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A Note From the Editors

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© Joseph Pallant

interviews

Blockchain For Climate

by Joseph Pallant
January 29, 2020

frank | Hi Joseph! Excited to speak with you. Will you start by introducing yourself?

Joseph Pallant | Sure! My name is Joseph Pallant and I am the founder of the Blockchain for Climate Foundation – our goal is to put the Paris Agreement on the Blockchain. I am also the Director of Climate Innovation at Ecotrust Canada and a community scholar in Blockchain for Climate at the Dahdaleh Institute for Global Health Research at York University. This confluence of roles and really is a mashup of my 15 years of work in carbon offset development, and my excitement for using emergent technology like blockchain that can help solve a bunch of the problems we encounter in the climate space.

In layman's terms, what do you mean by your “excitement for using emergent technology like blockchain that can help solve a bunch of the problems we encounter in the climate space?”

Climate has been my day job for 15 years. And about three years ago, in the spring of 2017, I read an article about blockchain and about initial coin offerings that coincided with the start of the ICO boom. It was a really long read, and by the end of it, I had three burning thoughts:

My first thought was, "Oh my gosh, I need to drop everything and get into crypto." And my second thought was, "Heck no. I have a months-old baby, a mortgage and I love my work. I really need to NOT just drop everything." Then my third thought was, "Well, if we could put the Paris Agreement on the Blockchain and operationalize Article 6 (the carbon trading aspects) of this international agreement, THAT would be the killer app for blockchain, vis a vis climate.”

You see, a major issue with achieving the vision of the Paris Agreement rests on the ability to pay for the economic transformation that needs to happen to actually beat climate change. Carbon markets and “Article 6” can help achieve this by connecting countries so that you could have capital flow from one country to another where it was more cost effective to reduce greenhouse gases, and then have environmental assets, these carbon credits called “Internationally Transferred Mitigation Outcomes” or ITMOs under Article 6, flow back in the other direction in return. The opportunity that I saw in Blockchain was a tool built for the making and keeping of distributed ledgers, but moreover creating digitally scarce token, digitally scarce units that can be bought, sold or traded and really have that portability and verifiability of value. 

So, over the next year I got to explore a lot of different models using Blockchain for selling carbon credits or for verifying and auditing of projects, but I kept coming back to where I started, focusing on this last mile of connectivity between countries to enable this key part of the Paris Agreement. We've subsequently received a lot of good feedback and buy-in on this use case, so we remain hard at work to make it a reality. 

Amazing. Can you break down this portion of the Paris Agreement and who the buy-in is from? How do you get people to participate in this? I think my barrier to fully wrapping my head around how this all works is that the Paris Agreement is policy driven – and when I look at Blockchain and how Crypto works, policy seems behind. 

Yeah. So. You make a really great point. Basically, the part in the Paris Agreement that we're really trying to address is Article 6 of the Paris Agreement, which lays out the rules for trading of carbon credits from one country to another. So, kind of at that simple level, the Paris Agreement sets rules around doing those trades internationally.

What we're trying to do is build a piece of infrastructure to enable that to happen, transparently and effectively.

Blockchain is such a good fit because it allows us to issue and trade a carbon credit environmental asset as a token.

Over the last few years, lots of people have tokenized intangible assets on the Ethereum blockchain using the “ERC20” token standard,  where they're tokenizing any manner of things. We're basically building a tool allowing governments to tokenize carbon credits that they're approving for transfer out of their country.

Can you define what a carbon credit is?

At its simplest level, a carbon credit is an environmental asset created by implementing a project that reduces or removes one tonne of carbon dioxide emissions from the atmosphere. In our case, there's a couple of ways it could happen. But theoretically, a project developer could say… Hey - this is probably way too much detail?

No, not at all.

Ok! Thank you. If you were to do a carbon credit project here in Canada where, for example, we could go and work to improve forest management practices in a logging tenure in the province of Ontario and go from releasing a million tons of carbon dioxide per year, down to 500,000 tons per year.

After going through the credit project development and verification process you could be issuing 500,000 tons of carbon credits per year. We have well established processes for doing this domestically, and for that we don’t need the blockchain. But say now Canada wants to trade those carbon credits to Norway?

If we then take those 500,000 tons of carbon credits and sell them to Norway, their total carbon footprint is reduced by half a million tons. But what we now need to do, and this is really the crux of our work, is to make sure that Canada is adds those 500,000 tons back on to their carbon inventory and basically increase our footprint in Canada by 500,000 tons because we sold those away. Does that make sense?

So you're tokenizing the carbon credits.

Yeah. What we want to do is tokenize the 500,000 tons of carbon credits, so Canada in that issuance and tokenizing event would be taking them off of their national carbon inventory and readying them for transfer to another country. 

And then why this is important is because the carbon credits might get sold to Norway, but then Norway might sell it to England might sell it to Germany, might sell to Japan. And so these units are going to be potentially, quite widely traded. And that's good in a lot of ways because it allows for a bigger market, allows for more capital invested and greenhouse gasses reduced.

By running on Blockchain tokenized rails, we can ensure proper bookkeeping of emissions outcomes transferred from one country to another under the Paris Agreement.

Countries will be able to see how many tonnes of carbon dioxide they’ve bought and sold, and then they compare that against their actual national carbon footprint that gets calculated and reported to the UN. So, you might see Canada starting off with 730 million tons of emissions this year. And then we might sell off 5 million tons of carbon. So, we'd actually have to increase our footprint to 735 million tonnes. Then we might buy a hundred million tons of carbon credits to get us toward that Paris commitment. So then you'd subtract that off our inventory and so on. We’re excited about the building our platform because it really leverages the nature of Blockchain, natively in tokenizing that environmental outcome and making it into a digital asset. This supports clarity in that bookkeeping and clarity of ownership, all of which we're doing to support getting more capital to reducing greenhouse gases.

How did you start Blockchain for Climate? Again, how did you start getting people to buy into this idea of getting carbon credits onto the Blockchain?

There's so many different things to do in Blockchain and so many different things even to do with climate and Blockchain. I was able to really grasp a moment of clarity and focus and say, "We're just going to work on this one tool to operationalize the Paris Agreement." We had an original team of five folks, including myself, that actually met down at DCTRL, which is literally an underground cryptocurrency members club here in Vancouver, British Columbia. So, we met there, I think, in December, 2017 to just kind of talk about what was going on here.

Basically that initial team came together and then we kept it at five for about another year because we were still just sort of fleshing out exactly what we needed to do. We had an early blockchain developer, a person from the climate space, a person from governance and then also another crypto-native and an awesome individual from the clean energy space. And so the team really started to figure out what type of Crypto tools we need, started to figure out how to really craft the use case.

It was really the launch of CryptoKitties that helped me realize kind of how to make Crypto work for carbon credits. Are you familiar with CryptoKitties?

We did an interview with Blake Finucane about crypto art, and she spoke a lot about CytoKitties.

That's awesome. CryptoKitties was created here in Vancouver, and it's an amazing story for a lot of reasons. But the part cogent for my story was how each CryptoKitty has eight attributes like eye shape and background color and fur color and so on, displayed on the kitty’s token page and coded on the blockchain. And I'm like, "This is exactly what we need to be able to have each individual carbon credit token carry all of the information of its genesis carbon offset."

A quality carbon credit is valuable and credible because of the information that backs it, all of the project information, scientific detail, auditing… Instead of eye color, we could have the name of the credit project. And instead of background color, we could have, which country was this project developed in? And what sector is it? Is it forest carbon, and so on and so forth. 

So that was an "Aha" moment, because we know about Bitcoin, Ethereum and Dogecoin and the fact that people are starting to tokenize things on Ethereum. But for our project to really work, you needed to be able to know everything about that credit from that token. It was really CryptoKitties and non fungible tokens that was the first foot to fall and set us on our way.

In March 2018, I sat down and spoke with one of my collaborators, one of the five, Matt Lockyer here in Vancouver. He had just submitted ERC-998, which is an improvement or a tool proposed to the Ethereum blockchain that allows you to create “crypto composables.” This would basically allow your non fungible token, like your CryptoKitty, be able to own other non fungible tokens, like other CryptoKitties. Or you could tokenize bags of CryptoKitty cat food, and have them belong to your CryptoKitty token. Or your CryptoKitty could hold an ether token. That ability to nest other non fungible tokens within other non fungible tokens was the other foot to fall. Because of course the thing that created the huge slowdown in the Ethereum network near the end of 2017, and a lot of ruckus about CryptoKitties was that you can actually only move one of them per transaction on the blockchain. And so that wasn't going to work for our climate system where we're going to have billions of tons moving all the time. But that ability to do that composability where we could say, issue a project token that could then issue and hold 50,000 individual carbon credit tokens? Now we're talking.

So as that got clear and we moved forward, then we opened up the gates for more team members. Since then we've grown to  a team of around 20 kind, generous folks, contributing from a wide variety of life experiences and professional expertise. Because you know, we have a subject matter focus on blockchain and climate, but building this into fruition takes a lot of other skillsets. We’re really lucky because these folks are all profoundly skilled, and leaders in their respective fields. It brings home the fact that we’re working on a critical task, and bringing compelling tools to the job of getting it done. 

Conceptually, I understand. So there's what, 196 countries in the Paris Agreement?

Yeah.

When you say that you have people buying in to the project who are you talking about exactly? If country is the answer, how many of the 196 are currently operating on the blockchain?

Right. So that's our next frontier. It’s been neat just getting people in the space to understand and get on board with this idea. Those are kind of the precursors to the other types of buy in which we'll need ultimately to get some or all of the 196 countries on board. I think a stretch goal is to create like the tool for everybody to use the tool for Paris Agreement-compliant issuance and exchange of carbon credits . But what's more likely is that we'll have a smaller number as few as two, two's our minimum, one buyer, one seller, to trial this. And so right now we've come back from the UN COP25 in Madrid, and we're working on building a national party working group of countries to co-create, utilize and champion our system. We have a notional goal of six varied countries interested in working with us over the next year and a half to try to refine and support the building of this tool so that by this time next year we are actually able to allow countries to trade carbon credits through our system. We're hoping to get countries that are keen to use the tool and will say, if you build it and it works, we'd like to use it. We also want them as users to really provide their feedback. What do they want to see? What are they allergic to?

Why is this a blockchain manifestation of the Paris Agreement a better option than what's happening right now?

With the slight caveat that I'm still learning, and there's always a risk that I'm smack talking a little bit, which is really not the goal. But basically, Article 6 in the Paris Agreement, which is the one around international carbon trading, started out as only one page. Before work could start to build a tool like we’re building to enable really clear transparency around these international trades, countries have to do a bunch of work around hammering out the Article 6 rule book. By 2018, all the other Articles that have solidified their rules and might be like 40, 50, 100 pages. But active opposition to critical parts of a rulebook for Article 6 has meant that, even though the rules are looking a lot better now after COP25, they’re still not complete and universally agreed upon. This has a number of impacts, including that further building of a transparency tool like ours by official channels has paused until some future date. 

Under the earlier Kyoto protocol, there was a system of carbon credits called the Clean Development Mechanism (CDM). International trade of these credits was registered on the International Transaction Log or the ITL. Every two years the ITL recorded the sum total of all the pluses and minuses, all of the trades that each country would do of carbon credits. An interesting nuance under the CDM, was that the “developing world” could create carbon credits and sell them to the “developed world.” And that would lower the footprint of the purchasing country, usually in Europe or Japan, but they didn't actually add the corresponding emissions back onto the carbon footprint of the selling country. It was really a one way flow.

Now that all countries of the world have committed to reducing emissions, if you are going to sell a carbon credit and somebody else is going to remove it from their footprint, YOU have to put it back on your footprint as the seller. And so this International Transaction Log, my understanding is they're not going to even start building it or its replacement until Article 6 has been finalized, which will hopefully be this November in COP26 in Scotland, but we don't really know. The fact that they can't start building that till all the rules are made and the fact that we hear it will take around three years just to build that once all the rules are made, really slows down the ability to roll out to a carbon market and mobilize capital to fight climate change. Those are some of the reasons why we decided we needed to do this.

The other main reason that's kind of intangible, or emotional, or maybe I’m just being overtaken by crypto geekery, is that if the world goes with the old way, they're locking in this old technology and it’s not really sufficient for the task at hand. If we’re going to mobilize the billions of dollars of capital and deploy it in every corner of the world to fight climate change, we’re going to need the technological advancement of tools like blockchain. So really we're building our platform to enable corresponding adjustments between carbon accounts to happen in real time rather than every two years.

We just see that with the pace of climate change, with the urgency of addressing it, with countries getting on board keen to start moving quickly, we risk the positive momentum if we have to fall back to a system that only reconciles the books every two years.

It’s a mis-fit. It just doesn’t feel right. Also, this use case really jives with the nature of crypto and of blockchain, which tokenizes values or tokenizes an outcome. This is exactly what was needed to solve this problem of how to issue, exchange and reconcile carbon credits under the Paris Agreement. When you have a tool that fits the task so well, it just kind of calls use it. So that's a cluster of the reasons why we are.