Networked Carbon Markets: Permissionless Innovation with Distributed Ledgers?

Abstract

Abstract Carbon markets are key components in the climate change mitigation response, enabling a price to be placed on carbon emissions. Connecting these markets has the potential to allow a more integrated, efficient, and globally consistent price on carbon which will promote greater confidence in the market, investment, and, ultimately, help foster new technology development through new financial flows. The challenge to connecting carbon markets is that each individual carbon market has its own legal and regulatory framework as well as its own rules for assigning and accounting for the carbon units traded. Such legal and regulatory fragmentation presents significant legal and political hurdles. An alternative, “bottom-up” solution to enable carbon trading between markets without forcing legal and regulatory homogeneous standardization and conformity on those markets would be a more practical way to connect them. One candidate technology to facilitate such connection is the “Distributed Ledger” (DL) or Blockchain, which provides the combination of a distributed database with public/private key encryption and a decentralized infrastructure. This potentially allows for innovative solutions to data sharing, or transaction management application areas, making it a good first-order match to the emerging requirements for an interoperable carbon market infrastructure. To meet the objectives of the Paris Agreement, a solution needs to be found that facilitates a global-scale distributed infrastructure, which allows a diverse set of markets and participants to utilize and exploit it. The established literature on innovation and technology diffusion gives some guidance on this issue, but not the ability to predict success. The purpose of this chapter, therefore, is to outline the most important questions identified regarding the connecting of carbon markets through the application of DL technologies, and share the authors’ current thoughts on those questions.