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Blockchain Unlocking the Climate Change Puzzle

FTWW Guest Editor Nisa Amoils and Dr Jane Thomason

In light of the recent announcement at Davos that Hyperledger has a new working group that will explore how blockchain can help governments and companies meet climate goals set out in the Paris Agreement to reduce global emissions, it is worth taking a look at how Blockchain helps in many use cases to fight Climate Change.  Blockchain has potential to transform the global green and climate finance landscape to help achieve the UN Sustainable Development Goals by 2030. 

Developing countries will require tens of billions of new public funding annually to adapt to climate changes that are already apparent. The global financial framework is undergoing a phase of transition and, given the pace of technological progress, the way money and transactions are managed will change substantially.

Blockchain-based FinTech innovations will help build the trust and transparency in international climate finance and will have potentially huge implications in scaling and speeding up climate finance transfers, as well as monitoring effectiveness. Blockchain can also  leverage private finance in a number of climate change policy areas, including renewable energy investment, green bonds, carbon finance and sub-national climate finance transfer mechanisms. Traditionally, energy production and distribution have been very centralised.

There are multiple startups and research initiatives that try to understand how Blockchain could create new ways of dealing with carbon emissions and pricing, smart grid management or energy data analysis in a decentralised way. 

Climate Finance

Climate finance channels funds toward activities that reduce or mitigate greenhouse gas emissions or help communities adapt to climate change’s impact. It is absolutely critical to poor countries’ abilities to prepare and protect themselves from the impacts of climate change, as universally agreed at COP 21 in Paris, where a  commitment was made to mobilise $100 billion annually until 2025. 

Blockchain smart contracts could speed up results-based climate finance  which pairs measurable changes in environmental factors with payments as incentives. For example, a measurable reduction in CO2 measured by an Internet of Things (IoT) based network of atmosphere monitoring sensors placed around a village, could “trigger” the release of cryptocurrency or record a commitment to pay to the village account an amount based on the observed measurement in the environment.

As soon as the sensor readings are transmitted via the internet to the destination smart contract with the rules that apportion payment for demonstrable reductions in greenhouse gases at the local level, a smart contract can facilitate immediate payment. Today, the model of performance evaluation and the subsequent payment processing for climate finance rely heavily on human actors and their sensing of the environment and reporting those measurements via phones, tablets, or web.  Blockchain has the potential for the process for administration of funds for climate change and resilience initiatives to be driven by a network of interconnected blockchains.

Outcomes from one smart contract will feed into one or more downstream smart contracts, or many smart contract outputs will feed into a single smart contract, or many smart contracts will feed their outcomes into another group of many smart contracts. Smart contracts offer a tamper-proof and zero-cost administrative mechanism for connecting positive (or negative) environmental changes or outcomes to financial incentives/disincentives.

This is infinitely more efficient than the current global system of aid administration we have in place today.  The entire mechanism will depend on the identity of people and machines (usually  IoT environmental sensors). Carbon pricing was developed to pay for the right to emit CO2 in the atmosphere. These rights can be traded. Carbon assets on a public blockchain will offer transparency and will ensure that transactions are valid and settled in minutes and the poor can convert into value.  IBM and Chinese Energy Blockchain Labs are working together to develop a blockchain marketplace for trading carbon assets.

The objective is to make it more efficient to develop and manage carbon assets and as such reduce carbon emissions. 

Renewable Energy

Blockchain  opens the doors to autonomous market players and services to disrupt the  energy market using a Peer to Peer (P2P)  business model. Developing countries represent one of the most interesting use cases for decentralised energy through a P2P infrastructure using new low cost renewable energies.  For instance, the price  of solar panels has dropped over 80% over the last decade. Solar panels can now be connected to the blockchain in order to enable consumers  to benefit from distributed generation.

This would enable a villager  to buy small solar panels and plug them into an off-grid network of cables in order to produce electricity for their local community. Another person from the same village can use its phone to buy electricity from the solar panel as a pay-as-you-go service. The incentive of buying solar panels for people in remote areas is high as they can immediately generate electricity and get paid instantly by the consumer.    The smart contracts on the blockchain allow participants in that system - consumers and producers - to buy and sell solar energy from each other, using digital tokens that can be redeemed for a local cryptocurrency or fiat. As the blockchain is immutable,  and highly secured through a distributed infrastructure it then ensures that this process is completely automated and cannot be hacked or corrupted.  

Smart Grid Management

Blockchain has a significant chance to help combat climate change as it enables the creation, usage and exchange of renewable decentralised energy in a trustworthy and reliable manner, which will make renewable energy a lot more attractive to consumers, organisations and societies.  Smart grids are the future of energy.  Smart grids will regulate energy demand to ensure that the grid remains online. Blockchain can help improve smart grids and the management of those smart grids and quite a few startups are working hard to develop a decentralised solution.

Investment in Climate is Accelerating at a Rapid Pace

There are a plethora of start-ups tracking the climate challenge.  A sample are listed below: 

Electron is using  smart contracts on the Ethereum blockchain to develop a smart grid that will always deliver energy.  

Grid Singularity is working on  a decentralised energy data management and exchange platform. This platform will enable regulators, operators, investors, traders and consumers to collaborate efficiently on smart grids.  The analyses of massive amounts of energy data can help organisations such as universities, meteorological organisations or financial institutions to gain insights from energy consumption. This information can help create new applications and reduce energy consumption. 

ElectriCChain is using Blockchain technology, in combination with SolarCoin, which  incentivizes solar electricity generation. The objective of ElectriCChain is to gather non-confidential energy data related to solar energy and they aim to build a network of millions of solar installations worldwide. Using the insights from the solar installations, they aim to deliver cheap and clean solar energy solutions for the globe.   

Azuri is producing low-cost solar panel solutions for off-grid areas in rural Africa. Beyond providing clean energy, this smart rent-to-own system, makes solar technology affordable at half the price of kerosene. This grants access to longer lasting renewable energy source without having to travel hours to get the kerosene.Evercity is a blockchain platform for impact measurement and  investment for carbon trading. 

LO3 Energy works with utilities and retailers to deliver a local energy marketplace that meets the demands of modern energy customers.  They offer a simple way to pool local distributed energy resources and enable customers to buy and sell local energy and optimize the grid at a community level.It’s not just startups that are popping up, but massive amounts of capital are being reallocated toward ESG investing by funds and big companies.

Proof of Impact, a Netherlands-based blockchain powered marketplace to donate or invest directly into measurable impact outcomes, closed its first institutional investment round. The round was led by Franklin Templeton, a global fund manager managing around $700 billion in assets, with participation from Ausum Ventures, Crypto Valley Venture Capital and Pangea Blockchain fund. 

On the road to sustainable mobility, Mercedes-Benz is increasingly focusing on procurement: together with start-up Circulor, Mercedes-Benz is conducting a pilot project for transparency on CO2 emissions in the cobalt supply chain as part of STARTUP AUTOBAHN. The project partners use blockchain technology to track the emissions of climate-relevant gases as well as the amount of secondary material along the complex supply chains of battery cell manufacturers. In addition, the data network documents whether the Daimler sustainability standards are passed on throughout the entire supply chain. 

Sustainable Finance

A question remains of how to fund investments in early stage climate  startups, especially for social impact start-ups that may need a longer runway than a typical venture investment  to support developers and teams to get prototypes to the point at which they can commercially scale. There are many impact funds already but there is another source of capital not yet tapped into.  Tokenization, or fractionalization, of illiquid asset classes has the potential of unlocking enormous amounts of capital being kept in illiquid assets from traditional systems.  The token economy can democratize access to capital for both investors and issuers.  Right now, this is still accredited investors but laws may change to open it up to a broader pool of potential investors interested in impact.  Blockchain technology provides an accountable, transparent system and removes the hindrances for many interested investors.

Unlocking the Puzzle

If Blockchain technology is to diffuse without a significant lag, then it needs to be socialised with investors and governments  and  use cases profiled.  The role and uptake of governments remains crucial, as the process of developing bankable projects has high upfront costs, often untenable for small local entities and communities. Public intervention will thus be more effective where it targets local capacity building and strives to overcome impediments of scale (e.g. setting up pooled finance facilities) so that private investments can be fully mobilized.

There remain several regulatory, infrastructure and operational barriers, with low power settings, and poor internet, although mobile penetration is growing rapidly.

There is value in uniting the Blockchain innovators in developed economies with the emerging economies that bear the brunt of the climate crisis.  This includes, developers, platforms, people who know problems, government, and finance (VC, impact investing, local finance donors, etc.).  The key challenges of financing climate initiatives  are to mobilize investments in a way that benefits the largest possible population, guarantees inclusion of the most vulnerable and underserved groups, and supports the deployment of sustainable and resilient infrastructure.  Blockchain technology offers a path forward in the quest to address one of our most pressing issues.  There is a need to reach out even more to connect innovative ideas, with the local private sector, and social finance organisations to encourage innovation, entrepreneurship, and action for pressing development challenges. Blockchain represents a strategic ally, not an alternative route, towards a greener, inclusive, and resilient economy.

At London Blockchain week  we will be bringing the latest on :
1. Global and Future Trends
2. Decentralised Finance - a mega trend
3. Digital Assets - What will be tokenised next?
4. Blockchain and Internet of Things 
5. Blockchain Marketplace is Open for Business.
6. How is Industry Deploying Blockchain? 
7. Creating Transformational Social Impact with Blockchain and Frontier Technologies
8. Will Governments transition to Blockchain? 

See you there!

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