Distributed ledgers for carbon markets

Ledgers can be considered to be simple data stores. They are styled on accounting ledgers, books where transactions are recorded one after the other, and the overall state of the accounts can be evaluated by working through the recorded transactions to calculate how much money has flowed in and out of the accounts.

Blockchain or Distributed ledger

Often also known as blockchain, distributed ledgers are built on peer-to-peer like technology, with the data in the ledger replicated across all the computers involved in the distributed ledger. Each participant has a copy of the whole ledger, and any participant can add an entry to the ledger. 

However, because the ledger is distributed, and because there are multiple copies of the ledger, the system has to have some kind of mechanism to ensure every copy is in the same state. There needs to be a consensus mechanism, to agree which additions to the ledger proposed by individual participants are going to be added and distributed to all the copies of the ledger.

For the blockchain that BitCoin uses this consensus mechanism is mining. Every participant who wants to make an update to the ledger solves a mathematic problem where it's impossible before solving the problem to know which participant will solve it first. This introduces randomness into the choice of the participant whose update will be added to the ledger, as well as providing a deterministic way to decide who gets to update ledger.  

Mining doesn't mean individual participants won't be able to update the ledger, but it dictates the order in which updates are made thus preventing the system being hijacked for malicious updates: randomising updates almost guarantees that the same participant won't make consecutive updates. It's also a mechanism for choosing which updates to do, which is hard in a truly distributed system.

Another key feature of distributed ledgers is their immutability. Once an entry has been added to the ledger it cannot be changed or removed. This gives certainty of data, once an entry has been added, and also means that even though there are multiple copies of the data, they will all be in the same state.

Of course, the above is a naive and simplified introduction to distributed ledgers, there are a lot of technical details I've skipped over and other functionality that is important to distributed ledgers. However, the important thing to understand, at least in my opinion, is that the functionality provided by distributed ledgers isn't revolutionary. You could implement the same functionality using standard database technology and software. 

The difference with a distributed ledger is that it's implemented in such a way that there is no single point of control: every participant is on an equal footing in their ability to query and add to the ledger. Furthermore, because the ledger is immutable, there is no scope for the database owner to change data that's already been added (as is possible with standard database technology). The distributed ledger provide equal access and surety of data for participants.

Carbon markets

A key part of the Paris climate change agreement is the use of carbon trading, and carbon markets, to mitigate climate change. Carbon trading and carbon markets have been in operation for a number of years now, but they tend to be limited in scope, with little chance for truly global trading of carbon credits and mitigation outcomes (mitigation outcomes can be thought of as the results achieved by projects that remove carbon from the atmosphere or reduce the amount of carbon required for a given operation).

As climate change is a global problem, and we live and work in a global economy, restricting carbon markets to local jurisdictions really limits how effective climate change mitigation can be. Therefore, we have been looking at whether distributed ledgers could provide functionality to enable trading of mitigation outcomes between local carbon markets, enabling global trading.

EPCC has been working with Ashley Lloyd (University of Edinburgh Business School), Justin Macinante (Law School at Edinburgh) and Markus Hüwener (a carbon trading and renewable energy expert) to look at the potential for networking carbon markets using distributed ledgers.

Figure 1: An example of trading credits between markets using distributed ledger technology

We think that this technology does provide some benefits for carbon markets, particularly in bringing in smaller participants (countries, regions, and companies) who have not yet been involved in carbon trading, and providing transparency and auditability for carbon trading across a range of carbon markets.

We've produced a short White Paper on using distributed ledgers for networked carbon markets and are working with Funding Councils and other organisations to investigate further and provide a reference implementation. We hope to present these ideas and stimulate discussion at the upcoming UN climate change conference, COP23.