.png){kind=small}
Following from our recent post on carbon offsets, where one of the key challenges was auditability and double-counting, we’ve looked into the technology of Blockchain, which has been proposed as a way to address these issues.
Blockchain has baffled us for a while now, so we have tried to understand what it is at a simple level, how it works, and how it can be used for ESG applications.
Although it is more commonly associated with cryptocurrency, could Blockchain solve some of the challenges with carbon offsetting and supply chains?
What is Blockchain and what is so revolutionary about it?
Blockchain is a database that acts as a digital ledger, recording information in a series of blocks that are connected to form a chain (hence the name). It operates as a decentralized peer to peer network with each user (person in the network) being referred to as a ‘node’. Copies of the database exist across the network that allows all ‘nodes’ to hold a copy of the chain, allowing for transparency, accountability and security.
Blockchain is almost 100% secure from being tampered with.
It achieves this through a series of safety nets that make it nearly impossible to tamper with the records it holds. To create a Blockchain you first start with a block. The block contains a record of information as well as a randomly generated number code that is unique to the information in the block. Regardless of the size of the record, this code (the ‘hash’) will always be a fixed length and any alteration to the record, down to the deletion of a single comma, will alter the hash code of the block. When a new block is added to the chain, it records not only its own unique hash, but also the hash code of the block that directly precedes it.
If you were to retroactively alter the information in the first block, changing that block’s hash, it would no longer match the hash recorded by the second block. This would invalidate the connection between the two blocks.
Furthermore, if you had a chain comprising several blocks, all further blocks would also become invalidated. This is because each new block incorporates the previous block’s hash into its own records, meaning a change in the previous blocks hash will have the knock-on effect of automatically altering the current block’s hash, which will invalidate the connection to the next block and so on and so forth down the chain until all the blocks following the tampered block have become invalidated.
Much like a chain of dominoes, where knocking down one block can have a chain reaction on all subsequent blocks that then require individual attention to stand them back up again.
To remedy this a user would need to ‘mine’ (validate) the change in the first block, updating the record of the first block’s hash in the second block so that they matched. However, the second block’s hash would now change, invalidating its connection to the third block and so on and so forth.
So, to alter one block in a chain you would need to individually mine all subsequent blocks to remove any trace of the tampering.
This in itself is a long process (bitcoin for example is a Blockchain comprising of hundreds of thousands of blocks) and would require a considerable amount of time and computer power to achieve. Even if someone managed to tamper with the information in a block and mine all the subsequent blocks to hide the change, they would still have the problem that they had only altered a single copy of the Blockchain that they had access to.
Their Blockchain wouldn’t match the other copies of the chain held by other users or ‘nodes’ in the peer-to-peer network, once again raising the alarm.
While technically this problem could be overcome if the hacker took control of the entire network, this is almost impossible to do given the computer power that would be required to pull off such a feat. This, among other more complex security measures, makes tampering with a Blockchain virtually impossible.
Uses for Blockchain technology
Blockchains are used for a variety of tasks - cryptocurrencies use it to record transactions, jewellery companies are starting to use it to track supply chains, and banks and health services can potentially use it to keep records.
So Blockchain could prove useful in any multi-step transaction where traceability and visibility are desired. The technology also removes the need for a third-party intermediary, reducing both the cost and time required for each transaction.
Problems with Blockchain
The biggest criticism of Blockchain is that the technology has a massive environmental footprint. The way Blockchain is currently being used, particularly ‘mining’ to verify transactions and the distributed nature of the system, requires huge computing and energy resources.
A study by Cambridge University suggests Bitcoin, which is just one use of Blockchain technology, would rank in the top 30 countries for annual electricity consumption if it was considered a country, with estimated annual emissions of over 97 Mt CO2.
There are also concerns over lack of regulation, preventing fraudulent transactions, scalability, and too much real-time transparency in public blockchains, which could impact competitive advantage, intellectual property, and corporate strategy.
Many of these issues dive much deeper in the complexities of Blockchain which is beyond the scope of this article!
Using Blockchain for decarbonisation
Blockchain is already being utilised to help automatically track emissions down supply chains, to allow offsetting of produced carbon, giving traceability to the carbon offsets, and to reduce the need for third party intermediaries between emitters and offsetters.
This helps to protect against double-counting where carbon offset assets are erroneously sold multiple times to different companies.
A recent development in the world of Blockchain that has allowed automated and instantaneous offsetting has been the addition of ‘smart contracts’. Smart contracts are lines of code that allow transactions to automatically be executed when a previously agreed-upon set of conditions are met. As the process is digital and automated it is also instantaneous. An entire workflow can be designed to become automated, with the next step only being executed when the pre-set conditions are met. As smart contracts are within the Blockchain, they have the same level of transparency, security and traceability as any other records held in the database.
However, as we found in our recent article, there are still big challenges in carbon offsetting.
Firstly, many companies are still working to fully understand their emissions - many need to estimate their emissions, while they develop more accurate measurement strategies. Understanding the magnitude of emissions must be a company's first step.
Secondly, at the other end of the chain, there are big challenges in accurately quantifying the amount of carbon being stored by nature-based solutions.
So, while Blockchain can potentially address double-counting and improve the record-keeping of carbon offsetting transactions, much more work is needed to accurately quantify the volumes of carbon emitted and stored as the foundations for using Blockchain to record these transactions.
Examples of Blockchain use for sustainability
In April 2021, Lundin caused a stir when they announced the sale of the world’s first carbon neutral barrel of oil. The residual emissions calculated from the Edvard Grieg field during the full lifecycle (exploration, development and production) were offset by nature-based solutions with the transactions independently verified and tracked using Blockchain.
BHP are testing the use of Blockchain in several ways such as improving the efficiency of completing transactions during shipments of ore to their customers, and tracking raw materials through the supply chain to ensure ethical sourcing.
Pilot studies testing the use of Blockchain in tracking raw materials are at relatively early stages. Many different forms of physical tracking are also required to complement Blockchain technology in supply chains, and use of the "Internet of Things" (IoT) will become more common to automate and link these processes.
There are particular challenges around tracking those raw materials that are processed and transformed during their journey from, for example, raw ore extracted from a mine to the refined metal used in a factory.
As countries begin legislating the move towards carbon zero, more companies will be looking towards secure and traceable ways to offset their emissions. Blockchain presents an innovative solution that can help increase the transparency and trust in carbon offsetting, and will require integration into physical tracking systems.
But there is a lot of work to be done to ensure the accuracy of quantification of carbon emitted and stored is improved to be sure we are making the headway we think we are.
As with any computerised process, the initial information and data inputted is critical to get right, so we must continue to improve the foundation that technologies like
Blockchain rest on.
We would be really excited to discuss the details around emissions, ESG and reputable offset schemes with you - rachel@esgable.com or rosalie@esgable.com
Acknowledgements:
Big thanks to Gabby Watson for researching this topic and helping us to better understand how Blockchain works!
Sources:
http://graphics.reuters.com/TECHNOLOGY-BLOCKCHAIN/010070P11GN/index.html
https://www2.deloitte.com/ch/en/pages/strategy-operations/articles/blockchain-explained.html
https://www.ibm.com/topics/smart-contracts
https://www.dummies.com/article/business-careers-money/personal-finance/cryptocurrency/what-is-a-blockchain-and-how-does-it-work-262432
https://medium.com/swlh/blockchain-for-dummies-d3daf2170068
https://climatetrade.com/climatetrade-4-years-pioneering-tech-enabled-investment-in-decarbonisation/
https://www.forbes.com/sites/forbestechcouncil/2021/08/16/the-near-term-future-of-blockchain-tracking-carbon-offsets/?sh=1dd9728d5790
https://www.lundin-energy.com/sustainability/carbonzero-certification/
https://www.youtube.com/watch?v=_160oMzblY8&t=0s
https://ccaf.io/cbeci/index/comparisons
https://digiconomist.net/bitcoin-energy-consumption
https://www.mdpi.com/2673-4605/5/1/1/pdf