Blockchain for Climate Finance

The world is faced with an unconventional, unprecedented challenge – that of climate change – and needs unconventional ways to overcome it. The intersection of climate, finance and technology is doing just that, by turning to blockchain for climate finance. This was the hot topic at several discussion sessions at COP 24, and therefore, this piece will be dedicated towards explaining blockchain and drawing the link between the technology and climate finance.

COP24 official side-event: Decentralized Integrity: Climate Finance and Carbon Markets

Barriers underpinning climate finance

The areas of climate finance, energy markets and carbon trading are collectively facing several common barriers that are waiting to be addressed. Addressing these barriers is especially crucial in order to encourage the private sector to unlock investments towards the mitigation and adaptation efforts underpinning climate change.

As of now, an average of $500 billion is needed per year by 2030 to keep the global temperature rise contained. Current climate finance tools lack trust, transparency and traceability. According to the Blockchain Climate Institute, in 2016, only half of the countries were able to comply with the UNFCCC guidelines and requirements of transparency that stimulate traceable sources and tools of climate funding.

Access to climate finance is another challenge altogether. There currently exists an oligopoly of intermediaries, with rigorous eligibility requirements. More specifically, many developing countries are not able to meet the stringent accreditation requirements for international climate funds such as the Green Climate Fund, and even then, the process of obtaining funding through these funds is lengthy and cumbersome. In addition, the market is currently fragmented, with no single marketplace for climate finance transactions, making the entire process even more tedious.

A presenter at COP24 was quoted to have said, “We simply don’t have the luxury to wait, given the urgency to addressing climate change.” Digitalization, in the form of blockchain technology, seems to have the answer to the challenges discussed above.

What is blockchain?

Blockchain technology is a distributed ledger technology, best used for peer-to-peer transactions. Each transaction carried out through blockchain involves the following six steps:

  1. A user requests for a transaction
  2. A block representing the transaction is created
  3. The block is broadcasted to all the nodes of the network
  4. All the nodes validate the block and the transaction
  5. The block is added to the chain
  6. The transaction gets verified and executed

Using blockchain for climate finance

Blockchain is a relatively new concept, increasingly gaining traction in the finance field, for its speed, efficiency and security. In terms of climate finance, blockchain provides the following benefits:

  • Enhanced security – Information once put into blockchain is stored in distributed net of nodes and cannot be changed.
  • Greater transparency – The platform builds unprecedented trust by absolute traceability on each node of the supply chain
  • Increased speed and efficiency – Transactions can be sent and viewed from any device, without requiring the use of intermediaries. Further, decisions can be made within minutes.
  • Reduced costs – Transactions made through blockchain eliminate the role of settlement and registration entities, including the use of escrow accounts, in most cases. The technology also allows for direct peer to peer access to climate assets, leading to a significant reduction in costs.

Global use cases for blockchain

Though blockchain is a relatively newer technology, it is being used and experimented by various entities, even within climate finance. So far, the technology is being used for three purposes around the world; renewable energy investments, emissions trading and adaptation finance. Chile is using blockchain to bring climate finance to the unbanked. The technology is used to connect smart meters in remote villages, that leads to reduced need for intermediaries, increased time efficiency and lower costs. Canada has introduced a carbon emission reduction asset, using blockchain, that brings increased transparency and security for the users. The Jeju Island of South Korea, also known as the blockchain island, uses the technology to strengthen efficient and transparent regulation and encourage innovative ways of producing sustainable energy.

More information

There are many more ways in which blockchain is being experimented on, for climate finance tools and instruments around the world by entrepreneurs, engineers, scientists, and policymakers alike. COP24 was unique in that it brought together a host of such professionals, working at this intersection of climate, finance and technology, passionate about sharing their ideas with and learning from each other. COP24 also had representation from organizations working exclusively to create a network of professionals in the field, such as Blockchain Climate Institute and Blockchain Climate Foundation. More information on the topic can be found in the book, “Transforming Climate Finance and Green Investments with Blockchain”, written by experts of the Blockchain Climate Institute, to promote distributed ledger solutions which can accelerate global climate action and make then visible to the global audience.

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