain, Kyoto Protocol, carbon market, CET, carbon emission

Introduction

One of the major environmental menaces facing the world today is carbon dioxide emissions. To get down to the basics, carbon dioxide emissions stem from human activities as basic as day-to-day tasks like running a refrigerator, to large-scale industrial activities. The gases emitted through such man-made activities contribute to the greenhouse effect which further leads to an adverse effect on the climate. It is unfortunate that despite enough research and statistics, most people and countries still fail to acknowledge and address climate change as a real issue and work towards sustainable solutions. The estimated magnitude and impact of this neglected affair is rather devastating.

The past two years have been a testament to the wrath of climate change globally. From the Australian bush fires to the melting glaciers, from Canada’s heat dome to China’s deluge, one can go on about the catastrophic effects of climate change. China, one of the fastest-growing economies of the world, is infamously known for being the largest emitter of carbon dioxide. The United States is succeeded by India, making India the third-largest carbon emitter as of 2020. Climate change is a ticking time bomb, and these recent events are a wake-up call for the industrial world to adopt sustainable practices.

Where the world today is facing the wrath of the climate crisis, the effect of carbon emissions has forced the countries and companies to redesign their processes to make it more sustainable in their way forward. For instance, Coca-Cola pledged to sustainably source all key ingredients and reduce carbon footprint by 25% by 2025. BMW is time and again appreciated for its sustainable manufacturing through fuel-saving and clean production practices. The Government of San Francisco, California is working towards diverting all its waste away from landfills in the next few years and has banned harmful items like plastic bags and waterbottles. Such examples can be found in other sectors like hospitality, travel, software, retail, and so on.

Amidst such efforts by different sectors, one viable and universal solution to this ever-growing precariousness to mitigate greenhouse gas emissions is via a globally incentivized market mechanism proposed in the Kyoto protocol.  

Kyoto Protocol & Paris Climate Agreement

The Kyoto Protocol was enforced in 2005 after a lot of deliberation since 1997. Today, 192 member countries are a signatory to this protocol. It actualizes the United Nations Framework Convention on Climate Change’s (UNFCCC) aim to commit the industrialized countries to reduce carbon and greenhouse gases emissions in accordance with agreed individual limits. As per this protocol, the countries are encouraged to reduce and limit greenhouse gas and carbon emissions through national measures. However, it also suggests an alternative market-based mechanism:

• International Emissions Trading
• Clean Development Mechanism
• Joint Implementation

Toelaborate on the first mechanism, Article 17 of the Kyoto protocol allows countries that have emission units to spare – emissions permitted to them but not “used” – to sell this excess capacity to countries that are over their targets. Here, carbon dioxide and other such greenhouse gas emissions are considered as commodities that could be traded, forming a carbon trading system. Several governments and companies have attempted at curating a device to develop and implement this idea. However, most of it have seemed like a fool’s errand.

Along with the Kyoto Protocol, another such initiative of the UNFCCC is the Paris Climate Agreement. Adopted by 196 member nations and enforced in 2016, this agreement is also aimed at reducing carbon and GHG emissions by providing financial, technological, and capacity-building support to countries who need it. Nonetheless, this agreement does not talk about a market-based solution like the Kyoto Protocol.

Going back to the Kyoto Protocol, currently, different countries have adopted different carbon trading systems such as the Cap-and-Trade system of Gujarat, EST of the European Union, and so on. However, one of the rudimentary shortcomings of these methods is the lack of standardization. The current systems are subjected to a disintegrated implementation and lack transparency, leading to problems like double-spending, substantial transaction costs that transfer the earnings to middlemen involved, and over-crediting. While the Kyoto protocol did suggest a solution to this debacle, it failed to take into consideration the efficiency of these systems. The companies and governments using these varied systems are limited to trade only within a specified territory as the practices are not universally implemented. This calls for a single, unified and standardized global methodology. Only a system like this can ensure greater sustainability in the long run. One such solution to this issue is the integration of blockchain technology into carbon emission trading.

The Concept of Blockchain

To introduce, blockchain is a concept that has attracted a lot of traction from various sectors. It is an incorruptible digital ledger technology that is decentralized, distributed, and open, capable of storing anyinformation. Blockchain is a decentralized form of technology that comprises a widely disseminated archive of data that is constantly scaling up and has a record of reliable and protected data. Each block has a timestamp and link to thepreceding block.

While blockchain has also gained its popularity through cryptocurrencies, the technology is a lot distinct. Several organizations realized that blockchain technology could be used for a lot more than just the transaction and mining of cryptocurrencies. Global establishments such as the UNFCCC Secretariat have also recognized the general capability of blockchain technology in curbing carbon emissions. Developing countries like India have shown an interest towards integrating blockchain with elections. Developed nations such as US, UK, and Canada have paid close attention to the development of blockchain technology and its applications in various fields such as financial services, smart contracts in healthcare and music, and smartproperty.

While the level of privacy and transparency seem to be remarkable, there are a few negatives to this framework which easily convinces us to take a step back and look at the actual effectiveness of this revolutionary idea.A primary point to note is that the adequacy and efficacy of blockchain technology are often not evaluated on the basis of sound theoretical and practical claims, but rather on the intuition of trust, transparency, accountability, and decentralization. However, if implemented thoroughly, this technology can act as a breakthrough in the field of sustainable development of trade and commerce.

Comparison between Different Systems

• EU Emission Trading System

Before we delve into the interaction of blockchain with the carbon trading systems across the world, one must analyse the different systems that are in place today. To begin with, the European Union’s Emission Trading System (ETS) was launched in 2005 and has grown to become the world’s largest emission trading system dealing with the world’s predominant emissions trading. Its coverage extends to over 11,000 installations (power stations and industrial plants) with significant energy usage as well as airlines operating in the EU, together representing about half of the EU’s greenhouse gas (GHG)emissions.

The EU ETS works on the principle of the cap-and-trade system. It sets a maximum limit or cap on the number of emissions that can be made by one entity or entities covered under the ETS. Over time, this maximum limit is reduced, thereby curbing the carbon emissions. The ETS is tokenized to ensure smooth implementation of the system. Through permit token, burn token, and transfer token, the credit earned through emission trading can be used in a systematic and an accountable manner. Tokenization of ETS has also enabled it to better realize the benefits of implementing blockchain into the system. 

Article 6 of the Paris Climate Agreement already provides a foundation for decentralized cooperative climate action. Blockchain, as already discussed, is a decentralized technology and is expected to be a key technology to deliver these ambitions, particularly through future carbon markets. While blockchain can be integrated into the ETS, it also poses certain risks that compel one to revisit the repercussion and implications of integrating the two. Blockchain doesn’t seem like a cost-effective solution. The programmability and operating cost of integrating the two is too high and its success is contingent upon the legislative changes that may come. Adding on,a critical issue with any blockchain solution is its interface with the real world. The verification and accreditation processes in the EU ETS arecomplex and potentially burdensome. Transitioning from the current system of verifiers existing in the ETS to a completely decentralized system of indicators and verifiers as entailed in the blockchain is rather difficult and problematic when investigating its legality. This transition will involve both time and relevance which the system may not be able to afford currently. Therefore, such measurement issues may not allow for blockchain to be implemented into the current system.

• BCRB Model

Another model that can be analysed is the BCRB model. This algorithm, also known as the seller/buyer reputation-based trading system, is what drives how a transaction is carried out in the blockchain ecosystem. The entire procedure will be carried out via blockchain, with no changes to the process of issuing, distributing, or relinquishing allowances. Credits would be allocated via the Grandfathering, Benchmarking, and Auctioning processes. To collect accurate input data and ensure that the correct quantity of permits is relinquished, tamper-resistant smart metres are required. It’s worth noting that blockchain can only guarantee the immutability of data entered, not its reliability.

Interaction of Blockchain with Carbon Emission Trading

Despite the shortcomings that one may highlight with respect to the integration of blockchain and carbon trading systems, if such lacunae are overcome, then blockchain could prove to be one of the most efficient solutions to the issues posed by the current carbon emission trading systems. Integrating blockchain and carbon markets would mean decentralization, improved transparency, and better cost-effectiveness. “Blockchain technology can also make it easier to track and report emission reductions,” opined Raj Kapoor, Founder of, Indian Blockchain Alliance.  This method can be proved cost-effective as it eliminates the intermediaries who would otherwise add to the transaction costs. Blockchain also enables in the expansion of voluntary markets and increase their accessibility through the improved transparency in credit tracking. All of this indicates an improvement in the accessibility to carbon markets via the integration of blockchain.

Why Blockchain?

• Merits

Being an unorganised sector, the current carbon offset market is beset with inefficiency. As of now, sale of credits is an imbalanced act between larger corporations having huge resources and small corporations having their own limitations. This results in restricted access for smaller groups or individuals to equilibrate their environmental impact by purchasing or selling offsets.

Blockchain stores data and transactions on a multi-nodal ledger system that is accessible to everyone on the network, thus enabling greater accessibility and transparency to all the members of the ecosystem. Due to the easy access and transparent nature of blockchain for its users, it can be efficiently leveraged for the trading of carbon credits while aggregating small buyers for carbon offset projects or adding verified sellers or projects for sale of carbon credits from the developing countries like India.

Furthermore, the blockchain-based carbon credit ecosystem is safe, efficient, and uniquely suited for implementing carbon credit markets from developed as well as developing nations that have different environmental sustainability criteria. The immutable, cryptographically-secured distributed multi-nodal ledger enables reliable issuance and tracking of carbon credits at all levels of interaction making it a unique system. Public blockchains can be easily accessed by enterprises irrespective of their size throughout the world without restrictions, thereby reducing the entry threshold for the carbon trading market.

• SDG Exchange’s initiative

SDG Exchange is a unique carbon trading market infrastructure and platform which has been set up to implement Article 6 of the Paris Agreement in order to fully enable efficient, transparent, and trusted global marketplaces for carbon offsets. The SDG Exchange platform is based on blockchain technology (ETH) to track verified carbon offsets, facilitate trading, normalize standards and pricing, verify compliance, and carbon offset (credit) retirement. It seamlessly integrates all voluntary carbon offset markets globally, allowing for quick, safe, and profitable trading of these assets.

As the first global sustainability asset marketplace, SDG Exchange enables countries and companies to accelerate their adherence to Paris Agreement compliance through seamless, secure, and transparent blockchain asset transaction at a global scale. SDG Exchange (SDGx) delivers turnkey SDG market infrastructure for countries that require offset markets and offset solutions to meet Paris Agreement commitments (NDCs), as well as provides trading and custodial solutions for companies to meet requirements of the Task Force on Climate-related Financial Disclosures (TCFD). SDG also offers an independent exchange, capable of transacting in and across every market, as well as global offset price normalization.

Based on the blockchain, the SDGx platform provides an efficacious system to automatically eliminate current inefficiencies including double counting, double printing, double spending, and emerging double retirement. The platform enables for seamless tracking of carbon assets and exchange of emission permits, with “mint and burn” capabilities to track carbon assets, simplify trade and carbon credit verification, and track and permission movements. This SDG Exchange fills the gap by allowing countries and corporations to exchange carbon allowances to assure compliance and keep countries on pace to limit global warming to 1.5 degrees Celsius by 2030.

• Process for Specific Energy Consumption

The basic terminology used in blockchain-based system is Carbon credit wherein a carbon credit is an unit or an instrument that represents ownership of one metric tonne of carbon dioxide equivalent (using CO₂ as a unit to measure different greenhouse gases) that be traded, sold or retired. Carbon Credits are only traded in regulated, compliance mandated cap-and-trade markets.

Credit Tokens (ITMO Token or CARBONOS in case of SDGx) or Carbon credits are represented by digital tokens. ITMO token is digitalization of 1 tonne of Carbon in terms of UN’s Internationally Transferred Mitigation Outcome Guidelines. ITMO is a 21st Century solution for the Carbon market. Once the Carbon credit tokens are minted, they are credited, distributed, or sold/purchased to consumers, who can be carbon emitters or polluters- such as the energy industry or windmill farm or any other environmentally sustainable project which had been verified for its carbon credits.

Carbon Credit Trading Platforms/Exchanges such as SDGx are a digital marketplace where the consumers can buy/sell or trade carbon credits. The carbon trading exchange, fortified with market-leading features, enables smooth exchange and trading of tokens.

Smart Contracts:  The smart contract is responsible for the minting, burning, and distribution of carbon credit tokens. In addition, the smart contract facilitates the buying/selling and trading of carbon tokens on the carbon credit exchange.

Current Position in India

• A comparative study of Developed nations vis-à-vis Indian Scenario

A quick overview of the Kyoto Protocol’s history will help to clarify the goals and limitations of India’s coordinated efforts to reduce carbon emissions. In December 1997, the Kyoto Protocol was adopted, and it was essential in the establishment of the first carbon markets in several affluent countries. However, the effectiveness of emission reduction measures remained restricted due to the exclusion of developing countries such as India and China, as well as the US government’s refusal to ratify the agreement. The Paris Agreement, on the other hand, was ratified by 195 countries, representing more than 97 percent of global GHG emissions, with the ambitious goal of limiting global warming to 1.5 degrees Celsius. The tracking and reporting of emissions reductions, on the other hand, remains a challenge. This is due to double-counting of emission reductions, unit quality concerns, and an inability to ensure reliable accounting. This necessitated the creation of a transparent and reliable mechanism for tracking emission reduction progress. Until now, India has been a developing economy attempting to discover sustainable growth alternatives through the use of green resources while adhering to the Paris Agreement’s agenda.

A closer examination of the carbon markets in the EU, China, Japan, and California reveals a slew of issues and challenges, including tax fraud, inefficient transaction monitoring, and the issuance of surplus allowances, all of which result in significant price differences across global carbon markets. By decreasing information asymmetry and consolidating platforms globally, blockchain can address the issue of price differences.

• Command and Control Approach- Analysis

India’s current method to pollution management is command-and-control, which has resulted in high levels of non-compliance, a lack of high-quality information, transparency, and other issues. In India, there are two capital and trade markets. The first is a Renewable Energy Certificate Scheme, while the second is a ‘Perform, Achieve, and Trade’ (PAT) scheme that mimics the Emission Trading Scheme. Both have flaws and are ineffectual at producing emission reductions in a verifiable and accountable manner. A consistent standardisation and normalising mechanism for Specific Energy Consumption (SEC) figures across energy-intensive sectors is missing from the PAT scheme.

• Role of CPCB and CEMS

As the highest environmental regulating agency, the Central Pollution Control Board (CPCB) has a critical role to play in developing a strategic plan and obtaining the necessary funding from the Ministry of Environment, Forest and Climate Change for implementation. If these conditions are not met, the Continuous Emission Monitoring System (CEMS) rules will not be enforced. While implementation is critical, blockchain is critical for actual success, since it combines Blockchain technology with indigenous systems tailored to local industrial needs.

• The Cap-and-Trade System in Gujarat

Gujarat has implemented a Cap-and-Trade strategy to keep the total level of pollution produced by all industries under control by deploying Continuous Emission Monitoring Systems (CEMS) in various industries. The government has imposed a limit on the number of permits that can be bought and sold. The Gujarat Pollution Control Board (GPCB) will acquire readings from the CEMS in order to inform industry about overall emission reductions. The cap will ensure that the total level of pollution across all industries does not supersede the defined levels of allowed particulate emissions in the region.

The trustworthiness of the data obtained is a fundamental weakness in CEMS. The calibration of devices is critical in identifying the precise amount of emission. As a result, firms that aren’t interested in investing money to reduce pollution would want to tamper with the data or calibrate it in a specific way. Gujarat will be mainly successful in reducing pollution with this approach, but it will not be able to meet the needed emission reductions. This problem can only be solved with the help of blockchain technology. With every information available for scrutiny, blockchain will force people to conduct themselves responsibly. The proposed BCRB model makes no changes to Gujarat’s cap-and-trade system. Rather, it enhances the existing system, making it easier to apply in any given situation. The reputation element gives both financial and public perception benefits. The blockchain’s transparency can only help with this consequence. It also bans any organisation or institution from breaking its promise to reduce emissions. India’s carbon market has already generated over 30 million carbon credits, making it the world’s second-largest transacted volume and one of the fastest-growing. Speaking of India’s carbon trading market, which is developing faster than the country’s IT, biotechnology, and BPO sectors combined. It’s astounding to think that approximately 850 projects with a total investment of 650,000 million rupees are in the works. Carbon credits are being sold on India’s Multi Commodity Exchange, which is the continent’s first carbon credits exchange.

While India benefits the most from carbon trading and carbon credits are exchanged on the MCX, the country still needs a proper carbon trading policy, which indicates that carbon trading via blockchain will not be a success in India. As a result, the National Commodity and Derivatives Exchange Limited (NCDEX) has asked the Centre to build a comprehensive policy framework to allow trading of certified emission reductions (CERs), commonly known as carbon credits, on the market. A fully functional carbon trading system in India can be set up once the newly developed National Regulatory Policy on Carbon Trading is in place, allowing trading of domestically generated carbon credits through Block-chain based Trading Platforms or otherwise.

In addition, in order to comply with the Paris Agreement, in its true spirit, India must determine when and how its emissions will peak. It’s also crucial to assess technology solutions for meeting the reduction aim. This leads to the development of a roadmap for implementing blockchain-based carbon markets in India, which includes a broad analysis of policy design, feature selection, allowance allocation process, piloting an emission trading system, managing carbon allowances, price volatility, future integration into a global emissions trading system, and finally, trading restrictions.

Conclusion

To talk of the local perspective, blockchain, although a relatively old concept to the world, is still considered alien to India. Both the public and private sectors are yet to explore blockchain as an option for many transactions beyond the normative use of technology for cryptocurrencies. This is because of the decentralisation of the technology. For instance, while most financial markets are governed by authorities like SEBI, RBI and so on, cryptocurrencies cannot be regulated by one authority be it public or private. It is probable that it is because of this very reason that the arena of blockchain hasn’t been fully explored for other non-financial transactions as well.

Currently, as stated above, India follows a carbon market that is controlled and regulated by one or more agencies such as the Central and State Pollution Control Board viz. Gujrat Pollution Control Board and the Ministry of Environment, Forest and Climate Change. If blockchain is adopted, then none of these authorities can regulate the carbon markets in India and the transactions so done would only contribute to the unorganised sector. 

Due to the regulatory framework in India, unless any of the technological advancements such as carbon trading through blockchain are not supported or enforced by the Government Authorities, they will not be widely utilized for the sake of protecting the environment. There are companies who are conscious about carbon credits and carbon credit trading, but upgrading to the system of blockchain for the purpose of carbon credit on a mass level will happen only when the entire Government regulatory machinery is in sync with the carbon emitting industries and environmentally sustainable carbon credit generating projects. Only in that situation will our country be in a position to create a self-sustainable system for effectively utilizing block chain for the purpose of carbon trading. 

Additionally, India has a huge number of carbon credit merchants, however due to existing Indian legislation, customers from the European market are not able to enter the Indian market. In order to increase demand for carbon trading Forward Contracts, the Forward Contract (Regulation) Amendment Bill was tabled in Parliament (Regulation). Traders and farmers will find it easier to use the NCDEX as a carbon credit trading platform as a result of this improvement. However, it is worth mentioning that, in order to fully realise the potential of carbon trading in India, a new statute must be enacted, as the Indian Contracts Act is insufficient to control contractual concerns connected to carbon credits.

There is a long way to go till we achieve the targets of the Paris agreement to control our carbon emissions within specified limits and set up a National Blockchain Platform to set off the carbon emission with our own carbon credits to create a neutral balance situation.

While blockchain is not widely accepted in India, it has huge potential when explored. It is a very viable solution to many problems including carbon trading. India being the third largest emitter of carbon and GHGs if opened up to the world through blockchain integrated carbon trading would definitely aid in a more efficient and effective industrial sector. The only challenge, however, would be to establish a secure blockchain spread across such a huge population.

As a substantial number of clean development mechanism (Cdm) projects are pouring in from India, the rush to establish a carbon exchange in India is primarily driven by anticipation of a rising market for carbon credits emanating from India. However, the government has yet to agree on whether a carbon credit is a commodity or a financial instrument, which will determine whether carbon credits are traded on a commodity exchange or a stock exchange.

It will be difficult to predict the establishment of block chain-based trading platforms in India for the benefit of India generated carbon credits unless carbon trading is supported by a new legal framework and the creation of a regulatory authority. To sum it up, if this challenge could be overcome, then blockchain integrated carbon trading would undoubtedly become one of the most pragmatic and feasible solutions to this ever-growing issue in India.

About the Authors 

Ms. Pallavi Parmar is the Founding Partner of Vidhigya, The Advocates.

Ms. Charvi Devprakash is a 3rd Year Law Student from PES University, Bengaluru.

Editorial Team 

Managing Editor: Naman Anand 

Editors-in-Chief: Jhalak Srivastav and Aakaansha Arya 

Senior Editor: Muskaan Singh 

Associate Editor: Charvi Devprakash

Junior Editor: Sukrut Khandekar

Preferred Method of Citation  

Pallavi Parmar and Charvi Devprakash, “Blockchain Technology in CET” (IJPIEL, 2 February 2022) 

<https://ijpiel.com/index.php/2022/02/02/blockchain-technology-in-cet/>