Blockchain and Emerging Digital Technologies for Enhancing Post-2020 Climate Markets © 2018 International Bank for Reconstruction and Development/ The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Contents Acknowledgments _____________________________________________________________________________ 3 1. Executive Summary____________________________________________________________________________ 4 2. Introduction____________________________________________________________________________________ 6 Market Provisions Under the Paris Agreement__________________________________________________________ 6 Objective: Development of the Next Generation of Climate Markets_________________________________________ 6 3. Brief Review of Technologies and Practices in Existing Climate Markets______________________ 8 Current Data Collection______________________________________________________________________________ 8 Current Market Schemes____________________________________________________________________________ 8 Existing Technological Architecture____________________________________________________________________ 9 4. Architecture for New Market Design___________________________________________________________ 11 Enhancing the Comparability and Potential Fungibility of Mitigation Outcomes Across Bottom-up, Heterogeneous Markets___________________________________________________________________________ 11 5. Blockchain as an Emerging Technology________________________________________________________14 Blockchain________________________________________________________________________________________ 14 Blockchain in Climate Markets________________________________________________________________________ 16 Smart Contracts___________________________________________________________________________________ 17 6. How New Technology Aligns with Policy Framework__________________________________________18 Building on the METRIC Principles_____________________________________________________________________ 18 Extensibility________________________________________________________________________________________ 18 Scalability_________________________________________________________________________________________ 19 Governance Systems for Emerging Practices and the New Architecture_____________________________________ 19 Challenges, Vulnerabilities and Uncertainties for Blockchain________________________________________________ 21 7. Conclusions and Recommendations__________________________________________________________ 22 Recommendation #1_______________________________________________________________________________ 22 Recommendation #2_______________________________________________________________________________ 23 Recommendation #3______________________________________________________________________________ 23 Appendix ______________________________________________________________________________________ 24 References____________________________________________________________________________________ 25 Acronyms _____________________________________________________________________________________ 28 1 Figures Figure 1. Different Types of Emissions Accounting Systems Compared______________________________________ 9 Figure 2. The Transaction Registry in its Environment: Potential Connections and Interfaces_____________________10 Figure 3. Architectural Vision for Networked Climate Markets______________________________________________ 12 Figure 4. Peer-to-Peer vs. Centralized Authority__________________________________________________________ 15 Figure 5. Generic Structure of Blockchain Solutions______________________________________________________ 15 Figure 6. Illustrating the Hashing of Transaction Data Across Member Nodes and the Reconciliation of the Ledger via Consensus to Resolve Non-Conformities____________________________________________________ 17 Figure 7. World Bank METRIC Principles________________________________________________________________ 18 Figure 8. Governance Systems for Blockchain Applications Supporting the Next Generation of Climate Markets___ 20 Tables Table 1. Implementation Responsibilities for the New Generation of Climate Markets___________________________ 13 Table 2. Pros and Cons of Peer-to-Peer vs. Centralized Hub Networks_______________________________________ 15 2 Blockchain and Emerging Digital Technologies for Enhancing Post-2020 Climate Markets Acknowledgments This paper was prepared jointly by Xpansiv, Collaborase, and the World Bank’s Climate Change Group. The Xpansiv team included Joe Madden, Tom Baumann (also Collaborase), Jason Libersky, Eamonn McCormick, and Jeff Cohen. The World Bank’s Climate Change Group team included Xiaoqun Dong, Rachel Mok, Durreh Tabassum, Pierre Guigon, Eduardo Ferreira, and Chandra Shekhar Sinha under the guidance of and support from Neeraj Prasad (Practice Manager) and James Close (Director). The paper also received expert advice during several rounds of peer-reviews from Rachel Alexandra Halsema, Susan David Carevic, Peter Z.Y. Zhou, Joanne Olushola Martins, Stelina Maltezou, and Stela Mocan from the World Bank Blockchain Lab; Katherine A. Foster, Deanna MacDonald, and Karim Jabbar from the Blockchain Labs for Open Collaboration (BLOC); Xing Zhang from the International Finance Corporation (IFC)’s Climate Business Department; Frederic Dinguirard; and Paul Warren. The team also wishes to acknowledge Justin Macinante from the University of Edinburgh for the valuable guidance and editing provided. Despite efforts to be comprehensive, the team apologizes to any individuals or organization inadvertently omitted from this list and expresses our gratitude to all who contributed to this paper. 3 1. Executive Summary Scientific consensus is that rapid and aggressive reductions that the technological limits of an infrastructure based on in greenhouse gas (GHG) emissions are needed if significant centralized registries does not inhibit achieving the scale, climate disruption and irreversible environmental impacts heterogeneity, and functional complexity required. are to be averted. The changes required necessitate large-scale investment and governments at all levels are At the same time, a rapidly evolving technological responding with combinations of regulatory mandates, landscape presents opportunities for efficient and robust incentives and market-driven solutions. In this post-Kyoto design and development of this next generation of climate Protocol era, there is a growing application of pricing markets, as well as risks, both in terms of failure to engage, mechanisms, especially markets, in multiple contexts to address mitigation of emissions. The new generation of climate markets is thus likely to develop as a network of decentralized markets, linking at regional, national and subnational levels. Blockchain, Big Data, The Paris Agreement (the Agreement) recognizes the heterogeneity of approaches. To foster higher ambition the Internet of Things and sustainable development, and encourage large- scale financing towards the most effective mitigation (IoT), smart contracts measures, Article 6 recognizes that parties may engage in cooperative approaches, including the use of and other disruptive internationally transferred mitigation outcomes (ITMO) towards their individual nationally determined contribution technologies hold (NDC). out the promise of Such a bottom-up framework promotes innovation and addresses jurisdictional priorities. Nevertheless, addressing the needs the growing diversity in the type, design, and scope of schemes does not encourage economic efficiency or the of new generation effective application of available financial resources. As such, an identified need is development of tools, services climate markets and institutions to foster and enhance this next generation of climate markets that accommodate such a “patchwork” post-2020. of different domestic climate actions. Different climate markets trade different units (assets), have differences in structure and governance, and rely on or in failing to understand how to engage effectively. separate, centralized registries. The result is a multitude of Blockchain, Big Data, the Internet of Things (IoT), smart schemes trading instruments within closed technological contracts and other disruptive technologies hold out systems (with centralized registries) and differing rules, the promise of addressing the needs of new generation such as those associated with monitoring, reporting and climate markets post-2020. verification (MRV). To facilitate larger, more liquid and resilient trading across heterogeneous climate markets, a Blockchain, in particular, provides data sharing and new architecture is needed. transaction management elements well aligned with the requirements of climate markets. Blockchain is an There is a corresponding need, also, for the capability implementation of distributed ledger technology (DLT), to generate, manage, and harmonize information which, broadly, combines a distributed ledger (that is, a representing the outcomes of GHG mitigation actions copy of the ledger is held by all network participants), across multiple industry sectors and governmental public/private key encryption, and a decentralized jurisdictions. The complexity of conducting transactions infrastructure. The ledger is organized into blocks of between heterogeneous climate actions across information, each block containing information, such as jurisdictions increases when additional instrument types a collection of transactions. Once there is consensus, (that is, not just emission allowances) are traded. Thus, the block is added to the ledger, which is immutable and the next generation of bottom-up climate markets must accumulative. These characteristics support data integrity include mechanisms to address these differences so 4 Blockchain and Emerging Digital Technologies for Enhancing Post-2020 Climate Markets and security, while the distributed nature of the ledger promotes and rules; and finally, through smart meters and other devices transparency. associated with the IoT, combined with big data analytics, so as to facilitate the automated data flows necessary to harness the There are also challenges associated with blockchain, both technical potential of blockchain technology in supporting new generation and non-technical. The former includes the fact that certain types climate markets. of blockchain networks require high energy consumption (although these are unlikely to be suitable for climate markets), and potential It is recommended that: issues with the speed and security for data transfers to and from blockchain applications, for example, with other digital systems. 1. A roadmap for the implementation of blockchain and other emerging digital technologies in climate markets should be Non-technical challenges include a paucity of understanding of the developed with the objective of making substantive progress technology and its applications by many stakeholders. In particular, on overall design, demonstration activities, and implementation. a challenge for adoption of the emerging digital technologies that There should be close coordination with the technical policy must be resolved quickly is a culture change among regulators, agenda, both at the international level, for instance, in terms of standards developers, and policymakers. It is important to recognize the Article 6 work schedule and milestones, and at the national that established interests and legacy systems could inhibit the level. Specifically, these new technologies are most relevant in adoption of digital technologies. helping to address agenda items such as transparency, double counting, environmental integrity, and alignment with NDCs. Significant factors characterizing the changing landscape of stakeholder needs, driving the transition from current to emerging 2. Additional research should be conducted, firstly, to clarify and technologies and practices, thus include the increasing diversity of elaborate how other types of emerging technologies, such regulations, MRV systems, climate assets, and values of mitigation as smart meters and other devices associated with the IoT outcomes, within and across jurisdictions; the increasing size and and Big Data, can complement applications of blockchain scale of post-2020 climate markets, as well as linkages with related that support new generation climate markets; and secondly, climate actions and other markets; the expectation of new cross- to confirm the technical, economic and legal underpinnings jurisdictional trading arrangements (e.g., clubs, regional trading of the perceived advantages of blockchain applications in schemes, sectoral trading schemes); and greater financial flows addressing the challenges that confront the new generation and types of transactions, such as peer-to-peer and results-based climate markets. finance. 3. By way of extension of the research carried out under It is concluded that digital innovations can help address these the preceding recommendation, pilot markets should challenges firstly, through blockchain-enabled distributed ledgers be established to test research outcomes in “real world” that provide transparency and robust rule implementation via smart environments. Such pilots should also serve to elucidate contracts; secondly, through collaborative governance systems that stakeholder understanding of how, in practical terms, the new enable more efficient development of MRV standards structured as technology will interface with existing technologies, will be holistic systems of modular, compatible and extensible methods embedded, implemented and operated. 5 2. Introduction Market Provisions Under the policy, and other relevant elements are developing, the roadmap laid out in this paper will likely continue to evolve Paris Agreement significantly over the next few years. Since its adoption in December 2015 by the 21st Conference of Parties (COP21), within the United Nations Framework Convention on Climate Change (UNFCCC), 175 countries to Objective: Development of the date have ratified the Paris Agreement (“the Agreement”). Next Generation of Climate These countries have made commitments (NDCs), in some cases contingent on financing by developed countries, Markets to limit or reduce their GHG emissions through a variety Today, there is a broad use of pricing mechanisms, of measures including more significant deployment of especially markets, in multiple contexts to address renewable power, energy efficiency, land-use controls mitigation of emissions. Market mechanisms have proven such as conservation of forests and grasslands, carbon to be an economically efficient way to mitigate GHG pricing, and other measures compatible with each emissions to deliver a specific objective (e.g., an emissions country’s national circumstances and capabilities. reduction target by a specific date). There are 40 countries Even with full ratification of the Agreement by all 197 and more than 20 cities, states, and provinces that signatories, the aggregate effect is projected only to slow have already established or will soon be implementing the rate of GHG emissions growth from the 24 percent some form of carbon pricing system  — either cap-and- increase, between 1990 and 2010, to an anticipated trade or a carbon tax, including seven of the world’s ten increase between 2010 and 2030 of between 11 and largest economies. Carbon pricing initiatives now cover 23 percent.1 Far greater reductions, approaching net approximately 13 percent of annual global GHG emissions.2 zero emissions, will be needed after 2030 to meet the There are jurisdictions engaging in cooperative programs Agreement’s goals of limiting the rise in global temperature (e.g., EU Emission Trading System (ETS), Regional to below 2° C, or ideally below 1.5° C. To foster higher ambition and sustainable development, and also encourage large-scale financing towards the most effective mitigation measures, Article 6 of the Agreement recognizes that countries may engage in Market mechanisms cooperative approaches, including the use of ITMOs towards their individual NDC. Unlike the Kyoto Protocol, have proven to be an under which emissions trading was restricted to developed countries, who also could purchase emission reductions economically efficient generated by projects in developing countries, Article 6 of the Agreement potentially allows countries to contribute a way to mitigate GHG diversity of climate actions with mitigation outcomes that can be transferred in any direction between cooperative emissions to deliver Parties. a specific objective In this new, complex and diverse environment, this paper aims to examine emerging digital technologies (e.g., an emissions and architectures that could be used to enhance and connect the heterogeneous climate actions across reduction target by a countries, thereby supporting post-2020 climate markets that facilitate the most cost-effective achievement of the specific date). highest possible ambition. Given the speed with which information technology, system architectures, domestic 1 UNFCCC, 2015, “Synthesis report on the aggregate effect of the intended nationally determined contributions,” UNFCCC COP21, October 30, https://unfccc.int/resource/docs/2015/cop21/eng/07.pdf. 2 World Bank and Carbon Pricing Leadership Coalition, 2017, “2016-2017 Carbon Pricing Leadership Report,” http://pubdocs.worldbank.org/en/183521492529539277/WBG-CPLC-2017-Leadership-Report- DIGITAL-Single-Pages.pdf. 6 Blockchain and Emerging Digital Technologies for Enhancing Post-2020 Climate Markets Greenhouse Gas Initiative (RGGI), California-Quebec-Ontario3) To ensure an efficient and robust design and development of but even connecting independent emissions trading schemes this next generation of climate markets, it is critical to consider necessitates mechanisms to deal with different accounting rules, the rapidly evolving technological landscape. The goal of this scope, pricing, offset eligibility, governance, complementary paper is to provide background clarity to understanding the policies, and other key features. In reality, pricing mechanisms emerging technology trends that can support both the design and may take a variety of forms including as carbon taxes, schemes function of new climate markets from the bottom-up. While other generating project-based credits, or certificates schemes for fuel technologies such as the IoT and big data analytics are mentioned switching or renewable energy. All these have the potential for (and elaborated briefly in Section 5), specifically, this paper will integration in the broad mix of global “climate markets” post-2020. focus on the application of blockchain technology, and how it can work cumulatively with those other technologies. While such a bottom-up framework promotes innovation and addresses jurisdictional priorities, the growing diversity in the To achieve the vision of a new generation of climate markets type, design, and scope of schemes does not foster the most driving higher mitigation ambition, it is essential to first consider the efficient and effective application of the financial resources current practices and technologies that have been used to support available. Against this backdrop, the World Bank is working with pricing and the challenges they present. Understanding the issues governments, the private sector, academia and civil society to and gaps is essential to assessing the potential for emerging develop the tools, services and institutions needed to foster and practices, technologies and architectural frameworks to harness develop the next generation of climate markets that accommodate the power of markets in delivering on the objectives outlined in the such a “patchwork” of different domestic climate actions. Paris Agreement. 3 California, Quebec, and Ontario established a linkage agreement that became effective on January 1, 2018. 7 3. Brief Review of Technologies and Practices in Existing Climate Markets Current Data Collection Current Market Schemes In spite of their differences, carbon pricing mechanisms The Kyoto Protocol took a homogeneous approach to around the world share common elements (e.g., data- tradable units, which by definition were all equal to one driven emission caps and allowances, offset provisions, tonne CO2-equivalent GHG emission. The two most defined sectors),4, 5, 6 and there are a multitude of MRV common types of tradable units in climate markets have practices and technologies encompassing data collection, been allowances and credits and following the Kyoto data processing, and data analysis that underpin these approach, these are generally set at a value of one mechanisms. Since the 1990s, new technologies have tonne as well, although what it is a tonne of (e.g., CO2, enabled expanded MRV practices, from simplified or CO2  equivalent, or another GHG) will depend on the —  organizational and subnational inventories and project- nature of the particular scheme. specific calculations to more accurate and comprehensive accounting, including, for example, continuous emission monitoring systems (CEMS), integrated life cycle assessment (LCA) databases, and cloud-based, tracking software systems for supply chains and programs of activities (POA). The next generation More recently, innovative MRV practices and technologies of bottom-up climate utilizing information and communication technologies (ICT),7 such as mobile and remote monitoring, are being markets must advanced for transportation, distribution of household appliances and land use mitigation activities. include mechanisms At a time when climate markets are gaining interest,8 to address these and advances in technological adoption and automation of MRV is occurring, nevertheless most climate change differences so related MRV practices still involve manual processes that rely on disconnected data trails, spreadsheets, and as to not inhibit static PDFs to achieve market and environmental integrity. These processes stand in contrast to the increasingly reaching the scale, interconnected, highly transparent digital paradigm that is emerging globally,9 constraining market integration and heterogeneity, and scalability. functional complexity that will be required. 4 World Bank, 2016, “Emissions Trading Registries: Guidance on Regulation, Development, and Administration,” October 1, http://documents.worldbank.org/curated/en/780741476303872666/pdf/109027- WP-PUBLIC-12-10-2016-15-54-42-PMRFCPFRegistriesPosting.pdf. 5 Kossoy, Alexandre et al., 2016, “State and Trends of Carbon Pricing,” World Bank, October 14, http://documents.worldbank.org/curated/en/598811476464765822/pdf/109157-REVISED-PUBLIC-wb-report- 2016-complete-161214-cc2015-screen.pdf. 6 World Bank, 2016, “Emissions Trading in Practice: A Handbook on Design and Implementation,” January 1, http://documents.worldbank.org/curated/en/353821475849138788/pdf/108879-WP-P153285- PUBLIC-ABSTRACT-SENT-PMRICAPETSHandbookENG.pdf. 7 Smarter2030, accessed September 30, 2017, http://smarter2030.gesi.org. 8 World Bank, 2015, “State and Trends of Carbon Pricing,” September 20, http://documents.worldbank.org/curated/en/636161467995665933/State-and-trends-of-carbon-pricing-2015. 9 World Economic Forum, 2016, “Introducing the Digital Transformation Initiative,” accessed September 30, 2017, http://reports.weforum.org/digital-transformation/introducing-the-digital-transformation- initiative/. 8 Blockchain and Emerging Digital Technologies for Enhancing Post-2020 Climate Markets Allowances are issued under cap-and-trade programs where The term registry can refer to a GHG emissions inventory, a list emissions within a defined boundary (e.g., country, industry of project and program information, or databases with varying sector) are capped. The allowances are issued to entities that are levels of functionality. While there are multiple considerations in regulated within the boundary of the cap, to be surrendered by the development, administration and regulation of GHG registries, them against their emissions. Thus, the face value of an allowance there is a commonality in the underlying technological architecture reflects a unit of the amount the regulated entity can emit, rather of existing registries. Regardless of structure or level of complexity, than the amount of GHG emission mitigation brought about by a existing transactional registries utilize a technological architecture unit of that scheme. based on a centralized ledger (or database) to support the transaction of units. There are good reasons for this design around Credits can encompass a variety of instruments, most notably GHG central ledgers. Centralized ledgers are reliable and provide a offset credits, renewable energy certificates,10 and renewable fuel system of record for transactions within a given scheme with certificates (RINs).11 As opposed to an allowance, a credit can reflect clearly defined, tradable units. a unit of the amount of GHG emission reduction achieved, although depending on the type of credit, it may need to be converted into Due to legal constraints, confidentiality concerns, institutional a base unit such as tonnes CO2-equivalent: for example, renewable barriers, or other factors, there may be multiple registries or energy certificates may be expressed in KWh and need to be multiple centralized ledgers used within a single jurisdiction. converted in order to be comparable with other units. Integrating multiple centralized ledgers requires not only new architecture (see Figure 2), but also overcoming constraints so as In any case where diverse pricing mechanisms are connected so to facilitate the integration and transfer of relevant data. as to allow transactions between them, in other words to provide for “fungibility” (or the mutual interchangeability) of their respective For example, under California’s Cap-and-Trade Program, details tradable units, there will need to be a mechanism to enable associated with an approved project may be stored across comparability. This is discussed further below. multiple websites each referencing serialized numbers and reports held in various places. The California Air Resources Board (ARB) summary for a project will be a set of serialized numbers Existing Technological Architecture held in the ARB central ledger, but these same numbers might initially have been held as a separate serialized set of numbers A functioning climate market requires rules, institutions, and in a centralized register operated by another registry, such as infrastructure to enable proper market operation, transparent the American Carbon Registry (ACR) and backed by a separate, accounting and to ensure environmental integrity. A fundamental PDF verification report.12 In order for the original set of serialized building block for market infrastructure is the accounting system(s) numbers representing offsets issued under the ACR and held on in which tradable units are held, transferred, retired, and recorded. the ACR registry to be transferred to ARB’s centralized ledger, ACR must (a) “retire” the serialized numbers in its central ledger, The World Bank has defined three types of emissions accounting (b) manually transfer the same numbers to ARB via spreadsheet systems (illustrated in Figure 1.) or CSV to ARB, and (c) have ARB reissue a new, equivalent set of serialized numbers in ARB’s central ledger. Figure 1. Different Types of Emissions Accounting Systems Compared An approach, such as in this example, may be sufficient within a given jurisdiction with appropriate governance and oversight. Register/ Data However, when the centralized ledgers are in different jurisdictions, GHG Transaction Management standardized rules and oversight to enable transfers of units Inventory Registry System between those ledgers may not be available. Records physical Records carbon Records information Figure 2 illustrates the systems supporting GHG data collection, GHG emissions and units for market on carbon unit and removals mechanism/ policy/program/ aggregation, accounting, and reporting in jurisdictions usually results-based project organized around centralized databases. The databases have climate finance varying degrees of integration, depending on the jurisdiction and/ programs or program considered. This is indicative of the system architecture in many jurisdictions with a market program in operation, each Source: Emissions Trading Registries – Guidance on Regulation, Development, and of which operates with its transaction registries at the core of Administration. World Bank, 2016. its design. Each transaction registry will reflect the particular 10 United States Environmental Protection Agency, “Renewable Energy Certificates,” accessed September 30, 2017, https://www.epa.gov/greenpower/renewable-energy-certificates-recs. 11 United States Environmental Protection Agency, “Renewable Identification Numbers (RINs) under the Renewable Fuel Standard Program,” accessed September 30, 2017, www.epa.gov/renewable-fuel-standard-program/renewable- identification-numbers-rins-under-renewable-fuel-standard. 12 California Air Resources Board, “ARB Offset Credits Issued,” accessed September 30, 2017, https://www.arb.ca.gov/cc/capandtrade/offsets/issuance/arb_offset_credit_issuance_table.pdf. 9 design and type of scheme of which it forms part, and thus will value is a measure of) is necessary. The complexity of conducting be technologically separate from those in other jurisdictions with transactions between heterogeneous climate actions across different schemes, as will be the units, transactions in which are jurisdictions increases when additional instrument types (e.g., not recorded in that ledger. just emission allowances, but also renewable energy certificates, RINs, offsets) are introduced. Thus, the next generation of bottom- To address these differences, specific bilateral or multilateral up climate markets must include mechanisms to address these agreements are required for any cross-jurisdictional transactions differences so that the technological limits of an infrastructure to occur. When the climate actions in the different jurisdictions based on centralized registries does not inhibit reaching the scale, are both emissions trading schemes, agreement as to the relative heterogeneity, and functional complexity that will be required. respective value of the units (and as to what those units/that Figure 2. The Transaction Registry in its Environment: Potential Connections and Interfaces MEASURE/CALCULATION AGGREGATION AND ACCOUNTING REPORTING, COMMUNICATON AND ANALYSIS Databases Data GHG INVENTORIES Data Sources Records physical GHG emissions and removals Uses National/Subnational Level National Statistics Program/Project Level International Reporting (e.g., UNFCCC) REGISTER/TRANSACTION Market Companies Supporting IT REGISTRY Infrastructure Systems Records carbon units for (e.g., trading (e.g., customer market mechanism and platform) National GHG data relationship GHG data results-based payments Subnational Facilities (verified) management, (processed) and related identification and related Reporting Carbon information management, information Unit Other Register/ workflow Account Account Transaction automation) Products Registry Policy Compliance DATA MANAGEMENT SYSTEMS (e.g., Tax, ETS, etc.) Projects Records information on policy/program/project activities, carbon units, and additional information (e.g., safeguards, data on other air polutants) Source: Emissions Trading Registries – Guidance on Regulation, Development, and Administration. World Bank, 2016. 10 Blockchain and Emerging Digital Technologies for Enhancing Post-2020 Climate Markets 4. Architecture for New Market Design As noted above, different climate markets trade different units (assets), have differences in structure and governance, Enhancing the Comparability and rely on separate, centralized registries. The result is a and Potential Fungibility of multitude of schemes trading instruments within closed technological systems (central-ledger-based registries) Mitigation Outcomes Across and differing rules—for example, those associated with Bottom-up, Heterogeneous MRV. There are examples of linked programs (e.g., the California-Quebec-Ontario cap-and-trade program) that Markets: Tracking aim to facilitate larger, more liquid markets by providing for cross-jurisdictional transactions, but the advent of Environmental Attributes of more advanced technological approaches and designs Various Commodities that could provide more secure, efficient transactions of assets (carbon allowances, credits, or other carbon units) Physical commodities such as oil, coal, palm oil, or is changing the paradigm. soybeans can vary in value according to grade or quality or source location. Assets in climate markets (emission To facilitate larger, more liquid and resilient trading across allowances, credits, renewable energy certificates or other heterogeneous climate markets, a new architecture units), although they are not natural commodities but a is needed. There is a corresponding need, also, for function of the policies and legislative schemes by which the capability to generate, manage, and harmonize they are created, similarly may vary in value, in terms of the information representing the outcomes of GHG mitigation GHG mitigation in which they result. The variations will be actions across multiple industry sectors and governmental a function of many factors, such as scope of the scheme, jurisdictions. Advances in technology and standards, coverage, specific rules and scheme boundaries; the discussed in subsequent sections, allow conceptualization suite of policies and measures within which the scheme and design of systems in which information pertaining to operates; or the jurisdiction’s particular circumstances, different qualities of assets can be identified and tracked capacity and ambition. separately, but in connection with, other information concerning those assets, as they are transacted in the For different physical commodities, a digital asset can be markets. created to represent and provide title to the commodity asset, as well as the multiple outputs (e.g., energy content) and outcomes (e.g., GHG emissions, energy access enhancement, poverty reduction impact) associated with its production and/or lifecycle.13 The digital asset can be This delineation and registered at the point of initial production to create a single, immutable record of the embedded attributes for tracking of separate that unit of the particular physical commodity. Similarly, for tradable units in climate markets, information value elements in concerning value in terms of mitigation, or in relation to co-benefits such as energy access enhancement, or the units is the key poverty reduction impact, can be identified as separate elements and tracked independently, while at the same idea behind this new time maintaining information concerning their source or identity. Blockchain technology can provide a digital architecture. mechanism for recording and tracking these separate streams of information associated with units, including when they are transacted across jurisdictional boundaries. 13 World Bank, 2017, “Results-Based Climate Finance in Practice: Delivering Climate Finance for Low-Carbon Development,” May 1, http://documents.worldbank.org/curated/en/410371494873772578/ Results-based-climate-finance-in-practice-delivering-climate-finance-for-low-carbon-development. 11 This delineation and tracking of separate value elements in the from coal, natural gas, solar, hydro, or wind) could be accurately units is the key idea behind this new architecture. As long as firstly, associated with its embedded impact within a given electricity the integrity of the recording of the information is maintained, market or, as in the case of renewable energy certificates, secondly, the information is aggregated in an accepted form of transacted separately. a climate information asset (or “climate asset”), and thirdly, the necessary mechanism is in place to convert climate assets to a This approach is dependent on the integration of production common metric for comparability, such as their mitigation value, data (supported by appropriate technology, e.g., the IoT), the then transactions can take place across jurisdictions. Further, any next generation of governance that supports digital approaches type of market instrument (e.g., allowances, credits, RINs, renewable to MRV, larger scale data analysis to support MRV processes energy certificates), can be so transacted, provided such a metric (e.g., big data analytics), and the broad application of blockchain (as, for example, mitigation value) can be applied. Furthermore, functionalities in a dynamic market context at (or close to) real time. irrespective of how markets bundle and transact, the underlying Such an integrated approach is unlikely to be possible through the information for the climate asset remains the same. This approach combination of manual audit processes and multiple, disaggregated ensures market and environmental integrity by precluding double databases at the producer, auditor and/or market level. Further counting in relation to climate assets. analysis of these emerging technologies and practices is included in Section 5. In this paradigm, ideally, new and existing markets (commodity markets, environmental and climate markets) might incorporate, The combination of blockchain technology, IoT, and the governance or be configured in relation to, a universal ledger and trade the of the next generation of climate markets (discussed below), underlying attributes. Physically measurable events, represented enables the creation of digital representations of commodities that by production and operational data, could be certified against new can be used for existing markets and for transacting across climate standards and aggregated into universally accepted assets. In markets (see Figure 3). The function of each layer illustrated in this the case of electricity, for instance, each MWh of power (derived vision of the new architecture in Figure 3 is outlined in Table 1. Figure 3. Architectural Vision for the Networked Climate Markets Market Existing Existing Future Future Layer Market A Market B Market A Market B Automated Market Administration Layer Market Manager • Legal Governance • Accounting Asset Information Changes in Asset Ownership Layer • Standards Asset Information Data Integration Integrator and Analytics Layer Commodity Oil and Agriculture Electricity Offset Producer Layer Gas 12 Blockchain and Emerging Digital Technologies for Enhancing Post-2020 Climate Markets Table 1. Implementation Responsibilities for the New Generation of Climate Markets Functional Layer Role Function Examples Commodity Event Data Foundational role in the ecosystem. ■■ Oil and gas producers, Producer Provider The entities are primarily commodity producers and other sources of growers, refiners, power GHG emissions or emission reductions, subject to governance. generators ■■ Capped emitters ■■ Offset project developers Asset Information Data Gathers event data from event data providers. ■■ Data platform operator Integrator Integration, Data analytics and assignment of quantified and verified climate asset ■■ Independent monitoring and Analysis, and using consensus and peer-to-peer communication protocols (that is, verification body (although Attribution blockchain). this role could be automated, Assignment The role of “information provider” is also key to transparency. depending on design) Increasingly, information asset providers will leverage IoT to obtain access to production data and Big Data as a secondary source of information for automated verification. Governance Layer Legal, Governance will also be increasingly automated and can be Standards organizations Accounting, administered through embedded logic derived from a combination of and consensus-based, internationally-recognized standards, market rules, Standards regulation, and auditing. Automated Market Market Aggregates and structures climate assets using blockchain and makes Blockchain platform Administration Manager them available to the market. This layer also records the provenance of Layer the assets as they are bought, sold, and eventually retired. Market Layer Transactions All manner of markets ■■ GHG allowances, RINs, renewable energy certificates, offsets ■■ Existing commodity markets (e.g., oil and gas, agricultural, electricity) This simple “information service provider” architecture is the the need for complex trading agreements across separate, key to transacting across climate markets from the bottom- centralized registries housing non-fungible assets. Over time, up. If deployed across multiple jurisdictions over time, the the foundational approach of generating climate assets could technological link between jurisdictions together with appropriate encourage standardization of MRV processes, enhancing the mechanisms to allow comparability of tradable units would reliability of the mitigation outcomes of different instruments. enable direct transfers of mitigation outcomes and decrease 13 5. Blockchain as an Emerging Technology The emerging and accelerating technological landscape holds promise in supporting the new generation of climate Blockchain markets from the bottom-up in a post-2020 environment. While secure chains of blocks of data,18 incorporating Specifically, blockchain technology, trends referred to cryptographic hashing,19 have been defined and designed as IoT and Big Data,14 and smart contracts should be since the early 1990s, the first production implementation considered in the future design of climate markets. of blockchain technology was in a white paper authored by a person (or persons) using the pseudonym “Satoshi While this section examines the application of blockchain Nakamoto” in 2008.20 The paper proposed an innovative technology and smart contracts on post-2020 climate peer-to-peer electronic currency called Bitcoin that would markets, more detailed analysis on other types of enable online payments to be transferred directly, without emerging technologies, such as IoT and Big Data, an intermediary. Bitcoin has garnered much attention, should be considered moving forward. Briefly, by way of but the underlying technology, blockchain, is particularly background, the IoT is a very broad, constantly changing relevant here. concept, for which one technical professional organization has sought to establish a baseline definition15 that gives an all-inclusive definition that ranges from small, localized systems confined to a specific location to a large globally distributed system, composed of complex systems.16 Blockchain technology The expression “Big Data” describes: can synthesize “… high-volume, high-velocity and/or high-variety information assets that demand cost-effective, and support the innovative forms of information processing that enable enhanced insight, decision making, and transaction of all types process automation.” 17 of emission-related These concepts are mentioned as technologies that can be complementary to applications of blockchain that data (e.g., facility level, support the new generation of climate markets and, as such, they are areas for future research. However, they projects, programs, are not considered here in more detail, the principal focus of this paper being on blockchain and its applications. quantified production, and life cycle attributes) in a shared, globally accessible environment. 14 There are also other aspects not necessarily falling within the concept of “Big” data, such as the inclusion of specified and necessary data points. 15 IoT, https://iot.ieee.org/definition.html : ‘Towards a definition of the Internet of Things (IoT)’ Revision 1 published 27 May 2015 (IEEE). 16 Ibid. 17 Gartner, 2012, https://www.gartner.com/it-glossary/big-data. 18 Haber, S. and W.S. Stornetta, 1991, “How to Time-Stamp a Digital Document,” J. Cryptology 3: 2, https://doi.org/10.1007/BF00196791. 19 Bayer, D., S. Haber, W.S. Stornetta, 1993, “Improving the Efficiency and Reliability of Digital Time-Stamping,” In: Capocelli, R., A. De Santis, and U. Vaccaro (eds), Sequences II. Springer: New York, NY. 20 Nakamoto, Satoshi, 2008, “Bitcoin: A Peer-to-Peer Electronic Cash System,” November https://bitcoin.org/bitcoin.pdf. 14 Blockchain and Emerging Digital Technologies for Enhancing Post-2020 Climate Markets Blockchain is just one possible implementation of Distributed Table 2. Pros and Cons of Peer-to-Peer vs. Centralized Hub Networks Ledger Technology (DLT). Deloitte describes DLT as: Pros Cons “a type of database that is spread across multiple sites, Peer-to-Peer ■■ Low transaction cost ■■ Difficult reconciliation countries, or institutions. It is decentralized in nature, ■■ No single point of failure ■■ Intricate coordination eliminating the need for an intermediary to process, ■■ Resiliency ■■ Hidden vulnerabilities validate, or authenticate transactions. Each party (e.g., ■■ Distributed authority (double spending) individual, organization, or group) is represented by their ■■ Innovation independence computer, called a node, on the network. Each node keeps ■■ No large attack target its own copy of all transactions on the network, and nodes Centralized ■■ Transactional security ■■ Single point of failure work directly with one another to check a new transaction’s Hub ■■ Reliability ■■ Higher transaction validity through a process called consensus. Each of these ■■ Single connection cost transactions is encrypted and sent to every node on the ■■ Reduced complexity ■■ Influence ■■ Simplified reconciliation consolidation network to be verified and grouped into time-stamped ■■ Universal system of ■■ Consolidated attack blocks of transactions.”21 record target Putting this another way, transactions are grouped into timestamped blocks. Blocks that have been chosen for adding to In order to transact money or anything of value, society has the chain by the consensus mechanism are sent to every node on relied on intermediaries such as banks, governments, escrow, the network. and settlement services to perform a range of services to build flexibility and trust into transactional processes. Blockchain can be seen as enabling the collaborative creation of ledgers with properties and capabilities that go far beyond There is no requirement for an intermediary in peer-to-peer centralized ledgers and as having broad application for the transfer transactions. However, intermediaries are important when making of value in human systems  including climate markets. —  a digital transaction. Digital assets, like money in a bank account or credits on a registry, are electronic files that are easy to reproduce. Financial services companies have shown early support for This creates the “double spending” (or in the case of climate blockchain due to its ability to reduce risks and costs, although markets, a “double counting”) problem. discretion and solutions are still needed for anti-money laundering (AML), as well as combating the financing of terrorism (CFT). The technology is increasingly being used in a variety of other sectors Figure 5. Generic Structure of Blockchain Solution as well, including retail, manufacturing, telecommunications, media and entertainment, and healthcare.22 A B B A C The basic premise of blockchain can be illustrated by comparing two types of transactions: (a) peer-to-peer; and (b) via a centralized hub (an intermediary or series of interconnected, trusted intermediaries). Blockchain solution Figure 4. Peer-to-Peer vs. Centralized Authority A B A B As can be seen in Figure 5, blockchain technology combines the “pros” of peer-to-peer with the “pros” of a centralized hub listed in Table 2. The accumulative and immutable nature of the blockchain enables multiple parties to securely transact directly between C D C X D each other without a central “trusted” authority. Blockchain can be used in public (permissionless) or private E F E F (permissioned) networks. A public blockchain network is open to anyone who is interested in joining and participating in the network. On the other hand, a private blockchain network can only be joined by invitation and participants will be validated by the 21 Deloitte, 2017, “Project Ubin: SGD on Distributed Ledger,” May 26, https://www2.deloitte.com/content/dam/Deloitte/sg/Documents/financial-services/sg-fsi-project-ubin-report.pdf. 22 PwC, 2017, “Briefing: Blockchain,” May 18, http://usblogs.pwc.com/emerging-technology/briefing-blockchain/. 15 network initiator. Therefore, a private blockchain network is usually Transformative a permissioned network that places restrictions on the type of eligible participants and/or transactions.23 In the context of transacting across climate markets pertaining to jurisdictions at various levels of technological maturity, DLT (hence blockchain) can be transformative: Blockchain in Climate Markets ■■ DLT does not require sophisticated IT infrastructure; it can support the migration to increasing levels of IT sophistication In a post-Kyoto Protocol era, carbon-constrained world, GHG and functionality requirements over time. This is important, mitigation in all its forms increasingly has financial value. Blockchain as global climate markets span jurisdictions with varying technology can synthesize and support the transaction of all types degrees of technological sophistication and also jurisdictions of emission-related data (e.g., facility level, projects, programs, with existing, “legacy” infrastructure and processes.26 quantified production, and life cycle attributes) in a shared, globally accessible environment. A blockchain-based architecture can ■■ The immutability of transactions supports market integrity, and accommodate data that is captured automatically or manually the distributed nature of the ledger supports transparency in to support an integrated network of climate markets over time line with the METRIC Principles (see Section 6). without disruptive action. Recent publications by the University of Edinburgh present the advantages of blockchain in this context ■■ The shared environment provides a common source of data and make the case for the transition to “networking” of markets to support the creation of new and/or the refinement of through the new architecture.24, 25 existing methodologies and governance systems. As noted in one of the Edinburgh publications, currently public and permissionless blockchain networks (e.g., Bitcoin and Ethereum) tend to use mining as a mechanism to reach consensus without Integrity a single entity dominating the network or participants being able The current process for assuring integrity of mitigation outcomes to tamper with the distributed ledger. However, this mechanism for most tradable units requires a significant amount of manual requires significant computing power, and therefore, significant verification by third-party, independent auditors. The “notary energy consumption. If the energy consumed is from high GHG- function” as a standard component of blockchain technology could emitting resources such as oil and coal, then these types of be deployed to automate many aspects of existing verification blockchain networks may not be suitable for climate markets. processes. This would entail, for purposes of validation, verification, or issuances, creation of computer code logic to automatically Thus, the proposed conceptual model advocates the use of require “proof of existence” of permits, certifications, standards, permissioned networks that do not undertake mining, but rather and/or other verification methods by referencing information reach consensus by agreement of the permissioned nodes, and that is publicly available on outside databases, as well as data allow for the flexibility to define user roles and privileges that will from private sources (e.g., remote sensing, satellite imagery and deliver the required functionality across different organizational encryptions, data providers, etc.) to ensure integrity of any and all and regulatory environments. digital assets. Blockchain’s ability to collect an increased amount of data at a Further, the assurance of marketplace integrity is supported national and subnational level and make it available to every through consensus across the ledger. A blockchain ledger is participant in a network may create concerns about data replicated across multiple member nodes and each location sensitivity. In some cases, a private blockchain network may be maintains its copy. Each member’s copy of the ledger is updated useful to address these concerns. However, this topic requires based on new transaction data. Figure 6 illustrates a sequence of more in-depth consideration in future studies. three transactions. In transactions #1 and #2, the data and signature information are properly validated by all three Member Nodes with identical hash values. However, the hash located at transaction #3 at Member Node 1 does not match the corresponding records at Member Nodes 2 and 3. Thus, this non-conforming record will be corrected by a consensus of the other member nodes. 23 Jayachandran, Praveen, 2017, “The difference between public and private blockchain,” IBM, May 31, https://www.ibm.com/blogs/blockchain/2017/05/the-difference-between-public-and-private-blockchain/. 24 Macinante, Justin D., 2017, “A Conceptual Model for Networking of Carbon Markets on Distributed Ledger Technology Architecture,” Edinburgh School of Law, April 10, http://ssrn.com/abstract=2948580 and [2017] 3 CCLR 243-260. 25 Jackson, Adrian, et al., 2017, “Networked Carbon Markets: Permissionless Innovation with Distributed Ledgers?” University of Edinburgh, July 4, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2997099. 26 Technology diffusion considerations are described in detail in Jackson et al. (supra). 16 Blockchain and Emerging Digital Technologies for Enhancing Post-2020 Climate Markets Smart Contracts were an independent assessment framework or frameworks to provide a common metric to value the differences between A “smart contract” refers to transactional terms and conditions units of differences schemes, thereby affording those assets embedded in computer code which allow automatic execution of fungibility. This could include the internalization and execution of the relevant transaction once precise conformity with those terms mutually agreed-upon equivalencies at the unit level by integrating and conditions has been established. independent assessment of mitigation actions and outcomes (for example through the Mitigation Action and Assessment In the context of transactions between climate markets, smart Protocol (MAAP)27). Furthermore, smart contracts can be used contracts have multiple applications. First, they can provide the to internalize governance (e.g., standards, policy, verification, mechanism for transactions between existing market schemes data sources and commercial terms) between two or more domiciled in different jurisdictions operating different registry jurisdictions or counterparties to prevent negative consequences infrastructures with differing instruments at the national, sub- (e.g., leakage), inhibit “bad actors” in the marketplace and ensure national, or even industry level. This would only be the case if there the environmental integrity of the market. Figure 6. Illustrating the Hashing of Transaction Data Across Member Nodes and the Reconciliation of the Ledger via Consensus to Resolve Non-Conformities Member Node 1 Transaction Data 1 Transaction Data 2 Signature A Signature C + + Signature B Signature D = = Hash Hash Transaction Data 3 Signature E + Bad or Corrupt Data Signature F = Hash Transaction Data 1 Signature A + Signature B = Transaction Data 1 Transaction Data 2 Hash Transaction Data 2 Signature A Signature C Signature C + + + Signature B Signature D Signature D = = = Hash Hash Hash Transaction Data 3 Transaction Data 3 Signature E Signature E + Correct Hash + Signature F by Consensus Signature F = = Hash Hash Member Node 2 Member Node 3 27 World Bank, “Mitigation Action Assessment Protocol,” accessed September 30, 2017, https://maap.worldbank.org/#/homepage. 17 6. How New Technology Aligns with Policy Frameworks To support new generation markets post-2020, policymakers and stakeholders need the means to Building on the METRIC assess the suitability and effectiveness of direct, indirect, Principles and other, more innovative, forms of cross-jurisdictional transacting. The METRIC Principles, outlined in Figure 7, Further to the framework provided by the METRIC provide a framework for such assessment. Principles, technology needs to be aligned with policy in designing effective connections between climate markets that can put the world on a path to achieve the ambitions in Figure 7. World Bank METRIC Principles the Paris Agreement. Thus, it is important that technology design takes into account factors such as future growth (extensibility) and the need to accommodate increasing arket integrity amounts of work (scalability). Ensuring that capital is allocated efficiently and avoiding disturbing the continued efficient function of carbon and related markets (such as financial and energy markets) Extensibility Extensibility means that design takes into account future nvironmental integrity growth. The principle of extensibility in this context refers to practices and technologies for MRV and market Enhancing the transparency and comparability of the value of the mitigation outcomes that are being instruments that can encompass multiple attributes, such transferred, based on key parameters such as as activities involving diverse Sustainable Development robustness and ambition of the linked schemes Goals (SDGs), as well as the ability to be applied in a modular and interoperable approach. ransparency Existing environmental markets have overlapping and sometimes redundant requirements such as carbon Transparent design to provide all stakeholders with a clear understanding of its rationale in order to generate emission caps, fuel switching (coal to natural gas), support, and allow the free exchange of information renewable energy targets, renewable energy credits, rebates for energy efficiency and electric vehicles, direct sector-specific regulatory controls, and carbon ecognize ambition fuel-intensity limits. In addition, local public health and economic impacts may be difficult to account for in cases Recognize effort sharing for a below 2° C target and avoid incentives to reduce effort where a reduction in GHG emissions is the only metric. Accounting units and standards need to be extensible and interoperable for MRV at different levels of application, such as at the project-level and throughout the value nclusiveness chain level. Additionally, MRV standards and practices Facilitate and encourage more jurisdictions to join the need to be modular to facilitate multiple environmental scheme and promote greater international cooperation attributes and claims, such as the structure of the new Gold Standard for the Global Goals.28 ost-effectiveness Reduce the overall cost of mitigation, including administrative and transaction costs, and improve economic efficiency Source: World Bank, 2016. 28 Gold Standard, 2015, “Gold Standard For The Global Goals: Leveraging Climate Action for Greater Impact in Sustainable Development,” www.goldstandard.org/articles/gold-standard-global-goals. 18 Blockchain and Emerging Digital Technologies for Enhancing Post-2020 Climate Markets Scalability Scalability means the capacity of a system or network to accommodate an increasing amount of work, or the potential Though blockchain is to be enlarged in order to do so. The principle of scalability applicable in this context refers to practices and technologies a powerful technology for MRV and market instruments that can be efficiently applied to large-scale climate actions at local and regional levels such as to ensure rules are supply chains and commodity markets. Heavy reliance on manual processes of current practices and technologies, described earlier, observed and applied, combined with multiple, dissociated and centralized registries inhibits the ability to scale market mechanisms and provide for how to develop markets to connect more globally. Thus, scalability is an important consideration to be addressed. appropriate rules for the digital age and bottom- Governance Systems for Emerging up implementation of Practices and the New Architecture the Paris Agreement is To operationalize and provide oversight for these new connected climate markets, underpinned by emerging technologies such as a separate issue. blockchain, new systems of governance will be required. With the adoption of the SDGs in 2015, and the Paris Agreement as the new global framework for addressing climate change, an unprecedented diversity of initiatives and innovative models integrating environment, society, and economy, with significant stakeholders into governance-related activities and documentation, implications for the existing world of governance,29 have been while being able to balance necessary data protections. recognized. Though blockchain is a powerful technology to ensure rules are observed and applied, how to develop appropriate rules Beyond these advances, additional innovations and enhancements for the digital age and bottom-up implementation of the Paris may be needed for a next-generation governance system that will Agreement is a separate issue. For example, connecting markets support a blockchain or digital platform. Elements that might be will require rules to govern trading of assets across multiple included in such are listed in the Appendix at the end of the paper. jurisdictions. The new architecture enabled by digital technologies A next generation of governance systems that provide greater requires a new set of operating rules such as smart standards and agility and scalability will be essential to support the transformation rules for smart contracts. of the economy and communities with new digital technologies The next generation of governance will shape the application of like blockchain. The following figure illustrates an example of a digital technologies to support or automate activities such as data governance system for blockchain applications. input and processing, quality assurance and quality control (QA/ QC), audits and verifications, and standards collaboration. Digital technologies also enable greater participation and transparency for 29 For climate markets, “governance” generally refers to technical standards, methodologies, protocols, and guidance related to GHG quantification or assurance (i.e., MRV), as well as market rules and relevant legal, regulatory and institutional frameworks. 19 Figure 8. Governance System for Blockchain Applications Supporting the Next Generation of Climate Markets Various blockchain applications Climate Climate metrics Data Smart contracts Blockchain supported Actions and instruments registries, exchanges and markets Modular framework for system rules for technical, legal, accounting and MRV Democratized open standard processes for rules development, validation and digital implementation Knowledge base of technical content and modular rules framework Decentralized communities using digitally enabled collaborative platforms Global Solution Networks1 of networks for MRV and digital governance Knowledge Networks2 Global community Advocacy Networks3 of experts developing and managing governance system for MRV rules supporting markets Standards Networks4 Policy Networks5 1. Global Solution Networks (GSNs) are multi-stakeholder, self-governing networks enabled with digital technologies, such as the Blockchain Governance GSN. 2. Examples of knowledge networks addressing education and research are the Partnership for Market Readiness, NDC Partnership, Transparency Partnership, LEDS Global Partnership, GHG Management Institute, World Resources Institute, and Climate Ledger Initiative. 3. Examples of advocacy networks are the Carbon Pricing Leadership Coalition (CPLC), International Emission Trading Association (IETA), World Business Council for Sustainable Development, and Environmental Defense Fund. 4. Examples of Standards networks are the GHG Protocol, International Organization for Standardization (ISO), ISEAL Alliance, Gold Standard, American Carbon Registry (ACR), and Verified Carbon Standard. 5. Examples of Policy networks are We Mean Business, The Climate Group, 350.org, the Climate Reality Project. Note: The initiatives listed in 1–5 are indicative and not intended to be exhaustive. 20 Blockchain and Emerging Digital Technologies for Enhancing Post-2020 Climate Markets Challenges, Vulnerabilities, and Uncertainties for Blockchain As with other digital technologies, there are technical challenges A next generation associated with blockchain, such as the fact that certain types of blockchain networks require high energy consumption to adopt of governance financial applications ubiquitously30 (and generally the association of the technology with bitcoin). There may also be issues with systems that provide the speed and security of data transfers to and from blockchain applications, for example, with other digital systems such as greater agility and those in the IoT. Currently, there are also only a limited number of blockchain developers (as of June 2017, the estimate is only scalability will be 20,000),31 yet a further consideration is the risk that the diversity of types of blockchain technologies could create incompatibility. essential to support Therefore, industry stakeholders will need to establish blockchain governance and standards to avoid the technology lock-in risk. the transformation Among the widely-recognized, major, non-technical challenges is of the economy and the lack of understanding of the technology and its applications by many stakeholders, for instance, in relation to issues of privacy on communities with new transactions, access to commercially-sensitive data, security of the digital assets, access to digital technologies (e.g., smart devices), digital technologies like and the costs and benefits of using blockchain as an alternative to conventional financial services. Additionally, stakeholders may blockchain. lack understanding as to what the technology can and cannot provide, while intended recipients’ capacity to implement also needs to be considered. The lack of, and the overarching need for, a governance system to support blockchain applications can also create uncertainty.32 In summary, blockchain technology has the potential to establish efficient peer-to-peer transactions without the need to have an intermediary (such as a bank, in the case of financial systems). However, new governance systems will be needed to ensure market and environmental integrity in a peer-to-peer environment. Realizing the speed, agility, and scalability that distributed technologies offer will require new types of collaborative “distributed governance” systems that incentivize and motivate participants. Otherwise, the deployment of the digital technologies and climate actions necessary to achieve the goals of the Paris Agreement and the SDGs could be inhibited by bottlenecks associated with the application of technical governance (standards, protocols, methodologies) mechanisms in a digital context. 30 As noted in section 5, public and permissionless blockchain networks (e.g., Bitcoin and Ethereum) can involve intensive algorithmic computations to confirm financial transactions, incurring high energy consumption. In contrast, permissioned blockchains (e.g., IBM Hyperledger) require lower energy consumption. 31 Redman, Jamie, 2017, “Experienced blockchain developers demand big salaries,” June 8, Bitcoin News, https://news.bitcoin.com/experienced-blockchain-developers-demand-big-salaries/. 32 Financial Times, London, 2017, “Blockchain’s Governance Paradox,” July 14, https://ftalphaville.ft.com/2017/06/14/2190149/blockchains-governance-paradox. 21 7. Conclusions and Recommendations This report has focused on the potential and issues ■■ Smart meters and other devices associated with the associated with emerging digital innovations, principally IoT, combined with big data analytics, so as to facilitate blockchain and its applications, which could enable a the automated data flows necessary to harness the new architecture to be designed and operationalized potential of blockchain technology in supporting new to support the next generation of climate markets and generation climate markets. its related diversity of assets in the post-Kyoto Protocol era. While hurdles remain for digital innovations to While considering how emerging technologies and become fully operational, such as the integration of digital practices can be deployed, it is essential to support different technologies and governance systems to support a new sectors and jurisdictions, proceeding at various rates and digital paradigm, the benefits of the emerging technologies applying combinations of practices and technologies, outweigh the limitations of the current technologies and to ensure a stable transition to a new global “disruptive practices. technology” architecture. Investors and companies are already demonstrating enthusiastic bottom-up adoption Significant factors characterizing the changing landscape of blockchain for financial and non-financial applications. of stakeholder needs and drivers to precipitate the transition from current to emerging technologies and A key, non-technical, challenge for adoption of the practices include: emerging digital technologies that must be resolved quickly is a culture change among regulators, standards ■■ The increasing diversity of regulations, MRV systems, developers, and policymakers. It is important to recognize climate assets, and values of mitigation outcomes, that established interests and legacy systems could within and across jurisdictions; inhibit the adoption of digital technologies. Culture change requires acceptance by these stakeholders of the need ■■ A demand for more robust MRV systems to support development of rules and standards via corresponding to the needs of climate finance for collaborative governance systems and to encourage ITMOs; greater innovation. ■■ The increasing size and scale of post-2020 climate On the basis of the challenges and opportunities markets, as well as linkages with related climate described in this report, the following recommendations actions and other markets; aim to support a rapid phase of capacity building and implementation of emerging digital solutions. ■■ The expectation of new cross-jurisdictional trading arrangements (e.g., clubs, regional trading schemes, sectoral trading schemes); and Recommendation #1 ■■ Greater financial flows and types of transactions, A roadmap for the implementation of blockchain and other such as peer-to-peer and results-based finance. emerging digital technologies in climate markets should Digital innovations can help address these challenges be developed with the objective of making substantive through: progress on overall design, demonstration activities, and implementation. There should be close coordination with ■■ Blockchain-enabled distributed ledgers that provide the technical policy agenda, both at the international level, transparency and robust rule implementation via for instance, in terms of the Article 6 work schedule and smart contracts, to address the array of regulations milestones, and at the national level. Specifically, these and standards, and provide both the accountability new technologies are most relevant in helping to address and transactional efficiency required by regulators, agenda items such as transparency, double counting, investors, and market participants; environmental integrity, and alignment with NDCs. ■■ Collaborative governance systems that enable more Through its different initiatives building climate markets, efficient development of MRV standards that are the World Bank will support countries to make informed structured as holistic systems of modular, compatible decisions and facilitate parallel development and alignment and extensible methods and rules; and of policy and technology, so as both to address and resolve constraints, and to identify and leverage opportunities. 22 Blockchain and Emerging Digital Technologies for Enhancing Post-2020 Climate Markets Recommendation #2 Recommendation #3 Additional research should be carried out, firstly, to clarify and By way of extension, pilot markets should be established to test elaborate how other types of emerging technologies, such research outcomes in a “real world” environment. The pilots might as smart meters and other devices associated with the IoT not only engage a variety of sectors and regions, but should focus and Big Data, can complement applications of blockchain that on diverse elements, so as to better identify drivers of design support new generation climate markets. Secondly, and perhaps aspects in the new generation markets, thus assisting in the more importantly, there should be research conducted to test prioritization of issues going forward. Such pilots should also serve and confirm the technical, economic and legal underpinnings to elucidate stakeholder understanding of how, in practical terms, of the perceived advantages of blockchain applications in the new technology will interface with existing technologies, will be addressing the challenges that confront the new generation embedded, implemented and operated. climate markets (including, for example, the dichotomy between greater transparency and the need to preserve data privacy and On this front, the World Bank is working with a number of countries confidentiality). It is important that this research be coordinated to identify a pipeline of climate actions where blockchain and other and dovetail with the agenda items focused in the roadmap, emerging digital innovations could be applied. By targeting different and dive deeper to examine key aspects such as the delineation stages and layers of climate markets (e.g., asset generation and and tracking of separate value elements of climate assets, the digitization vs. transferring and reporting; national vs. individual identification and application of common metrics for comparability, trading), the World Bank aims to effectively build countries’ and the mechanics of transactions (e.g., including smart contracts) knowledge and capacity, address challenges and concerns, and in these new generation climate markets. thus create opportunities for timely blockchain developments in these countries. To facilitate this process, the World Bank — through its “Blockchain Lab” — has already started to engage and partner with leading technology companies, start-ups, entrepreneurs, innovators and other development organizations. 23 Appendix Additional innovations and enhancements that may be needed for a next-generation governance system to support a blockchain or digital platform might include: (1) A community of experts (e.g., standards development, management, application) using advanced online collaboration tools much more extensively; (2) Standards structured so that specific parts can be updated more easily (as a “living document”) without compromising the overall integrity of the document or governance system, in contrast to current practices with loosely-related static published documents; (3) Standards linked to contextual content within a larger collaborative knowledge management (KM) system, including platform and user communities, for example: (a) Links to the online knowledge base (e.g., a Wiki) and supporting research or work that has gone into the development of a standard, (b) Links to “how to” guides, templates, data sources, and other resources to support the better implementation of a standard, (c) Direct engagement with online expert groups (such as a mini social network of professionals) sharing expertise in Q&A forums; (4) Standards designed to be more modular within a comprehensive framework, (a) Modular standards made to be interoperable building blocks to reduce conflicting or duplicative requirements, as well as to avoid wasted resources and uncoordinated proliferation of standards; and (b) Standardized or sectoral approach developed with a good balance of environmental integrity and the MRV cost; (5) The specific content and methods in the standards that reflect the new digital, automated processes enabled by blockchain and IoT (in contrast to the largely manual or Excel-based current practices); (6) The foundational governance system rules, e.g.,“the standard for developing a standard,” and validation of new standards, that reflect more open, decentralized participatory or democratized collaboration models enabled by online tools, in contrast to the current practices that are more hierarchical and bureaucratic; and, (7) Participants motivated to develop standards by a new economic model that is results-based, built on the outcomes of the use of the standards, in contrast to current practices in which strained expert volunteers experience “standards fatigue,” or standards bodies sell copyrighted standards to recover the high cost of developing standards. For example, revenues associated with the carbon assets generated by the application of the standard(s) are shared directly with the standards participants as compensation. This approach is analogous to the blockchain model in which cryptocurrency “miners” are compensated according to a consensus validation of transactions on the blockchain. Studies by the International Organization for Standardization (ISO) demonstrate standards have created significant economic value.33 33 ISO, “The main benefits of ISO standards”, accessed September 30, 2017, http://www.iso.org/benefits-of-standards.html. 24 Blockchain and Emerging Digital Technologies for Enhancing Post-2020 Climate Markets References Andium, “Building Management,” accessed September 30, 2017, http://andium.com/building-management/. Bayer, D., S. Haber, and W.S. Stornetta, 1993, “Improving the Efficiency and Reliability of Digital Time-Stamping,” In: Capocelli, R., A. De Santis, and U. Vaccaro (eds), Sequences II. 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