2020 International Conference on Innovative Trends in Information Technology (ICITIIT)

Carbon Credits on Blockchain

Dhiren Patel Sanidhya Sharma Yash Dusing
Computer Engineering Information Technology Information Technology
Veermata Jijabai Technological Institute Veermata Jijabai Technological Institute Veermata Jijabai Technological Institute
Mumbai, India Mumbai, India Mumbai, India
[email protected] [email protected] [email protected]

Benita Britto Kaustubh Gaikwad Mrinal Gupta

Information Technology Information Technology Information Technology
Veermata Jijabai Technological Institute Veermata Jijabai Technological Institute Veermata Jijabai Technological Institute
Mumbai, India Mumbai, India Mumbai, India
[email protected] [email protected] [email protected]

Abstract—This paper proposes a token based economy for by industrialized countries to meet a part of their emission
carbon trading using blockchain as a means of ensuring decen- reduction targets under the Kyoto Protocol [7].
tralization and transparency at a global level. It explores digital The mechanism stimulates sustainable development and
tracking of carbon emission permits. It also proposes a safeguard
against the hoarding of carbon credits. emission reductions, while simultaneously giving some flex-
Index Terms—carbon trading, blockchain, CERs, carbon cred- ibility to nations trying to meet their emission targets. Ul-
its timately, such a scheme tries to bridge the gap between
the amount of carbon dioxide equivalents produced and the
I. I NTRODUCTION amount of carbon dioxide equivalents reduced or sequestered.
A. Current scenario in carbon emissions In order to make this mechanism successful, a cap-and-trade
Green House Gases (GHG) emissions are the leading con- scheme (Emission Trading Scheme) needs to be followed.
tributor to climate change globally [1]. Countries aim to reduce First, an upper limit or cap is set on the amount of pollutants
their emissions to foster better and cleaner practices. This is a participant can produce and then allow the participants to
the fundamental step towards making Earth habitable for future trade between the excess and deficiency. Over time this cap
generations. is reduced so as to make participants find cleaner and more
New Zealand, U.K. and Scotland recently announced their efficient processes and reduce the overall global emissions.
plans for net zero carbon emissions by 2050 [2]. This seems This scheme has the added advantage of allowing a smooth
to be a step in the right direction as countries try to look for transition to stringent policies of pollution control which
efficient mechanisms to create products. India has pledged a causes minimal disruption in the market. This is because the
33-35% reduction in the “emissions intensity” by 2030 [3]. cap is adjusted gradually, thus providing enough time for the
India also has set a reasonable expectation from the ‘three- participants to adjust their internal processes and plan for
stage nuclear power programme’ which is supposed to enter future reductions. This is the fundamental idea behind the cap-
its third stage that aims for Thorium-based reactors. While and-trade scheme [8].
this looks to be promising, India’s carbon dioxide (CO2) If established with a sound economical foundation, trading
emissions are growing at a faster rate than in any other major of carbon credits can push countries and industries towards
energy-consuming nation. In 2018, CO2 emissions in India environmentally friendly practices and bring about reduction
rose 4.8% from the previous year, according to a new report by of pollutants from the atmosphere.
the Paris-based International Energy Agency. Emissions from
C. Blockchain overview
India accounted for 7% of the global CO2 burden in 2018,
compared with the US’s 14% [4]. The increasing emissions Ever since the publication ‘Bitcoin: A Peer-to-Peer Elec-
are due to the fact that the country has been leaning more on tronic Cash System’ by ‘Satoshi Nakamoto’ [9], decentralized
fossil fuel based energy. databases and research have seen a huge boost. The underlying
technology behind Bitcoin - Blockchain has spun multiple
B. Clean Development Mechanism variations, each having an improvement over the last iteration.
The Clean Development Mechanism (CDM) allows The core motivation behind Blockchain are the ideas of
emission-reduction projects in developing countries to earn decentralization, immutability and transparency. Blockchain is
certified emission reduction (CER) credits, henceforth referred a ledger sharing among the participating entities. Because of
to as carbon credits, each equivalent to one tonne of CO2 [5], these advantages, Blockchain has been employed in various
[6]. These carbon credits can be traded and sold, and used fields from government autonomy to education and business

978-1-7281-4210-4/20/$31.00 ©2020 IEEE

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 decisions. We propose one such use case in the field of carbon C. Susceptibility to Fraud
trading. A carbon credit trading system is vulnerable to frauds
and carbon cheaters who persuade the common public into
D. Carbon trading overview investing in worthless or fake permits [12]. The reason for
The trading of carbon credits is currently tracked by the such frauds is the underlying complexity of the system as well
Clean Development Mechanism registry as stipulated in the as the lack of transparency. A decentralised and transparent
first session of the Conference of Parties to the Kyoto Protocol blockchain system prevents such cases by making the data
[10]. According to the report, some of the pertinent tracking publicly available. By tracking the path to the source of the
requirements are as follows: carbon credits, many frauds such as major banks turning a
blind eye to theft [13] could be tracked easily and a suitable
• “A standardized electronic database which contains, inter
punishment could be imposed on the cheating party.
alia, common data elements relevant to the issuance,
holding, transfer and acquisition of carbon credits” D. Hoarding
• Accounts with specific responsibilities such as a pending
account used to store issued carbon credits, one each for A carbon credit trading system is also prone to the problem
hosting a CDM activity, one for cancelling carbon credits, of hoarding [14]. Hoarding is the storing of purchased carbon
one for holding and transferring CERs corresponding to credits for an indefinite period of time so as to sell them when
the share of proceeds which will be used for administra- their demand and price is higher. This decreases the supply of
tive purposes. credits along with the liquidity of the market and makes the
• Each carbon credit shall be held in only one account in transition of a participant to lower emissions more difficult.
one registry at a time. This in turn could drive away the participant if the price of the
• Each account within the CDM registry shall have a unique carbon credits matches the penalty imposed by the government
account number. on carbon emission violations. The problem of hoarding of
• Each carbon credit must have a unique serial number. carbon credits must therefore be effectively discouraged for the
• The CDM registry shall make non-confidential informa- economy to be sustainable and effective in lowering pollution.
tion publicly available and provide a publicly accessible
user interface through the Internet that allows interested III. T HE B LOCKCHAIN S OLUTION : O UR P ROPOSAL
persons to query and view it. A. Introduction
The rest of the paper is organised as follows: Section II On close inspection of the requirements (Section I-D) one
discusses problems with the existing carbon trading imple- can clearly see a fitting application of blockchain technology in
mentations. Our Blockchain solution is highlighted in Section the tracking of carbon credits. Properties such as immutability,
III with advantages of using Blockchain technology being single ownership of carbon credits, trust are present in the
discussed in Section IV. Section V concludes the paper with requirements and thus warrant the use of blockchain as a
future scope and references being mentioned at the end. possible solution for tracking carbon credits globally. The
following sections explain how blockchain technology can be
II. P ROBLEMS ASSOCIATED WITH CARBON CREDIT implemented and how it can provide numerous advantages
TRADING IMPLEMENTATIONS over the current implementation of Clean Development Mech-
anism registry.
A. Centralization
A centralised authority in any system controls the entire B. Actors
system. In carbon credits scenarios, this is undesirable as there – Participating Entities: There exists 3 participating entities
can be cases of fraudulent conduct by central authority with in the system,
no repercussions. There is also a chance that the carbon credits 1) Generator
system will be controlled by few powerful entities who possess 2) Consumer
the majority of carbon credits. 3) Issuer
– Generators are entities who are awarded permits for
B. Insufficient motivation for participants
offsetting carbon. These permits can be achieved either
In a cap-and-trade system, carbon credits are allocated by carbon offsetting or using an efficient mechanism such
to polluters for free based on historical emissions and the that carbon credits consumption is less than the limit
emissions cap for the industry. This gives the polluters an imposed by the cap-and-trade scheme. Carbon offsetting
incentive to not reduce their emissions, because if they do can be done in various ways such as planting trees, setting
reduce their emissions they will receive fewer carbon credits up windmill farms and performing other activities that
in future. According to Preston Teeter and Jorgen Sandberg benefit the environment. Any corporate entity who has a
[11], because of the complexity and uncertainty of this system, surplus amount of carbon credits can also function as a
fewer organisations try to innovate and comply. generator.

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 BlockChain

Token Fee transaction

Transaction written to
written to blockchain
blockchain
Issuer

Verified by Fee for Purchase

Authorities issuer Token

Generators Consumers

Token consumed
and retired

Fig. 1. Proposed Blockchain architecture for carbon credit trading

– Consumers are corporate entities who fall short of carbon issuer, the CER issuer after verifying the claims of the activity
credits given to them. Therefore, carbon credit consumers issues carbon credits to the generator. This CER certificate is
need to purchase permits from generators. attached to newly generated tokens in the economy and the
– Issuers are entities in the system that verifies the carbon transaction is recorded in the blockchain.
emissions of each industry or organisation and decides Now, if any consumers exceed their carbon emission limits,
the emission cap for each year. These are the one’s who they can purchase CER from the generators via a unified
verify the carbon emissions of each industry, decides the trading platform. Once the CER permit is purchased by the
emission cap for each year and also validate and verify consumer, an expiry timer begins. This timer signifies the
the carbon offset of generator. lifetime of the permit. Once this timer is expired, the permit
is retired. Meaning, the permit is worthless after the timer
C. Workflow expires. This is done in order to prevent the hoarding of carbon
The issuer decides the emission cap for the industry for a credits. So, it is necessary for the consumer who buys these
specific amount of time. This is done by independent auditing CER permit to use all these purchased carbon credits before
of the industrial process used during the manufacture. Then, the timer expires or return the excess tokens back to the seller.
these permits (which are less than the total cap) are distributed As the cap emissions for the industry reduces every year,
among the organisations. These permits can also be auctioned the quantity of these carbon credits reduces drastically. Or-
by issuer as an alternative and the funds received through ganisations would therefore prefer to invest in researching and
the auction are utilized for sponsoring environment relation employing more efficient mechanisms rather than purchasing
organisations or research for achieving efficient mechanisms. the costly CER permits. Breakthroughs in research would
This ends the initial phase of the cap-and-trade scheme. bring down the emissions far below the cap allowing the
If the generator contributes positively towards the environ- consumer industries to even generate carbon credits in the
ment and submits the request for carbon credits from the future.

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 D. Incentive and transparency C. Reduction in complexity
The transactions are committed to the blockchain and a The digitization of carbon credits and their online trading
small reward is deducted from the transacted tokens and would simplify the process and would become economical as
awarded to the member node as a fee for verifying the more participants join. A simple verification of authenticity
transaction. This serves two purposes. Firstly, it provides an can be done by connecting to a node and verifying the
incentive to member nodes to verify and commit blocks of digital signature on the certificate attached to the token. No
transactions and secondly it reduces the effective amount of complicated procedures would have to be followed in order to
carbon credits generated for consumption. verify whether the credit is genuine and a cost of tracking the
Once the buyer emits enough effluents so as to match the origin and validity of a token will be diminished.
amount of carbon credits it had purchased, the token is retired. D. Hoarding
This can be done by spending the equivalent token to a known
dead account from which no tokens can be spent again. For In order to counter the problem of hoarding of carbon credits
example, if an account’s private key is not known, all input and their sale can be moderated by checking the requirements
transactions to it become locked and cannot be spent. of the buyer and attaching an expiry timer to the token
As specified in the requirements, any independent auditor purchased. This would prevent a participant from buying and
can view the transaction history of a carbon credit and verify hoarding carbon credits as they would expire if not utilized
whether an account has sufficient amount of tokens. This within a reasonable amount of time. The time would be set
would prevent the selling of bogus tokens on the market as in accordance with a report which would be submitted to a
a quick search on a web portal would reveal instantly the designated entity by the buyer which would verify whether
validity of a transaction and the authenticity of the carbon the participant requires the carbon credits for the requested
credits attached to the token. This can be done by attaching amount of time. If approved, the transaction can be verified
digitally signed certificates to tokens which can be verified and added to the pool of transactions after which it can be
by comparing with the issuer’s signature. A buyer can thus committed to the blockchain. This property can be introduced
verify the issuer’s signature before purchasing carbon credits by the use of smart contracts which will enforce the timer on
and avoid scams of this sort. carbon credits and retire them as soon as the timer expires.
V. C ONCLUSION AND F UTURE S COPE
IV. A DVANTAGES OF USING BLOCKCHAIN TECHNOLOGY
In this paper, we have presented a Blockchain solution
A. Improved Transparency for trading carbon credits. It is evident that tracking carbon
credits using blockchain technology has tremendous benefits
As described in the previous sections, a major reason for
with respect to usefulness, participation and cost. Replacing
skepticism of various industries when it comes to participating
the Clean Development Mechanism registry with a blockchain
in the Clean Development Mechanism stems from the fact
ledger will therefore support the growth of the carbon market
that they do not trust the authenticity of the generated carbon
and help direct the industries to a cleaner and more sustainable
credit. The various frauds which occur are mostly related to
future. This is a work in progress.
the fact that the carbon credits traded have no value as their
If we gauge the effect of pollution based on location, it is
sources were invalid. Such scams also discourage participa-
easy to see that some areas are in a lot more danger than
tion. However porting the registry to blockchain would ingrain
others. For example, a large city with many industrial plants
the property of immutability and allow participants to instantly
would be more easily susceptible to pollution than a small
verify the authenticity and validity of any given carbon credit
underdeveloped village with an intact natural cover. It would
[15]. Awarded certificates will be digitally attached to the
make sense to make it costlier to pollute the city so as to
tokens in the economy and can be traced back to the generator
not exacerbate the pollution and health hazards in the region.
by following the blockchain upwards.
Therefore, the price of the token should be affected by the
emitting location. A way must be found in order to make
B. Improved trust
it harder to further pollute already suffering areas so as to
Since the trading of carbon credits involves multiple dis- alleviate the difficulties of areas which need serious attention.
trusting parties, the introduction of a blockchain intermediary The proposed implementation is viable at the industry level
would infuse trust into the system and would foster partic- and is in progress. Tracking of emissions is an intensive
ipation from all over the world [15]. This is because the task and with the available means, our goal is to focus at
entire registry would be public and easily verifiable. Politics of corporate level use cases. However, with the improvements
nations would not affect the trading capabilities of participants. in tracking mechanisms and technologies which would allow
Moreover participating in carbon trading would improve the tracking at individual consumer level, the above implemen-
reputation of the member and any member would want to tation can be extrapolated to track and inhibit pollution at
advertise their initiatives. This public registry would therefore all levels. Carbon emission of humans could then be tracked
be an incentive for participants to participate in the scheme and an accurate carbon tax could be imposed so as to instill
and reduce their emissions according to the cap and trade. environment friendly habits. For example, if a person takes

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 a flight from point A to B, a normalized carbon tax can be major - banks - turned - a - blind - eye - to - the - theft - of -
added to that person’s ticket amount and such tracking would billions-of-pounds-of-public-money.
dissuade unnecessary pollution. Issues of scalability need to [14] Carbon credits bring Mittal 1bn pounds bonanza.
be addressed before a consumer level carbon tax scheme can URL : https : / / economictimes . indiatimes . com / news /
be implemented. Currently, blockchains do not work well with international/carbon- credits- bring- mittal- 1bn- pounds-
a lot of small scale transactions as verification takes a lot of bonanza / articleshow / 5310181 . cms ? utm source =
time. However, as the future brings adaptations to make the contentofinterest&utm medium=text&utm campaign=
system accommodate these many transactions, consumer level cppst.
tracking can be added to this system. [15] Matthew Hooper. Top five blockchain benefits trans-
forming your industry. 2018. URL: https://www.ibm.
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