Distributed ledger technologies are here to stay

Blockchain and other distributed ledger technologies might be a critical tool to unlock trillions for climate action.

The World Bank states: “Scientific consensus is that rapid and aggressive reductions in greenhouse gas (GHG) emissions are needed if significant climate disruption and irreversible environmental impacts are to be averted. The changes required necessitate large-scale investment and governments at all levels are responding with combinations of regulatory mandates, incentives and market-driven solutions.”1

At the current rate however, the global 2C target of the Paris Agreement is not possible. PWC’s Low Carbon Index 20172shows that the global carbon intensity, i.e. the emissions per dollar of GDP (tCO2/USD GDP) needs to fall by 6.3 per cent every year until 2100 to stay within the 2C carbon budget. In 2016, the global carbon intensity fell by only 2.6 per cent, and the average decarbonisation rate pledged in the G20 NDCs implies a rate of only 3 per cent.

The fact that current efforts are not enough is a concern shared by, among others, the International Energy Agency3and the Climate Action Tracker4.

Current climate action approaches have not yet led to the substantial carbon reductions needed. While following the path of further incremental improvements should be continued, more disruptive approaches need to be developed and invested in.

The challenge of climate change’s complexity

Climate change is a formidable challenge: It is difficult to define and difficult to solve as every dimension is interconnected. It’s a problem that runs counter to almost everything that human beings are wired to respond to effectively. In order to keep the global temperature rise below the 2C target, unprecedented changes are required along the line of new social dynamics, new ways of doing business and operating markets, policy making, capital markets and new economic models.

The financing gap of the UN Sustainable Development Goals 2030

All UN Sustainable Development Goals (SDGs) have in common that they need significant amounts of investment in order to be realised. Beyond the challenge of the high degree of complexity and uncertainty associated with climate change, the financing of adaption and –mitigation efforts represents a critical key success factor towards a truly zero-carbon economy.

According to current estimates of the United Nations Conference on Trade and Development (UNCATD), achieving the SDGs will cost between €4.4 to €6.1 trillion, which leaves a significant financing gap until 2030. At the same time a recent report by the Business & Sustainable Development Commission estimates that achieving the SDGs could open up to €10.6 trillion of market opportunity and 380 million new jobs by 2030.

Is digitalisation the key to unlock the trillions needed for climate action?

So, why is it so difficult to finance deep decarbonisation initiatives and SDG-related initiatives if the market potential is huge?

The SDGs challenge current economic models, highlighting two key questions: (1) How will the world collectively come together and agree on a new economical paradigm that holistically accounts for ecological, social and economic value? And (2) how will the costs of ecological and human externalities be shared?

In fact, current economic models cannot to answer these questions.

As for climate change specifically, it is a global problem and will require a truly decentralised, multi-stakeholder, bottom-up approach to be solved. Digitalisation (the internet of things (IoT)), data analysis (artificial intelligence (AI) and machine learning) as well as data encryption and transaction (blockchain and associated distributed ledger technologies(DLTs)) is likely a key lever for a successful transition to a zero-carbon economy.

First and foremost, DLTs increase the level of decentralisation, which allows the shortcomings of today’s centralised systems to be addressed. Decentralisation leads to higher levels of fault tolerance, attack resistance, resistance to collusion and abuse of power, permission-less innovation, efficiency in inherently decentralised systems, and immutability. Decentralisation is borderless, transnational and neutral.

Second, DLTs enable new open markets for tasks that today are coordinated by the state or corporations (e.g. the energy industry). Third, DLTs enable smart networks based on the IoT and AI to develop their full potential without exposing humanity to the risk associated with centralised approaches as mentioned above. And fourth, DLTs increase social scalability by sacrificing computational efficiency. As researcher Nick Szabo elegantly puts it: “Scaling human traditional institutions in a reliable and secure manner requires increasing amounts [of] accountants, lawyers, regulators, and police, along with the increase in bureaucracy, risk, and stress that such institutions entail.”5

Deploying digitalised innovation for deep decarbonisation

The lack of an institutional blueprint of how to effectively deploy digital innovation to close the SDG financing gap , and more specifically for a zero-carbon economy, is good news for radical innovators. However, in the ever-changing and evolving world of digital transformation, keeping up with the most recent developments and their respective impact potential can be a daunting and almost impossible task. However, two key words should to be taken away from this report: Experiment now!

A recent comprehensive report6, commissioned by EIT Climate-KIC, suggests that now is the right time to engage in experimentation and learning around technological capabilities and to build institutional technological capacity, i.e. connect with the right partner networks and build the promising innovation portfolios. Unlocking the necessary trillions in financing is a challenge as daunting as it sounds. Beyond the necessary technological evolution, the report calls for action at key innovation hotspots in non-technological areas.

For instance, the report identifies the need for professional education programmes that teach and train B and C-level executives on the potential of DLT to trigger climate action.

New climate action funds for DLT are needed

At the same time, it will be critical to develop dedicated climate action funds for DLT. They should ideally offer financing, network and support structures for start-ups and help to excite the start-up community about climate action and attract their investment. Technological progress, awareness building, resource allocation and community mobilisation can only unleash their full potential if there is regulatory certainty. Informing policymakers about aspects of regulation that hinder disruptive digitalisation solutions and business models will be key in defining the window of opportunity for DLT as a tool for climate action and provide the necessary certainty that is key to sustainably attracting key stakeholders to this space.

These current uncertainties make it difficult to assess the real value DLT and associated technologies will bring to climate action. At the same time, it is certain that it is a space worth exploring and that those who have the courage to shape the DLT climate action space will be the ones rewarded for it, because one thing is certain: DLT is here to stay.

Download the full report on “DLT for Climate Action Assessment” here.

This article is part of an eight-part series by Climate-KIC and Environmental Finance discussing Mission Finance, the theme of the 2018 Climate Innovation Summit in Dublin on 6 – 8th November.  To see the series hub click here.

References:

  1. Dong, Xiaoqun, Rachel Chi Kiu Mok, Durreh Tabassum, Pierre Guigon, Eduardo Ferreira, Chandra Shekhar Sinha, Neeraj Prasad, et al. 2018. “Blockchain and Emerging Digital Technologies for Enhancing Post-2020 Climate Markets.” The World Bank
  2. PWC. 2017. “Is Paris possible? The Low Carbon Economy Index 2017.” 
  3. IEA. “Tracking Clean Energy Progress.” Accessed June 18, 2018
  4. Climate Action Tracker. “Climate Action Tracker.” Accessed June 18, 2018
  5. Szabo, Nick. 2017. “Money, blockchains, and social scalability.” Accessed May 30, 2018
  6. EIT Climate-KIC, 2018. Distributed Ledger Technology for Climate Action Assessment.
 
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Goal 10: Mainstream climate in financial markets
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