Networked Carbon Markets: Permissionless Innovation with Distributed Ledgers?

Abstract

Carbon markets are key components in the climate change mitigation response, enabling a price to be placed on carbon emissions. Connecting these markets has the potential to allow a more integrated, efficient, and globally consistent price on carbon which will promote greater confidence in the market, investment and, ultimately, help foster new technology development through climate finance.

The challenge to connecting carbon markets is that each individual carbon market has its own legal and regulatory framework and its own rules for assigning and accounting for the carbon units traded. This presents significant legal and political hurdles that rule out a single, global, carbon market being established. An alternative, ‘bottom-up’ solution, to enable carbon trading between a range of markets without forcing legal and regulatory homogeneous standardisation and conformity on those markets, would be a more practical way to connect them.

One candidate technology to facilitate such connection, is the ‘Distributed Ledger’ (DL), which provides the combination of a distributed database with public/private key encryption and a decentralised infrastructure. This potentially allows for innovative solutions to data sharing, or transaction management application areas, making it a good first-order match to the emerging requirements for an interoperable carbon market infrastructure.

To meet the objectives of the Paris Agreement, a solution needs to be found that facilitates a global-scale distributed infrastructure, which allows a diverse set of markets and participants to utilise and exploit it. The established literature on innovation and technology diffusion gives guidance on this issue, but no ability to predict success.

The purpose of this White Paper, therefore, is to outline the most important questions identified in relation to the connecting of carbon markets through the application of DL technologies, and outline the authors’ current thoughts on those questions.

Keywords: carbon markets, networking, distributed ledger technology, Paris Agreement, mitigation outcomes, international transfers, innovation, technology diffusion, distributed computing, blockchain