Democratic victories in last week’s elections have given new life to efforts to combat climate change through cap-and-trade systems. Advances in distributed ledger technology could kick them into high gear.
The election-night confetti was still falling but the announcements came quickly. Newly elected governors in New Jersey and Virginia said they would take steps to join the Regional Greenhouse-Gas Initiative (RGGI). Farther west, a new Democratic majority in the Washington legislature is poised to link the state with California, Ontario and Quebec in a regional carbon market.
Europe added to last week’s surge of good news. The European Union approved changes to its emissions trading market, the largest in the world. The steps will result in higher carbon prices and strengthen incentives for carbon reduction projects.
While new participants and structural changes are welcome, carbon markets could get a further boost from software. Distributed ledger (also known more popularly as blockchain) technology applications hold the potential to make many financial processes more efficient and more secure. At its core, DL technology decentralizes the record-keeping and authentication functions for financial transactions, activities traditionally performed by intermediaries like banks, clearinghouses and exchanges.
With federal action on climate unlikely, state efforts have moved to center stage. RGGI has been a quiet success story, running auctions for emissions permits that have raised $2.8 billion for investments in renewable power and energy efficiency projects. It stands out as the only mandatory, cap-and-trade emissions reduction program in the US.
But RGGI and other cap-and-trade programs will need to cover more industries and set tighter limits if they’re going to be effective in cutting carbon emissions and promoting clean energy on a scale needed to avert catastrophic climate change.
Critics note that carbon-permit auctions are slow, hard to administer and lack adequate regulatory oversight. They also can be vulnerable to fraud and theft – a problem that has afflicted Europe’s trading program.
Even supporters of cap-and-trade recognize its limitations. Topping that list is the Clean Development Mechanism (CDM) – a program administered by the United Nations that grants credits to qualifying projects in developing countries that lower carbon emissions. These credits can be used by industrialized nations to meet their targets under the Kyoto Protocol, the predecessor to the Paris Agreement and the first international effort to combat climate change.
The CDM is complex and hard to navigate. It can take years to verify projects and validate standards, and it alone maintains the registry of approved credits on which the market relies. It is an excellent example of a highly centralized structure that can be reinvented using DL technology. The Climate Ledger Initiative is one group focusing on this opportunity.
The future of carbon trading isn’t a faster bureaucrat but a less centralized system.
The use of DL technology could reduce the barriers for those who want to participate in the carbon market, whether they are a project developer, financial institution, investment firm, electric utility or manufacturer.
In fact, financial institutions are at the forefront in developing DL technology to reinvent payments, securities settlement, custody, clearing and other financial processes, and many of these firms are also involved in environmental finance and emissions trading. All of which suggests progress in this area could come more quickly than many expect.
Perhaps the carbon market should get ready for more good news.