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Blockchain for climate finance

Updated: Mar 13, 2021

It’s pretty easy for everybody to say that our current financial system is not sustainable: climate change is probably the world’s greatest market failure and ignoring it would profoundly threaten economic growth. Put economic costs aside, the uneven distribution of climate change impact signifies social injustice and ethical consequences: poor countries and their population will be at the highest risk, even though their contribution to the causes of climate change is minimal.

Over the past decade, public and private climate finance have risen in power, as both sectors increasingly recognize that climate actions are in their economic interest, but several factors can explain most of the difficulties encountered at a national and international level:

  • Need for great coordination and intermediation to facilitate investment flows and align the interests of stakeholders, regulators, communities and investors.

  • The “mutual trust”, needed for negotiations is actually compromised by problems of clarity and transparency, mainly regarding the task of tracking, monitoring, reporting and verifying climate finance funds. Much of this is due to the lack of solid data and transparency, owing to lack of regulation and an adequate system for defining, categorizing, tracking, and evaluating climate finance to guarantee the data reported are true and accurate.

  • Many of the smallest and most risky countries now claim that they do not have the means to access the international climate funds directly and such centralized transaction mechanisms force them to go through financial intermediaries.

As we know Blockchain can address the above institutional problems by enabling trustworthy and transparent “peer-to-peer” transactions: every participant in a network can transact directly with every other network participant without involving a third-party intermediary. Transactions are no longer stored in a central database but are encrypted and distributed to all participant computers, which store the data locally. In this sense climate finance and green investment provide the best ground on which to apply Blockchain, perhaps in a range of different climate-relate sectors: from carbon pricing to monitoring emissions reductions.

One of the main possible applications regards peer-to-peer energy trading because blockchain offers an innovative solution to the double-spend and accountability problems facing various trading platforms. The ability for households to generate, sell and trade energy from one neighbor to another is turning into reality thanks to the with the development of Brooklyn Microgrid (BMG), by a New York based start-up, that allows peer-to-peer energy sale system via its blockchain verified network.

This concept of blockchain-based community mobilization is better explained by the Finance 4.0 project by Stefan Klauser. The idea is that whenever you produce an externality, at the end of the day you get compensation that is attached to it. For example when you do a service for your community (promoting the sharing economy or recycling) you can measure these actions and translate them into digital currencies or coins that are going to be automatically paid out when you can prove that you did one of these activities. On the other side, when you use basic resources, create a noise or pollute the air, these negative externalities can be measured again and you can get negative coins through your actions that you have done.

This could lead to a situation in which people compete for the good externalities and to a future that could be more sustainable, fair and efficient.

Coming back to Brooklyn, in April 20016, a resident who owns a roof-top solar panel sold the world’s first kilowatt-hours of locally generated solar energy to a neighbor through an Ethereum Blockchain smart contract and this was the first-ever Blockchain-supported energy transaction system. By this way BMG has used the Blockchain to create a virtual microgrid encouraging residents to trade solar power produced on their rooftops pursuing a decentralized power distribution. Blockchain technology can efficiently codify energy transactions, between two parties on a platform which is more open, transparent and hence, verifiable and trustworthy than ever.

BMG project is more than just a marketplace for solar power because reflects the desires of individual communities to localize decision making and therefore democratize global energy supply.

Energy systems worldwide are rapidly shifting from fossil fuel to renewables: the historic mindset saw energy supply as something needing a centralized solution of a nationwide or regional utility “big” grid fed by “big power”, such as nuclear or coal power stations.

Many localized, decentralized clean energy systems are now appearing around the world to challenge this orthodoxy and there is of the wish to democratize energy supply: an increasing number of companies and individuals are able and want to participate in the new energy market.

Another significant venture has taken place in South Africa, a country that receives double the sunshine hours compared to the UK and Germany, despite the number of solar installations is significantly lower, in part due to their high up-front cost. Abraham Cambridge recognized an opportunity and moved from the UK to South Africa to estabilish The Sun Exchange. It is a marketplace with Blockchain at its heart which connects solar energy projects with investors around the world in order to ease solar cells crowdfunding and lease them back to organizations. It uses Blockchain based smart contracts for transactions and. accepts Bitcoin payments. The key point is that they are not the intermediary in the transactions, so that the person who has bought the solar panel in Africa doesn’t have to rely on third parties: once the initial crowdfunding process completes, it doesn’t matter if The Sun Exchange itself stops functioning, the Blockchain ensures the payments validation. Finally, The Sun Exchange performs due diligence on all the projects the platform includes, helping mitigate corruption issues that many African countries experience.

Corruption is certainly relevant in climate finance and most of the times the cause of a slow development has to be found in bureaucracy. Blockchain eliminates the need for trusted third parties that, in many cases, lead to a decrease in efficiency.

As an added bonus, buying solar panels through The Sun Exchange allows the owners to receive any allocations of the digital token, Solar Coin.

The Solar Coin Foundation has set up a free reward program based on cryptos, to incentivize global solar electricity generation. For every 1MWh of energy, that is the equivalent to power a home for one month, verified as produced using solar panels, individuals or organizations can claim one SolarCoin.

This currency circulation mechanism is similar to how Bitcoin rewards miners for their computer processing power input to the network but, unlike Bitcoin, SolarCoin is environmentally friendly. Anybody has access to SolarCoins, from prosumers with panels on the roof to large solar farms. Therefore, rather than concentrating the economic benefits for a small number of centralized large organizations, the Blockchain enables wide redistribution of those benefits.

If the messages to reduce emissions are ignored major disruption to economic and social activity will occur later in this century and in the next and if we don’t use blockchain’s full potential we will end up with just a nice little feature here and a little bit of efficiency increased there and, in terms of Paris Agreement implementation, we don’t have time. Blockchain has the potential to get the people directly involved with impact-driven climate actions.

Author: Pietro Del Bianco

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