What is a Carbon Credit?
Carbon credit is a certificate that allows the holder or any energy company to emit one ton of carbon dioxide. It levies a cost on carbon emissions by creating the value of the credit for every 1 ton of hydrocarbon fuel. And the organizations or the groups that act to reduce the carbon emissions, get the credit granted.
A carbon credit is tradable at its market rate, in the international market. As per Kyoto protocol, International Panel on Climate Change (IPCC) looks after the carbon credits and ways for slowing carbon emissions. Additionally, there are voluntary carbon credit markets as well, existing in cities of United States.
Significance of Carbon Credits
Industrialized countries are required to meet their own emission standard as per the emission market and in case, a country matches its emission standard then it can sell its surplus to the countries that have not been able to meet the emission standard. The Clean Development Mechanism (CDM) executive board issues the carbon credits. The credits are issued for helping the sustainable development work in the developing countries that can be traded further in different markets.
It facilitates carbon trade between the countries and individual companies, to trade pollution rights via a system of cap and trade. So, the companies that pollute less sell their unutilized pollution rights to companies that pollute more. The whole objective is to limit the level of pollution and incentivize the companies that cause less pollution.
Current Scenario: Challenges in managing Carbon Credits
After the purchase or sale of carbon credits, it is not necessarily updated in carbon registries due to the involvement of tiresome and lengthy process in its management.
- Lack of Credibility: Carbon credit faces credibility issue when it comes to seeking out the accurate information related to it, such as validation, verification standards followed or not.
- Lack of Transparency: It is hard to know about the origination and the whole journey of carbon credit. The process associated with the journey of carbon trade confirmation, clearance and negotiations are lengthy and time-consuming because of the several steps and procedures are carried out by intermediaries.
- Political Influence: The policy of cap and trade, is mostly set by the political authorities i.e. in permit creation and setting a cap on emissions. And due to the endless pressure and influences, they tend to keep the caps high with a low carbon price. It is evident by the fact that so far, none of the cap-and-trade has managed to get the carbon price more than $10 per ton, whereas, as per the analysis, carbon price need to lie in the range of $25 to $50 per ton. And the revenue earned is supposed to be spent on the energy-related projects but, due to political influences, it has failed to meet its endeavor.
How can Blockchain help?
Blockchain is specifically intended to impart transparency and enable auditing of the system. It eliminates all the glitches and possibilities of fraud.
Ensuring Right Utilization of Funds Raised
Blockchain will ensure that the revenue raised is strictly being used to solve carbon emission problems, and not to fund any alternative political agenda. Since, it has the capability to bypass the administrative glitches, which have plagued the emission trading system very badly.
Carbon credit is a data-driven concept and makes use of multiple approval procedures that exist separately but are correlated to one another. Thus, it can perfectly be targeted by Blockchain technology. Blockchain is a digital ledger in which the transactions (consisting of unique keys) are recorded in an orderly manner and reside in public domain. It has the capability to increase the transparency, accuracy, and trustworthiness in the realm of carbon credit.
Eliminating Double Counting
Blockchain can eliminate the risk of double counting and can embolden the trustworthiness, which in turn reduces the energy consumption and will attract the participation of private finance, microfinance, and crowdfunding etc.
Tracking Critical Data
Blockchain can fairly address the damages or losses arising from climate change since it can track the critical data, events, insurance risks and can identify the people adversely affected by it too.
Moreover, Blockchain can fill the vacuum left open, by immensely affecting the following associated factors:
- CARBON TRACKING: Blockchain can tell the entire journey of a carbon credit i.e. from origination to its purchase and retirement. Blockchain can automate the entire process of storing and processing of information about carbon credits.
- CARBON TRADING: Blockchain can cut the lengthy time duration associated with clearance and trade confirmation process by negating the need for any intermediary like clearing houses. Blockchain can facilitate instantaneous trade confirmations. The use of Smart contract can speed up buying and selling of carbon credits by automating the process of negotiations and agreements. Cryptocurrencies can further facilitate carrying out of instant transactions, and that too, in low transaction cost.
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