Application of blockchain in carbon markets in the Indian context

Abstract

Kyoto Protocol which was adopted in December 1997, was instrumental in setting up the first carbon markets in many developed countries. However, with the exclusion of developing countries like India and China and non-ratification by the US Government, the effectiveness of the emission reduction efforts remained limited. The Paris Agreement, with its ambitious target of restricting the global increase in temperature to 1.5 degrees Celsius was ratified by 195 nations representing more than 97% of the global Green House Gases (GHGs) emissions. The tracking and reporting of emissions reduction still remains a challenge due to double-counting of emissions reduction, concerns over unit quality, and failure in ensuring robust accounting. This created a need for a transparent and robust framework to track the progress of emission reduction. Blockchain, which is a distributed ledger technology, offers a tamper-free, secure and transparent method of storing data. The use of blockchain can also help improve the robustness of accounting by eliminating the issue of double-counting. As each party will be in a position to verify the origin and implementation of mitigation activity, blockchains can remove the information asymmetry and bring transparency to the system. A closer look at the carbon markets in EU, China, Japan and California highlight multiple problems and challenges such as tax-frauds, inefficient transaction monitoring and issuance of surplus allowances resulting in significant price variations across global carbon markets. The use of blockchain can tackle the issue of price variations by reducing the information asymmetry and aggregating the platforms globally. Currently, India follows the ‘Perform, Achieve and Trade’ (PAT) scheme, which simulates the Emission Trading Scheme (ETS). However, the scheme lacks a clear standardization and normalization process for Specific Energy Consumption (SEC) values across energy-intensive sectors. In order to comply with the Paris Agreement, India needs to decide when and how to achieve the peaking of its emissions. The evaluation of technology options to achieve the reduction target is equally important. This brings us to formulate a roadmap for implementing blockchain-based carbon markets in India which includes a broad analysis of policy design, feature selection, allowance allocation process, piloting emissions trading system, managing carbon allowance price volatility, future integration into a global emissions trading system, and finally, restrictions related to the trading of allowances.