Blockchain and the Environment

The subject of Bitcoin’s environmental footprint has been a constant in the news cycle since May, when Elon Musk tweeted that Tesla would no longer be accepting Bitcoin as payment because of the amount of energy it used. This announcement came only a couple weeks after the company started accepting Bitcoin, a move which had caused the price to shoot up to new highs and generated extensive institutional interest in crypto. The criticism of Musk’s ability to effectively manipulate the price of Bitcoin aside (just go on Twitter, or any blockchain/crypto publication to read a diatribe against Musk), the bigger issue here is the sheer amount of irony and hypocrisy that’s been leading the conversation around crypto and the environment ever since.

Yes, we know crypto uses a lot of energy

The thing is, everyone has known about Bitcoin’s environmental footprint for years. It is undeniable that Bitcoin, and to a lesser extent other cryptocurrencies, use a lot of energy. This is one reason that mining farms are popular in the colder areas of Northern Europe, where the natural habitat can help cool the GPU banks. All that being said, the Bitcoin and blockchain believers are equally aware of the environmental costs inherent in legacy financial systems, which simply dwarf those of Bitcoin. The believers just assumed everyone else was aware of this too which, judging from the firestorm (no pun intended) that’s erupted, wasn’t the case. No matter how you cut it, existing financial vehicles use more energy and emit more carbon than crypto or blockchain.

Because the blockchain space has known for so long that they have an energy consumption problem, they’ve also had years to come up with a solution. Ethereum, the most widely used public blockchain and the second largest cryptocurrency after Bitcoin, is currently rolling out a massive consensus mechanism change that will enable it to run on “a thousandth of the energy” it currently uses.(!)

But it’s not just efficiency improvements that will make blockchain “green.” Remember, cryptocurrencies, even as inefficient as many of them are currently, are still far and away less harmful than the current financial sector, precious metals, or even certain individual industries. A recent study noted that Bitcoin in all is maligned inefficiency only compares to 2% of the global defense industry. So, if the hard facts about crypto don’t matter as much, how to solve it’s eco-image? The answer is to make tokenization a part of larger environmental clean up initiatives.

The Problem with Carbon Credits

When protecting the environment became a concern, the introduction of CO2 certificates, sometimes called carbon credits, was one of the measures taken by governments worldwide to force the industry on a greener path. This didn’t actually require that factories get rid of their CO2. Rather, they only got a limit as to how much CO2 they were permitted to produce, and if they made more, they had to pay for it by buying certificates from other companies who had excess through a system known as cap and trade. Many companies just continued with their original business and bought more of these certificates. Others, such as Tesla, sell their excess CO2 certificates because they don’t hit their cap limit. That is a nice additional business model, and for Tesla it has become very lucrative.

The problem is obvious. These CO2 arrangements can only work to lower overall emissions if all countries act as one. That’s the theory. In reality, governments can just decide to exit from all such agreements, as recently demonstrated by the last US Administration. Others can simply refuse to ratify international agreements over the environment. When it comes to states every topic is ultimately political. In a carbon credit model with just two parties, one issuing the certificates and another one consuming them, there is a lot of potential for abuse. It’s an arbitrary system; why, for example, does Tesla receive any CO2 certificates at all? On the flip side, it is abundantly clear that no industry which is deemed politically inconvenient will ever get any of these CO2 certificates and so will forever have to bear the stain of polluting the environment, whereas other industries, even if they still pollute, can get a free pass. Let’s not forget that the CO2 market is built on the assumption that a certain amount of man-made CO2 is okay for the planet, and that this okay-amount would be absorbed, somewhere, somehow.

The ideal solution, then, is one where CO2 is actively removed from the atmosphere. There are of course ways to remove CO2 from the atmosphere, known as carbon sequestration, and some of these techniques have been around for many decades now. For a variety of reasons, primarily the fact that carbon removal costs money and energy, the fraction of carbon removed by human efforts is insignificant compared to what the planet swallows through natural mechanisms anyway.

The answer is to make tokenization a part of larger environmental clean up initiatives.

But what if those industries shunned in the current political climate, or any other socially conscious company for that matter, had another way to literally “clean up” their image as well as the planet? After all, environmental impact is increasingly becoming an important issue for consumers as well as governments. Without the ability to tap into the natural CO2 removal mechanisms of our planet, they must organize an alternative for themselves.

Carbon Sequestration and Blockchain: A Proposal

One such model could be that Carbon Sequestration facilities, which actively remove CO2, issue certificates which are proportional to the amount of carbon removed from the atmosphere. Sequestration consumes energy, of course, but is paid for by all the other facilities which create carbon. Companies would only buy as many certificates as they need, and nobody in this proposed model would be granted free certificates or tax-payer funded income. The cost of these CO2 certificates would be covered by higher prices for products which produce a lot of CO2, so the consumer would also be paying directly for the “cleanup.” So these products are not so“dirty” any more, and nobody has to have a guilty conscience for buying them.

This model would be somewhat comparable to the electric grid with its many producers and consumers, and of course the grid operators and their corresponding jurisdictions. Only in this case there is no grid; the atmosphere itself can be seen as one big grid, sans operator. You could theoretically buy a certificate from a sequestration facility in Canada, even though you’re in Switzerland. There won’t be a noticeable difference in atmospheric CO2 content anyway, as long as it’s actually being captured and stored somewhere.

This isn’t an entirely new idea. Thanks to the crypto space’s longstanding work to improve its impact, the market has already realized that the tokenization of Carbon can be a lucrative, prestigious, an highly effective project for combatting climate change. The next milestones are simply going from niche idea, to proof-of-concept, to mainstream adoption.

A Truly Green Blockchain Use Case

The idea behind cap and trade schemes was to use the power of financial incentives to fight pollution and green house gas production, though the arbitrary nature of the current system and the constant political involvement, including the ability for future administrations to simply nullify past rules and start polluting again, means this solution is hardly as effective as it could be. By combining our carbon sequestration model outlined above with two additional features, blockchain and a free market, you get a much more efficient system that actually corresponds to the removal of pollutants without all the arbitrary political hoops of current cap and trade programs to jump through.

Carbon sequestration certificates can easily be put on blockchain in the form of tokens, which means you no longer need the state to issue them. They can be issued by the sequestration facility directly, a huge benefit for the rapidly growing green startup market, as well as the environment itself. It just needs a proper audit to make sure that the certificates issued equal the actual CO2 sequestered. As a producer you can just buy these certificates and, again, a proper audit would ensure you’ve bought enough certificates from to cover the amount of CO2 you produce in your business. This is another reason why sequestration makes more environmental sense than credits, because companies are financially incentivized to produce more efficiently so they need fewer certificates, rather than just buying more polluting time.

If there are thousands of different CO2 sequestration tokens, there is of course a difference in price depending on the location and energy efficiency of the facility. Remember, it takes signifiant energy and resources to capture and store carbon which will be reflected in the token costs. Blockchain is also the perfect platform to build a secondary market for these tokens, maintaining the market incentive to remove carbon from the atmosphere or participate in pollution-fighting activities. As for the blockchain technology itself, it doesn’t need to be one of those wasteful proof-of-work blockchains. There are several alternative consensus mechanisms, such as proof-of-authority, which consume an insignificant amount of energy. Now that we have proposed a more effective solution to carbon credits, and solved for the issue of wasteful blockchains, there is just one question left.

What About the Audits?

It’s safe to say that businesses wouldn’t want to pay for a certificate that’s fraudulent, and consumers certainly wouldn’t want to pay a higher price for products that claim to offset their carbon by buying certificates, but instead only make the manufacturer a higher profit. As for the first problem, this will effectively be tackled by the market. With environmental topics today, is largely an issue of reputation when a company decides to buy CO2 certificates as described above. Every carbon sequestration facility would want its “products” to be audited of course, to prove that they are actually collecting and storing carbon dioxide. This can be even further leveraged by recording these audits on blockchain For the second problem, a free market will also be an adequate solution. We’re used to having quality certificates on all sorts of of products. There are already companies specializing in the creation, promotion and supervision of such compliance and quality standards. This is a thriving business, and there is no reason why such a quality seal, a guarantee of authenticity, shouldn’t be created for “carbon neutral” products that act in such a self-organized, non-governmental way as the one proposed.

A ‘Best of Both Worlds’ Scenario

By linking carbon certificates to the actual removal of carbon (it sounds obvious when you say it out loud, but here we are) and running the solution on blockchain, you keep the original financial incentives of the cap and trade system but remove the ability for corporations to practically get around environmental requirements or abuse taxpayer money.

This would also solve the endless debate about the energy consumption of Bitcoin and the demand to make it more “green” (even though it’s already more green than the current financial system.) If “polluters” have to purchase CO2 certificates, and if this carbon is actually removed from the atmosphere, then the problem is solved. And if the blockchain technology that makes Bitcoin and crypto possible is also a foundational element of fighting global climate change in a sustainable way that works for states, companies, and activists, then isn’t that a win for everyone?

Source: https://medium.com/coreledger/blockchain-and-the-environment-3bf3d01797d4?source=rss——-8—————–cryptocurrency