How blockchain helps in crypto climate impact accounting? You surely have heard about crypto and blockchain technology by now since the world is moving more and more online with the significant rise in the popularity and use of digital products such as crypto coins and NFTs or Non Fungible Tokens.
However, you may still have a lot of relevant questions quite naturally about how it works especially if you yourself have not gone down the rabbit hole and purchased some of these coins and digital assets.
And, for that matter, you will surely not know how it impacts the climate.
More than 190 nations have entered the Paris Agreement officially and are committed to reduce carbon emissions as per the set targets of the Agreement and follow the emission standards and emissions trading.
The main aim of the Paris Agreement is to ensure that the world is made more sustainable by 2050 with reduced carbon emissions.
Therefore, the regulators as well as the consumers need to consider sustainability while buying crypto and follow proper accounting standards and practices while accounting for their assets and climate impact.
It is true that crypto and blockchain cause carbon emissions but it can be handled effectively with the same technology itself.
Most people, like you, are unaware how blockchain itself may help in crypto climate impact accounting and crediting greenhouse gas emissions for reducing the impact and ensuring sustainability.
This is an article that you will find to be very helpful to know about it all.
You will know about carbon credits, the framework for accounting and the different crypto carbon marketplaces.
How Blockchain Helps in Crypto Climate Impact Accounting?
- How to avoid any major disruptions when new measures are implemented in supply chains to reduce carbon emissions?
- How to maintain accuracy while accounting for carbon emissions and climate impact?
- How can a business put the new opportunities to best use as and when they arise to make more profits?
- What are the ways in which new and more sustainable job opportunities can be created without causing any impact on the climate?
Finding answers to all these questions and others is very important for precise reporting on carbon emissions.
Though there are both social and regulatory initiatives to lower carbon footprints, business opportunities will still be created since carbon credits prompt innovation and create new marketplaces.
These marketplaces have specific goals to achieve and one of the most significant goals is to boost up accessibility and liquidity while selling surplus carbon credits to other companies.
However, before you move ahead with the accounting aspect, there is a lot more to know with relation to that.
This will make your knowledge much more comprehensive.
You will need to know about the market, carbon credits, crypto and blockchain technology when they come into play.
Cryptocurrencies use blockchain technology for verification and validation of transactions made on it.
The chain links all verified records together using cryptography.
This process of validating transactions by the participants on the blockchain network is called mining, which creates new coins.
Mining is an essential part of the blockchain network which basically involves arriving at an agreement and approval regarding the current state of the decentralized and distributed ledger called blockchain.
This ensures security of the network on the whole.
It is the working process of blockchain that makes the records immutable or tamper-proof.
Ideally, it is the blockchain records that give the assurance that the coin is verified and legitimate.
It is the same as verifying whether a dollar is genuine or not by looking at the watermark, security thread, micro-printing, and color-shifting ink.
Blockchain technology is widely adopted and applied in cryptocurrencies that have the ability to influence new innovations that transform the current financial system making it more efficient, transparent, inclusive, and secure.
However, cryptocurrencies are considered to be extremely energy intensive.
It is estimated that Bitcoin alone uses up more than 100 terawatt hours of energy.
Therefore, mining crypto coins needs a lot of computing power and it differs based on the particular type of consensus protocol followed during the mining process.
Typically, Proof of Work mining is much more energy intensive as compared to Proof of Stake consensus mining which depends on the amount of coins stacked by a participant.
It is the energy-intensive aspect of the Proof of Work mining process in particular that causes a lot of greenhouse gas emissions which harms the climate.
This growing concern has caused the stakeholders to deal with the climate impact related with their crypto activities.
Still, historically, estimating exactly how much crypto mining activity can impact the climate has never been easy or consistent.
This is because it needs specific standards for accounting of greenhouse gas emissions accurately for all the stakeholders across the crypto ecosystem.
The problem is that such accounting standards were not available in the crypto industry, until recently.
It is found that with the use of blockchain technology this particular challenge can be dealt with easily and effectively.
Therefore, several significant steps were taken by different organizations, agencies, governments, and countries to meet this challenge.
To start with, it was on the 8th day of April 2021 the Crypto Climate Accord was formed and announced.
The primary initiative of it was to make the crypto industry completely renewable by 2025 by acting as a coordinating framework for decarbonizing every aspect of it.
According to the accord, the framework includes:
- Enabling all blockchain networks of the world to be powered completely by renewable energy sources by 2025
- Creating an open-source accounting standard to measure carbon or greenhouse gas emissions from the crypto industry and
- Achieving net-zero emissions and eliminating historical emissions for the whole crypto industry as well as all business operations outside blockchain by 2040.
However, it was felt that it is not enough that the Crypto Climate Accord creates a framework for reduction of carbon emission in the blockchain technology.
Add to that, it is also required to use accurate and acceptable methods for tracking and recording carbon emissions.
It was also believed that creating a carbon credit marketplace based on blockchain is just a part of the solution and not the whole solution.
Typically, a solution to be effective, it will also need to include an assurance that a transaction made on the blockchain of 50 tons of carbon offsets is met.
It should also contain the proof that it is happening and is justifiable.
For example, the Tesla CEO Elon Musk announced that Bitcoin will no longer be accepted as a mode of payment showing his and his company’s support to the environment.
There are also other examples that prove that there is a growing awareness among the public and the companies towards realizing the varied impacts crypto may have on the environment.
Ethereum, the biggest competitor of Bitcoin, for example, is all set to curb down its energy usage by 99.95% very soon with its changeover to a new PoS infrastructure model called Ethereum 2.0 from the traditional PoW mining model followed by Bitcoin.
This will reduce the environmental impact significantly.
In the meantime, there are other eco-friendly crypto options that people can use to reduce the impact on the climate.
There are lots of new and lesser known crypto coins available out there that are more sustainable than Bitcoin and Ethereum using the Proof of Stake or PoS consensus rather than the energy intensive Proof of Work or PoW protocol.
Consider Cardano for that matter. This crypto token was created by the co-founder of Ethereum.
It has the ability to process a thousand Transactions Per Second which is far too high as compared to the 7 TPS of Bitcoin.
It is considered to be one of the most useful green crypto coins today that use the more sustainable PoS technology.
Cardano is not the only green cryptocurrency out there. You will also find others such as:
- Nano, which claims to have the lowest carbon footprints
- Stellar, which is used by several companies in different countries and
- SolarCoin that users receive for using solar energy.
These are just to name a few of the green coins. Undoubtedly, the future of crypto looks bright and promising, now that the emphasis is more on sustainability.
Therefore, this change is welcome, knowing that now all type crypto coins do not harm the environment.
There are a few that even help in reducing the impact of carbon emissions.
However, precise accounting is required to ensure that things stay that way and do not slide back to square one.
The Environmental Impact
There is no doubt that the negative environmental impact of crypto mining is significant and it is all due to the astronomical need of power for the mining process.
For example, the need of 121 terawatt-hours of electricity annually by Bitcoin’s PoW mining process, according to Investopedia, is more than the electricity consumed by the entire country of Argentina.
Also, according to a recent study conducted by the University of Cambridge, it is found that 40% of the mining power comes from coal, which is supposed to be the dirtiest of fossil fuels that cause massive negative environmental impact.
The need for energy for mining Bitcoin grows consistently because more and more people take part in it due to the fact that they consider it to be more profitable and a finite source of income.
According to some study reports published in the scientific journal Joule, the production of Bitcoin will produce carbon dioxide emissions ranging between 22 million metric tons and 22.9 million metric tons a year.
This is equal to 2.7 billion homes.
Until recently, that is before the crypto ban, more than 60% of mining took place in China.
So, the country was the largest carbon emitter. After the ban, things were expected to change but what happened is on the contrary and even worse.
As a result, energy consumption in these regions increased and so did the carbon emissions.
Therefore, the objective to reduce carbon emission for a better world did not really happen.
What actually happened is the concentration moved from one country to the other.
Therefore, a more extensive crackdown is required on mining in order to reduce the great threats that it poses to the prospects of the environment.
It is not only the amount of energy consumption that is worrying.
The hardware used for mining also causes serious and significant environmental impacts in the form of e-waste, to the tune of anywhere between 8,000 tons and 12,000 tons of non recyclable waste every year.
Add to that the cooling requirements of the mining farms make the situation even worse.
According to some estimates, mining plants typically need anywhere between 120 million gallons and 140 million gallons of fresh water to cool their mining equipment every day.
The water discharged from these plants is typically 30°F to 50°F hotter in comparison to the average temperature of the lake where it is discharged.
This endangers the ecology and wildlife of the lake.
With such serious impacts on the environment, there is an immediate need for some regulatory measures as well as a strict and mandatory crypto climate impact accounting framework.
In this aspect, the first coordinated effort came with the creation and launch of the new Crypto Climate Impact Accounting Framework.
It is developed by CCRI or the Crypto Carbon Ratings Institute and South Pole.
The inclusions in the framework are made after consulting with the team behind Blockchain Crypto and Digital Currencies or BCDC of PayPal along with other crypto and climate experts.
This is designed to offer measurement guidance to the crypto industry for accounting for the carbon emissions accurately.
It is expected that by following this particular framework it will be easier to align it with the global need of accomplishing net zero emissions by 2050.
As part of this framework, CCRI and South Pole have also developed a methodology jointly for the crypto value chain stakeholders.
This method will help them in allocating the greenhouse gas emissions to their activities related to crypto.
The good thing about this framework is that it helps in overcoming the limitations of one-dimensional allocation methods.
According to the CEO of Crypto Carbon Ratings Institute Ulrich Gallersdörfer, this offers more clarity and reflects the responsibility of the stakeholders in a much better way along the value chain.
This specific framework is supposed to be compatible with the dynamic nature of crypto.
You will have proper guidance on which particular emissions to include in your accounts and in the footprint of the stakeholders.
You will also know how exactly you should work out these emissions so that it is easy for you to build up a corporate greenhouse gas footprint and a more effective decarbonization strategy.
This framework is more holistic and allocates the greenhouse gas emissions of the network among the stakeholders of the value chain based on their crypto transactions and holdings.
This process is commonly referred to as the hybrid allocation method.
This method takes three of the most important aspects into account that are considered to be unique to the crypto industry.
- The decentralized and dynamic nature of the crypto value chains
- The financial incentives offered to the miners or validators that drives greenhouse gas emissions and electricity consumption and
- The differences in the electricity intensity and the incentive structure Proof of Stake and Proof of Work crypto coins.
The main objective of the framework is to democratize financial services by making the crypto industry an important component of the solution.
And, PayPal is proud to support this initiative and focused on building a new and more sustainable digital economy being the principal in the digital currency space.
It eventually helps businesses in managing crypto activities and reducing environmental impact with an effort to understand how they can account for their carbon emissions being a part of the crypto ecosystem.
Therefore, this framework will help the businesses to consider and account for the crypto activities and greenhouse gas emissions due to it.
This is vital today especially when there is an increasing demand for both mandatory and voluntary disclosures related to the climate.
The new framework will be a helpful tool that will direct the entire crypto industry towards a greener crypto ecosystem and also create much better solutions to move ahead to a net zero future.
All in all, this framework is quite useful to ensure that all businesses maintain a greenhouse gas emission accounting standard that is aligned with the industry specifics and set proper targets while interacting with crypto.
Now, before you get into the intricacies of climate impact accounting, you should know what carbon credits actually are.
You can consider a carbon credit as anything as follows:
- A license
- A permit or
- A certificate.
This permit allows a company to emit Carbon Dioxide or CO2 gas as well as other greenhouse gases in the air but in a limited amount.
There are seven different types of greenhouse gases that you will need to consider while accounting for climate impact according to the set standards covered by the 1997 Kyoto Protocol.
- Carbon Dioxide or CO2
- Methane or CH4
- Nitrous Oxide or N2O
- Hydrofluorocarbons or HFC
- Perfluorocarbon or PCF
- Sulfur Hexafluoride or SF6and
- Nitrogen Trifluoride or NF3.
As for the amount, a single carbon credit will allow you to emit an amount that is equal to the total mass of one ton of Carbon Dioxide.
When a company exceeds this limit, they are fined and will also have to pay significantly high tax, called carbon tax.
These taxes are charged to deter businesses and individuals from using too much of Carbon Dioxide by lowering the demand for goods and services.
On the other hand, there are several other countries including the United Kingdom and the United States that offer tax credits to those who harness, store, and use the greenhouse gases more responsibly.
However, it is good for all businesses to reduce carbon emissions and move towards a more sustainable economy, even better towards a net zero ecosystem.
Ideally, there are two major types of carbon credits identified. These are:
- VER or Voluntary Emissions Reduction – This refers to the carbon offset that is exchanged in the voluntary or Over The Counter or OTC carbon credit market.
- CER or Certified Emissions Reduction – This refers to the carbon credits or emission units that are generated through a regulatory framework to compensate for the mission of a project.
Ideally, carbon credits and carbon offsets work together.
However, carbon offsets are projects that are usually beyond a particular company and may also include others such as:
- Preserving forests
- Building wind farms and
- Planting new trees.
There is a significant difference between carbon credits and carbon offsets.
Usually, the carbon offsets, much unlike carbon credits, are not authorized by any regulatory prerequisites.
However, when these specific types of projects reduce carbon dioxide emissions, it results in a carbon credit.
The carbon offsets also finance projects in further areas such as renewable energy but these typically do not prevent pollution at the source.
Still, carbon offsets are important and are considered to be a movement in the right direction.
Finally, you should also know about a few different forms of carbon credits available today.
This knowledge will also help you in your accounting process.
Fraudulent carbon credits:
Carbon credits and carbon offsets may attract companies that have an intention to commit fraud either intentionally or unintentionally or by misleading or deceiving others.
These companies buy credits simply to use in their emissions and report it publicly but claiming for a huge reduction of carbon falsely.
Enterprise carbon credits NFTs:
Enterprise carbon credit Non Fungible Tokens or NFTs usually refer to the tokenized carbon credit permits to balance the functional NFTs for authenticity.
These NFTs provide access control to carbon credits as well as follow carbon offsets. The data is immutable and offers discerning transparency to address problems with fraud.
These physical carbon offsets with the ownership of Enterprise NFTs offer additional bonuses such as increase in the loyalty, reputation, and engagement of the brand.
Tokenized carbon credits:
Not to be confused with the Enterprise NFTs, the tokenized carbon credits are helpful for those businesses that need tokens to be fungible.
The carbon credits are tokenized typically by creating new Enterprise tokens or by fusing existing consortiums.
Blockchain will track these tokens and keep under tight control to ensure that the specific carbon offsetting happens in reality.
The businesses can track carbon offset projects internally and keep records of the same.
This helps the businesses to produce them as proof to the clients, regulators, or the customers while reselling credits and certificates or while purchasing land and forestry.
There are lots of ways in which carbon credits can be tokenized such as certified mass of Carbon Dioxide, certifiable badges of honor that proves ownership of forest, and more.
Now that you have a fair bit of knowledge about carbon credits and carbon offsets, you will find it easy in determining what to include in your process in order to ensure accuracy in crypto climate impact accounting.
For crypto climate impact accounting you can now use one of the climate accounting infrastructures based on blockchain, such as that of the KPMG.
A blockchain based climate accounting infrastructure will offer better solutions and will allow you to measure and report your greenhouse gas emissions more accurately.
The infrastructure is designed specifically to help businesses to analyze the risks related to climate as well as in evaluating the assets for offsetting carbon emissions.
This will be specifically helpful for the businesses across all sectors while documenting their respective sustainability practices and their results.
They will find it easy to figure out whether or not they have been able to meet the social, environmental, as well as the corporate governance demands.
As you may know that the requirements for carbon emissions and its accounting evolve and expand continually.
Therefore, you will need to be vigilant so that you can comply with both enterprise and accounting requirements and their objectives.
This needs a more transparent disclosure of the steps forward and reliable system for accounting on carbon emissions data.
It will be possible to meet the emerging regulations and the expectations of the stakeholders only with trusted reporting abilities.
Therefore, in your accounting infrastructure you will need to integrate all of the existing systems of your organization including the IoT sensors along with the external data sources.
This will help significantly in establishing a provable trail of carbon emissions and carbon offsets that are recorded on the blockchain.
It will also help you to build more effective and productive business and financial strategies for the long terms and help in business forecasting overall.
With the help of the blockchain technology all environmental data can be recorded and safely stored in a financial system.
This will become an integral part of the asset valuations and climate risk assessments for your organization.
One of the best things that you will get in a reliable climate accounting infrastructure like KPMG is that it is designed in consultation with large industry groups and climate tech companies and players such as Context Labs, Allinfra, and Prescriptive Data.
All these three enriches the features of this accounting infrastructure in different ways such as:
- Context Labs enriches carbon emissions data along with environmental context. This helps in advanced emissions insights and analytics.
- Allinfra facilitates end-to-end integration with confirmed supply of carbon offsets to the carbon offset demand model along with the renewable energy certificates.
- Prescriptive Data offers verifiable carbon emissions data over the real estate portfolios using their smart building software, Nantum OS.
They have made it a top priority for corporate disclosures on issues related to climate.
As a result, there was a notable surge in climate risk disclosures in corporate carbon accounting due to the increase in consumer demands and regulations for carbon reductions.
Matters related to climate can affect the finances of companies and therefore it is very important that you make sure that your financial report includes every climate-related disclosure.
It is also essential to ensure that all these disclosures are verifiable and accurate.
Therefore, you will need to structure your disclosures in such a way that the auditors can sign during the audit finding that the report provides them with uniform information.
Typically, such type of accounting for businesses involves considering a lot of moving parts in order to maintain compliance.
For instance, the carbon footprint of even a simple item will trail back to its source materials, the manufacturing process, shipping and handling.
Therefore, all these things are crucial elements and should be included while accounting for the overall carbon footprint of the item.
Actually, maintaining compliance is not very easy in carbon accounting because it involves inventory management of supply chain and interoperability, both of which can be major issues if not handled carefully.
Still, you will need to make it perfect because accurate carbon emissions reporting is the first and probably the most significant step towards reducing carbon footprint overall.
You will also need to consider the carbon marketplaces as well as net zero incentives during crypto climate impact accounting.
Ideally, there will be additional carbon credits when the companies reduce carbon emissions.
These companies are however allowed to sell these surplus carbon credits legally in a carbon credit marketplace.
According to some reports, the total worth of such a carbon credit marketplace will be to the tune of $50 billion by the year 2030. In these carbon marketplaces the users can speculate, trade and resell unused credits.
Typically, the speculation aspect adds a new dimension to the climate initiatives.
The companies can speculate on the positive aspects of the rising demand and potential of these carbon credits.
While a few of them will hold the carbon credits to sell them in the future at a higher price to make profit, others may buy further credits in the open market considering them to be an investment for the long term, based on their speculation.
However, both these carbon credits as well as the exchange of them are temporary, at least for the large part of it.
Companies in this world will be motivated to lower their carbon footprints fast so that they can recover some of the costs incurred for initiating climate initiatives.
Since incentives can alter behaviors, the carbon credit marketplaces will act as a means to bring in more value to a scarce item with more utility.
This will create an ideal avenue to offer the incentives that will encourage the companies to reduce their carbon footprint.
And, with the use of several blockchain for proof it will be even better for businesses to prove that they are really offsetting carbon emissions and their moves are legit.
Ideally, blockchain adds another layer of trust apart from ensuring that the exchange of value and information is seamless across the whole value chain.
It will also allow measurable proof of carbon emissions, verified transparency, tracking and recording data from beginning to end for the businesses and consumers.
It will typically ensure that the level of carbon emissions matches with the number of carbon credits used.
This will make it very easy for the others to figure out what is not used and are still available for resale.
Typically, a carbon credit marketplace can follow the cap-and-trade system.
In this method the total level of greenhouse gas emissions as well as other carbon emissions is capped.
However, this cap is increasingly reduced every year so that some sort of scarcity is created.
This system allows the companies with low greenhouse gas emissions to sell their unspent carbon credits to those companies emitting more carbon than they are permitted to.
This maintains the demand and supply aspect of the carbon credit marketplace and also helps in determining the price of carbon credits as well as other greenhouse gas credits on the open market.
Therefore, as you can see, crypto climate impact accounting is good for businesses and the planet as well.
However, it is not easy and a lot of things need to be considered to ensure that your accounting process is correct and the result is accurate and justifiable.