According to US-British finance company Refinitiv, the global greenhouse gas emissions trading turnover was $214 billion in 2020. Blockchain technology could play a key role in trading in this market.
Why is this issue relevant? Water vapor, methane, ozone, and carbon dioxide are highly transparent greenhouse gases in the visible spectrum. These greenhouse gases contribute to the atmosphere maintaining a comfortable temperature for life, but the balance of greenhouse gases has recently changed due to a drastic rise in CO2 emissions, causing global warming.
Emission allowances are regarded by the global community as one of the possible solutions for the problem of global warming. In 2005, 134 countries ratified the Kyoto Protocol in order to stabilize the concentration of greenhouse gases in the atmosphere. In turn, another important treaty on climate change was signed in Paris in 2015. These two documents have shaped today's allowances trading market. Corporations have to resolve the dilemma of whether to reduce emissions or increase costs. The cost of allowances rises permanently, and amidst the pandemic, the increase is particularly noticeable. For example, greenhouse gas emission allowances have risen from €33.27 to €62.45 per tonne in the European Union since the beginning of 2021. The total annual turnover in the European Emissions Trading Scheme is estimated at €51.4 billion.
In the US, the cost per tonne of greenhouse gas emissions is $23,30. Since the beginning of 2021, the auctioning of allowances has increased by 30.89%; however, the United States still lacks a unified emissions tracking system. Individual states have joined the initiative so far. California became the first state to trade emission allowances, followed by 11 other northern states. Washington, Ohio, and the Northeastern states are now planning to implement the program by 2022–23, while California expects to expand the initiative to Canada's Quebec as well.
China is the third major player in the emissions trading market, after the EU and the US. Despite early initiatives and a pilot project, the full market launch took place in the Middle Kingdom on July 16, 2021. China's total CO2 emissions make up 4 billion tonnes per year (the highest in the world); however, the country expects to completely eliminate greenhouse gas emissions by 2060. The cost of 1 tonne of emissions is 51.23 yuan (US $7.92) in China.
What about greenhouse gases in Ukraine
The readiness to monitor greenhouse gas emissions in Ukraine was declared in October 2020. The system was launched on January 1, 2021, but there is still a long way to go before the trading of allowances starts.
The government plans to make companies approve greenhouse gas emission monitoring plans together with the Ministry of Environmental Protection and Natural Resources of Ukraine. Companies will be required to submit their first reports by March 31, 2022. The opening of the emission allowances trading market is planned in Ukraine for 2026.
As of today, the country has approved a tax on greenhouse gas emissions. The tax amount is 10 hryvnia (EUR 0.32) per tonne. By comparison, in the European Union the cost per tonne of CO2 emissions is €62.45 and is expected to rise above €100 by 2030.
Energy Blockchain Labs – a revolution in emission allowances
Blockchain technology simplifies the implementation of the allowance system making it more transparent for all market participants. One of the first blockchain projects in the carbon market was Energy Blockchain Labs Inc., a partnership between IBM and EBL, which in 2017 resulted in an efficient and transparent platform where companies with high emissions can track them and purchase allowances as needed.
The initiative has reduced greenhouse gas emissions by 20%–50%, and the project primarily targets the Chinese market.
Tokenized emission allowances
The next step in the evolution of the system were projects offering tokenized emission allowances. Various companies have started creating platforms that issue tokens backed by emission allowances. The platforms are based on blockchain technology, so losing or replacing data in the blockchain is impossible. MOSS.Earth has achieved the most progress, issuing its own Moss Carbon Credit (MCO2) token. In August 2021, the project even attracted investment from SkyBridge, which bought tokens for the emission of 38436 tonnes of greenhouse gases. According to Coingecko, the MCO2 token is worth $7.5 as this paper is being prepared.
Carbon credit exchange
If tokenized allowances have already become the solution in the market, a joint project of four banks—CIBC, ITAU, NAB, and NatWest—has announced the creation of an exchange that will operate as a cryptocurrency exchange. But instead of digital assets, emission allowances for greenhouse gases will be bought and sold. The banks announced the initiative, called Project Carbon, in July 2021.
Initial access to the exchange will be limited to customers of the banks that created the platform. If this pilot project is successful, the carbon allowances will be traded by all the companies with emissions complying with the requirements (the enterprises emitting more than 20,000 tonnes annually). The transactions will be recorded in a blockchain, making it impossible to forge ownership, swap allowances, or commit other types of fraud.
The creation of a single blockchain platform for carbon trading is expected to be the start of the journey toward a green economy.
The main benefits of blockchain for the carbon market
Will blockchain be the panacea for all existing market problems? The question remains open; however, it is clear that the technology will be able to remove a number of obstacles:
· lack for transparency (the data in documents can be falsified);
· double counting of the results of environmental projects;
· necessity to accurately measure positive and negative environmental effects;
· trade and transfer of results obtained.
In the end, the introduction of blockchain technology is associated with increased market transparency, reduced transaction costs, fewer intermediaries, and increased overall system efficiency.
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