The Role of Blockchain in Climate Change Mitigation

The global climate challenge creates an imperative to harness technological tools that can help to reduce humanity's carbon footprint. Governments and international committees establish rules and policies, such as the Paris Agreement of 2015, that aim to slow the rate of climate change.

However, any legal or policy framework needs suitable tools and systems to be implemented effectively. Technological innovation is also becoming a focus in areas such as reducing carbon footprints, harnessing renewables, and making more effective use of existing resources.

Blockchain technology has several features that could bring about positive change in climate mitigation efforts. The ability to introduce transparency and traceability to transactions, along with a trusted, immutable ledger, can help to shine a light on areas such as high carbon expenditure, while peer-to-peer connectivity can enhance opportunities in areas such as energy trading and production. Token economics can also build incentives into the system, ensuring that people have a reason to act in good faith.

Using blockchain, particularly cryptocurrencies, in green projects or those aimed at social change is sometimes referred to as "regenerative finance" or "ReFi." Blockchain initiatives for climate change mitigation and the environment can be classed as one branch of ReFi. Still, ReFi can also encompass broader impacts, such as preserving cultural heritage or reducing socioeconomic inequality.

Green blockchain initiatives for climate change mitigation

There are many experiments and projects underway that leverage blockchain for climate change mitigation. Most can be put into three broad categories – carbon tracking initiatives, renewable energy grids, and efforts to support environmental sustainability.

Blockchain for tracking carbon emissions

Tracking carbon emissions allows firms to provide more transparency about their carbon footprint. However, the calculation of a carbon footprint can be a complicated exercise. Companies are issued a certain number of carbon credits that are designed to act as a cap on the carbon emissions each company can emit. However, if a company doesn't use its total allowance of carbon credits, they can be traded. Similarly, companies exceeding their carbon allowance can purchase credits. Carbon credits can also be generated through activities such as planting trees.

However, over the years, various issues with the carbon credit system have emerged, such as fraud and manipulation, including generating and trading fake credits. The carbon markets are also fragmented and lacking transparency regarding trading activities, making it easier to mask any ill-intentioned activity.

Many of these challenges could be effectively addressed with a blockchain-based system. Tokenizing carbon credits as on-chain assets could make them more transparent and traceable.

Each tokenized credit could have its own digital passport, making it easier to store information about the source of a credit or offset and removing any risk of double-counting or double-spending. Executing carbon credit transactions on-chain can also speed up transaction times and streamline settlement compared to existing systems, as well as make it easier to ensure compliance with legal disclosures about carbon expenditure.

There are several projects aiming to bring carbon credits on-chain. One example is the Climate Action Data Trust, which provides infrastructure for connecting fragmented carbon registries into a blockchain-based system where all transactions take place transparently and are recorded on a public blockchain ledger.

Renewable energy

In principle, blockchain can be used to support trading of renewable energy by tokenizing units of energy on-chain. This could facilitate the production and distribution of energy among smaller producers or even individuals on smaller, decentralized grids.

Implementing the blockchain element of such a solution isn't necessarily the difficult part. The key challenge is that established physical energy infrastructure is based on models of centralized production and distribution. Therefore, even testing such models requires building new distributed energy grids from scratch.

However, the climate imperative is deemed sufficiently important that governments and firms are prepared to invest in exploring what's possible. One of the more prominent examples of blockchain being leveraged for renewable energy is the European Flexigrid project. It started in 2020 with funding from the EU's innovation-focused Horizon program.

Flexigrid aimed to create an architecture for small and medium distribution system operators that are designed for flexibility, such as the ability to handle significant variations in supply and demand without outages. As of 2024, the project is still running with pilots in several EU countries.

While slow and costly to develop, these Distributed System Operations (DSO) for energy delivery are seen as strategically important for transitioning away from fossil fuels – for instance, by enabling more charging points for electric vehicles in remote locations that would be otherwise unserved by centralized providers.

Environmental sustainability

Blockchain can be used in several other broad ways to support environmental or sustainability initiatives. For example, some enterprise blockchain firms offer on-chain solutions for reporting on climate impacts in compliance with rules such as the EU Corporate Sustainability Reporting Directive and the Sustainable Finance Disclosure Regulation.

Another example comes from several initiatives harnessing blockchain for transparency in reforestation efforts, with some incorporating innovations such as smart contracts for disbursing ongoing funding based on the success of tree regrowth efforts.

Addressing the environmental impact of blockchain

The impact of cryptocurrencies on the environment is frequently raised as a counterpoint to any discussion of the role that blockchain can play in climate mitigation. In particular, Bitcoin's proof of work algorithm consumes vast amounts of energy, in part due to the popularity of Bitcoin as an asset. Critics argue that until this problem is addressed, blockchain technology creates more harm than good.

However, Bitcoin proponents offer the counterargument that the mining industry has made extensive headway into the use of renewables, and that Bitcoin can play an important role in balancing energy grid demands – a requirement that becomes increasingly critical as grids shift to renewables, which can experience peaks and troughs in supply.

Nevertheless, perception is important and advocates of blockchain in climate change mitigation often must manage negative preconceptions about the technology due to Bitcoin's energy consumption. Therefore, along with efforts to harness blockchain for climate mitigation, it's also necessary for Bitcoin to become as close as possible to carbon-neutral, if blockchain is to be a net good for the climate and perceived as such.

Blockchain in climate change essentials

• Blockchain's features, such as transaction transparency and an immutable ledger, offer the potential to support climate change mitigation initiatives.
• One key area is in managing the complexities of carbon credits, where blockchain could address issues such as market manipulation and fraud.
• Other opportunities include using blockchain to facilitate distributed energy production and supply, and in initiatives like reforestation.