POLICY PAPER: If you haven’t heard of blockchain yet, you soon will. From its beginnings as a system for verifying Bitcoin transactions, blockchain is now sweeping the world of finance and expanding into other areas of business and public policy. And it’s already being touted as a tool for facilitating climate-related transactions, including results-based payments for REDD+ – as outlined in a recent policy paper from Climate Advisers, Lestari Capital and Lykke.
So, what exactly is blockchain? In the jargon, it’s a distributed ledger technology (DLT), which uses a peer-to-peer network to securely verify and record financial and other transactions. Instead of relying on information stored in a central location, such as a single company’s database or server, DLT distributes the data associated with the transaction across an open network. This decentralized process makes it almost impossible to tamper with the data.
The system streamlines the transaction process – and reduces costs – by bypassing traditional intermediaries, including banks, governments and third-party companies. Instead, the validation process is crowd-sourced to other users of the system who verify and confirm each transaction. Once verified, the transaction data is permanently recorded in the system with a timestamp and visible to everyone on the network.
This creates trust, transparency and traceability. Any user can access the information in the system through an app or website on any smart device or computer. Users can trace whole series of transactions, reference the data, perform their own analyses, or apply it to other accounting and measurement applications.
While it may sound fiendishly complex to the uninitiated, blockchain is easy to use. And the transparency, confidence and efficiency it offers have the potential to transform more than just the finance sector.
How, you may be asking, does this apply to forests and climate? Trading in verified emissions reductions (VERs), including results-based payments for reducing deforestation and restoring degraded forests, is an important part of international climate efforts. However, governments, companies and investors interested in emissions trading are wary about the validity of VERs, particularly forest-based ones. There are also concerns about the lack of transparency in transactions and tracking the credits to ensure there is no double-counting.
Blockchain can help address many of these concerns. It can prevent double-counting by securing an easily accessible record of all verified transactions relating to a carbon credit. A blockchain can be created the moment emissions reductions activities are verified, funded or traded. It can track the first contractual arrangement at origin and record every step of the process until the verified emissions reduction or credit is retired. The information stored on the blockchain can be tied to market systems, while the data is readily accessible to civil society watchdogs and policy-makers alike.
These factors can encourage greater trust and transparency, help prevent corruption and greenwashing, and secure the integrity of national greenhouse-gas registries. And, because DLTs eliminate the need for third-party institutions to manage and verify transactions, blockchain has the potential to be an efficient, lower-cost tool for enabling transactions of VERs. This could be particularly significant, given the complex, diverse and distributed nature of climate commitments.
To illustrate how DLT could work with a results-based payment system, let’s consider the following hypothetical scenario:
- A REDD+ programme generates a certain number of units of emissions reductions, which are measured, reported and verified according to the nationally approved MRV framework, reference levels and accounting methodologies.
- It makes these units available for purchase by creating a ‘block’ on a blockchain. The block contains information on the emissions reduced or sequestered, the location of the project, co-benefits generated and other information as needed, as well as other details that would normally be found on a term sheet (e.g. price and any conditions on use).
- A buyer (whether a national government, private company or other entity) purchases an agreed volume of units or credits, and the transaction is recorded and verified by blockchain.
- Governments, NGOs or other third parties can access this information, ensuring the same units can’t be accidentally or intentionally resold or counted towards the original country’s climate commitments.
Blockchain isn’t going to transform the forest carbon market overnight. So far, applications have been focused on the financial sector, and proving its value in other fields will require proponents with resources and perseverance. Also, while blockchain is an effective way of validating and tracking transactions, existing safeguards and MRV systems are still very much required to verify the original carbon credit.
However, with many countries now on the cusp of REDD+ implementation, the time is right to pilot the use of blockchain in the transaction of result-based payments.