Background

The Kyoto Protocol attempted to create such a market on a top-down basis by a supra-national body (the Conference of Parties) policing limits committed to by governments. For a number of reasons this was unsuccessful but in the wake of that failure, numerous jurisdictions, regional (the EU), national and sub-national (provincial, municipal, city) have nevertheless implemented mitigation mechanisms that put a price on carbon.

These measures, while reflecting local preferences, are fragmented and heterogeneous; differences in design, implementation and the standards applied detract from their effectiveness. Businesses operating globally may come under multiple schemes without the capacity to easily net off their overall positions many large multinational entities have compliance obligations in multiple jurisdictions where they operate and would benefit from these diverse carbon markets connecting. Greater efficiencies and scale might be achieved if these schemes were connected in order to derive a more globally consistent carbon price, making them more attractive to investors and more effective in changing the behaviour of emitters.

The Paris Agreement directly supports the idea of international trading by recognising that Parties may engage voluntarily in cooperative approaches that allow internationally transferred mitigation outcomes (ITMOs) to contribute towards Nationally Determined Contributions (NDCs). Such engagements should promote sustainable development, ensure environmental integrity and transparency, including governance, and apply robust accounting, in particular in the avoidance of double counting.

Environmental Context

Mitigation of GHG emissions means changing behaviour, changing the way many economic activities are carried out. Putting a price on carbon is one obvious way to do this, whether by taxing the activity or by creating a market in which the cost of carbon (i.e., the related GHG emission) is internalised.

The Kyoto Protocol attempted to create such a market on a top-down basis by a supra-national body (the Conference of Parties) policing limits committed to by governments. For a number of reasons this was unsuccessful but in the wake of that failure, numerous jurisdictions, regional (the EU), national and sub-national (provincial, municipal, city) have nevertheless implemented mitigation mechanisms that put a price on carbon.

These measures, while reflecting local preferences, are fragmented and heterogeneous; differences in design, implementation and the standards applied detract from their effectiveness. Businesses operating globally may come under multiple schemes without the capacity to easily net off their overall positions many large multinational entities have compliance obligations in multiple jurisdictions where they operate and would benefit from these diverse carbon markets connecting. Greater efficiencies and scale might be achieved if these schemes were connected in order to derive a more globally consistent carbon price, making them more attractive to investors and more effective in changing the behaviour of emitters.

The Paris Agreement directly supports the idea of international trading by recognising that Parties may engage voluntarily in cooperative approaches that allow internationally transferred mitigation outcomes (ITMOs) to contribute towards Nationally Determined Contributions (NDCs). Such engagements should promote sustainable development, ensure environmental integrity and transparency, including governance, and apply robust accounting, in particular in the avoidance of double counting.

Distributed Ledgers

To date, Distributed Ledger Technology (DLT) has been associated most prominently with virtual currencies, such as Bitcoin, however DLT has many broader applications, for example, providing accurate, secure, globally distributed registers of assets; preconditioned, self-executing ‘smart’ contracts; and ‘trustless’ transactions which can be executed safely and securely without the need for (or time and cost inefficiencies of) trusted intermediaries.

The accuracy, auditing, security and reliability of transaction record-keeping and accounting will be core to the operation and success of cooperative approaches using ITMOs. This would be even more so the case with globally connected carbon markets. In these respects, the development of DLT is timely and the range of potential applications is growing.

Further Reading

  • Macinante, Justin; Operationalizing Cooperative Approaches Under the Paris Agreement by Valuing Mitigation Outcomes Available at SSRN or here
  • Macinante, Justin, A Conceptual Model for Networking of Carbon Markets on Distributed Ledger Technology Architecture (April 3, 2017). Edinburgh School of Law Research Paper No. 09/2017. Available at SSRN or here
  • Jackson, Adrian and Lloyd, Ashley and Macinante, Justin and Hüwener, Markus, Networked Carbon Markets: Permissionless Innovation with Distributed Ledgers? (July 4, 2017). Available at SSRN or here
  • Macinante, Justin, From Homogeneity to Heterogeneity and the Fundamental Question What Is Being Traded? (August 9, 2017). Edinburgh School of Law Research Paper No. 2017/15. Available at SSRN or here
  • World Bank Networked Carbon Markets topic
  • Networking Carbon Markets - Key Elements of the Process World Bank report

About

The project is informed by expertise from current World Bank initiatives in carbon trading practices and associated legal and technical frameworks, as well as extensive practical financial market trading knowledge and experience.

This collaboration was developed following a series of meetings at The University of Edinburgh developing systems requirements based on a discussion paper authored by Justin Macinante (Law School) for the World Bank’s Networked Carbon Markets initiative.

It builds on an established relationship between the Business School (Ashley Lloyd) and EPCC in developing scalable, secure, globally distributed computing systems for business and draws on expertise in distributed ledger architecture at EPCC (Adrian Jackson). To this team, Markus Hüwener brings thirty years’ expert financial market knowledge and trading experience.

Justin Macinante

Justin has over 35 years experience in law, specializing in the interaction of the environment and finance sector, and climate change. Justin was legal counsel for the First Climate Group. He consults to the World Bank Networked Carbon Markets initiative and has published a number of papers on the subject.

Ashley D. Lloyd

Ashley has worked in the emerging technology arena for over 30 years, publications range from Quantum Electronics to Innovation Management and projects led include the first Global Grid to connect three continents and the first trans-national ‘Big Data’ analysis of consumer behaviour in China.

Adrian Jackson

Adrian is a Research Architect with a wide range of experience in parallel computing, distributing computing across a range of hardware architectures, and data infrastructures. Part of his current work is designing scalable, performant, systems, including using distributed ledgers where appropriate.

Markus Hüwener

Markus has more than 25 years experience in financial and commodity markets and worked as an investment banker and asset manager. He founded and served as CEO for First Climate, one of the major independent companies in the CO2 markets.

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