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https://github.com/spirizeon/decentralised-carbon-trading

Eco-science project report on carbon trading using blockchain
https://github.com/spirizeon/decentralised-carbon-trading

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Eco-science project report on carbon trading using blockchain

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README 

        
Blockchain technology for transparent and secure Carbon trading


Table of Contents 
Certificate
Acknowledgements
Table of Contents
Abstract
Abbreviations
List of Figures
List of Equations
    

  1. Introduction
    2. 

  2. Methodology
    3. 

  1. Kyoto-Protocol
    

  1. Definition
    2. 

  2. Explanation
    3. 

  1. Carbon Market
    

  1. Definition
    2. 

  2. Working
    3. 

  1. Problems
    

  1. Legacy system
    2. 

  2. Improvements
    3. 

  1. Blockchain
    

  1. Definition
    2. 

  2. Perks
    3. 

  3. Prototype
    4. 

  1. Discussion
    

  1. Dataset description
    2. 

  2. Analysis of Results
    3. 

  1. Concluding Remarks
Future works
References
2
Abstract 
The mounting urgency of operationalizing carbon emission mitigation strategies has paved the way for the introduction of carbon trading markets as a tool for reducing greenhouse gas emissions. Nevertheless, the legacy carbon markets have been continually disrupted by imperfections, deceitful practices, and regulatory issues. As a reaction, this project investigates blockchain technology, which could change the way carbon trading works through the offered transparency, security, and decentrality.
Through the utilisation of smart contracts and Proof of Stake (PoS) consensus algorithms, blockchain can accomplish the elimination of intermediaries, lower transaction costs, and improve the execution of carbon trading processes. This document is an exhaustive study of the Kyoto agreement, the carbon markets, and the shortcomings that can be resolved with the use of blockchain technology.
To show how the systems could be implemented, a prototype model is proposed that would utilise the Hyperledger Fabric as the underlying blockchain framework and Ethereum as the cryptocurrency. Furthermore, the report covers the influence of external determinants, including the covid-19 and geopolitical events on carbon prices and market stability.
Ultimately, blockchain technology provides a promising platform for improving the efficiency, transparency, and sustainability of carbon trading Research, cooperation with regulatory authorities and industry participants remain key factors in the achievement of the total potential of blockchain regarding the climate crisis and the progress of the global efforts for earth renewal
Abbreviations 
UNFCCC - United Nations Framework Convention on Climate Change
PoS - Proof of Stake
PoW-Proof of Work
ETS - Emissions Trading System 
ETH - Ethereum
1. Introduction 
Industries by default produce Gigatons of waste every year, some of it is in the form of greenhouse gases. Some of these greenhouse gases are responsible for problems like ocean acidification, melting of polar ice caps, etc. In order to reduce the impact of pollution, the UNFCCC decided to launch specific mechanisms that would help firms reduce their carbon impact and work in collaboration to reduce global carbon footprint.

To achieve such, a system for monetisation of allowance of carbon-based emissions was created, where companies could set emission limits and trade in their excessive or lacking allowances with others. Hence, the carbon market was created. However, there were some potential problems with the carbon market, not restricted to faulty transactions, the presence of bias, middlemen, etc. 

To solve this, we have come up with a trading system, involving smart contracts, PoS based cryptocurrencies, all governed decentrally on a global blockchain. The perks of this system not only would increase the overall security by eliminating most of the problems with the traditional one but also make the market fairer, and hence collaborate to a greener earth shifting towards carbon neutrality.
2. Methodology 


2.1 Kyoto Protocol:



2.1.1  Definition:

Kyoto Protocol is a global agreement that has the goal of reducing the carbon emission to air and other greenhouse gases by an average of 5.2 %.This was pronounced on 11 December, in 1995 and it started functioning from 16 February, 2005. While the Kyoto Protocol had its challenges, the latter got the better of the former which is the Paris Agreement that came into effect in 2016.


2.1.2  Working: 

The Kyoto Protocol included three mechanisms that helped developed                                                                                                            countries meet their target emissions:
    

  • 

    The International Emissions Trading Mechanism: Countries that had excess emission units permitted to them but did not use them could engage in carbon and sell these units to countries that were over-target.

    • 

  • 

    The Clean Development Mechanism: Countries with emissions reduction or limiting commitments could implement reduction projects in developing countries to earn certified credits.

    • 

  • 

    The Joint Implementation Mechanism: Countries with emissions reduction or limiting commitments could earn emission-reducing units from a project implemented in conjunction with another party.

    • 



2.2 Carbon Market



 2.2.1 Definition:

The carbon market is a type of trading system where companies can sell off or buy their potential lacking/excessive emissions of greenhouse gases in the form of tokens called carbon credits. These can be monetised through a currency.
2.2.2 Types of Carbon Markets:-
There are two types of carbon markets: Compliance and Voluntary:
 
    

  • 

    Compliance markets: Carbon Markets that are established by governments or multi-government bodies that control the supply of credits and regulate their trading.

    • 

  • 

    Voluntary markets: Those carbon markets in which carbon credits may be traded voluntarily. The current supply of voluntary carbon credits comes mostly from private entities that develop carbon projects, or governments that develop programs certified by carbon standards that generate emission reductions and/or removal.

    • 



2.2.2 Working: 

Carbon markets are a key element of cap and trade programs intended to reduce greenhouse gas emissions. In a cap and trade program, also known as an emissions trading system (ETS), governments or groups of governments cap emissions at a certain overall level and assign limits to entities, such as countries or companies, covered under the rules. An entity that doesn’t need to use all of the carbon credits it has been issued can sell them to one that expects to exceed its limits. Each carbon credit is equal to one metric ton of carbon dioxide.
In addition, entities can create carbon credits, or offsets, by either reducing or removing carbon dioxide, which they can then sell. Reduction refers to initiatives that serve to lower emissions, such as adding solar panels or building a wind farm, while removal refers to projects that remove and then store carbon dioxide, such as through reforestation or sophisticated carbon capture technology.


2.3 Problems:



2.3.1 Legacy Systems: 

There are numerous number of challenges faced by carbon markets such as:
Fraudulent Practices in Carbon Trading: The EU carbon market has been marred by instances of fraud, such as carousel fraud, resulting in significant financial losses. Litigations against carbon traders and documented fraudulence in UN offset projects highlight the susceptibility of carbon markets to corruption. Regulatory responses have been mixed, with concerns raised over decisions that may inadvertently facilitate fraudulent activities.
Inadequate Regulation of Secondary Carbon Markets: Analysis of US climate legislation reveals insufficient measures to regulate secondary carbon markets, risking the emergence of speculative practices and the creation of a carbon bubble. Expansion of carbon trading to initiatives like REDD introduces further opportunities for manipulation and fraud due to significant financial incentives and the complexity of carbon measurements.
Challenges in Regulating Carbon as a Commodity: Scholars like Lohmann argue that carbon, as a commodity, is inherently difficult to regulate, attributing corruption not just to individual misdeeds but also to systemic flaws in carbon market architecture. Issues such as establishing baselines for emissions reduction projects pose significant challenges, making it difficult to distinguish additional from non-additional activities.
Misalignment with Environmental Realities: Critics contend that carbon markets prioritise economic interests over environmental concerns, refiguring nature as natural capital. Market efficiency criteria often conflict with social development objectives, undermining efforts to reconcile ecological, social, and efficiency goals.
Loopholes and Unjust Distribution: Carbon trading allows developed countries to shift emissions responsibilities to developing nations through mechanisms like offsets, perpetuating injustice. The reliance on international credits, particularly industrial gas offsets, raises concerns over the integrity of emissions reductions and the disproportionate burden on developing countries.
Failure to Deliver Sustainable Development: Despite promises of sustainable development, carbon trading has failed to deliver widespread benefits. The distribution of finance mirrors historical investment patterns, with offset programs often falling short of achieving community participation and environmental goals. Instances of environmental and social problems arising from offset projects further underscore the disconnect between sustainable development aspirations and market realities.
Institutional and Governance Challenges: Challenges extend beyond local experiences, with issues in market governance and regulatory structures. The separation of sustainable development from carbon reduction calculations and the reliance on market-based financing present significant obstacles to addressing development and climate change effectively. Concerns over the growing debt burden associated with carbon market financing highlight broader systemic risks.


2.3.2 Improvements: 

To address these challenges, several improvements can be made:
It is very important to deploy stronger regulations and pipeline measures with respect to the mitigation of fraud and corruption on the market for carbon emission. This means more access to information, greater surveillance of transactions and stringent measures in place.
Furthermore, the passage of new laws, rescinding the ones undermining current initiative and imposing legislative restrictions to reduce speculative risks, should be at the core of the process in states like the United States. In a way, the more precise and complete legislations serve as a base for correct control.
In addition to this, we can make it lawful to sanction and restrain inaccurate activities by companies trading in emission rights through penalties and sanctions. This would involve rigorous investigation processes and expeditiousness on those found guilty of the crime.
Together optimising carbon markets by unveiling flaws so as to credit the environmental objectives is also indispensable. There might be cases when the processes to do that will be employing such systems that would be favouring the environment rather than businesses and highlighting the real reduction in emissions.
The introduction of programs that ensure windfall profits accruing on carbon emission reductions are shared pretty by regions and industries at risk of being treated unfairly would help prevent injustices that may arise in carbon trading. This could be achieved in such a way that the revisions are made to offset mechanisms with the purpose to make wealthy countries not to depend unfairly on the developing nations as offsets of their emissions.
Bringing the stakeholders in, consisting of public institutions, investors, civil society and local non-governmental organisations, on board when decisions are made will create transparency, integrity and everyone's involvement in carbon trading systems. This is likely to result in rules and regulations which are broader and more basic and hence, more balanced.
Many countries could work together to unify carbon trading norms and rulings thereby creating stronger integrity in global carbon markets. Among the significant tasks on the agenda for the Town Hall is the sharing of best practices, exchange of information, and program coordination to overcome common challenges.
By putting in place strong rules, working together across borders, and making sure everyone has a say in how things are done, we can protect carbon markets from shady dealings and help our planet thrive.


2.4 Blockchain



2.4.1 Definition: 

Blockchain is a peer-to-peer chain of stacked spreadsheets containing records of transactions in a business network


2.4.2 Working: 

As each transaction occurs, It is treated as a “Block” of data. Those transactions show the movement of an asset that can be tangible (a product) or intangible (intellectual). The data block can record the information of your choice: who, what, when, where, how much. It can even record the condition, such as the temperature of a food shipment.
Each block is connected to the one before and after it. These blocks form a chain of data as an asset moves from place to place or ownership changes hands. The blocks confirm the exact time and sequence of transactions, and the blocks link securely together to prevent any block from being altered or a block being inserted between two existing blocks.
Transactions are blocked together in an irreversible chain. Each additional block strengthens the verification of the previous block and hence the entire blockchain. Rendering the blockchain tamper-evident, delivering the key strength of immutability. Removing the possibility of tampering by a malicious actor, and builds a ledger of transactions you and other network members can trust.


2.4.3 Prototype:

A proposed prototype will consist of building a live implementation of such a model. First we need a platform that will host the blockchain network. For that, we will be using Hyperledger Fabric, which is a hybrid blockchain hosting platform.

Hyperledger Fabric serves as the foundation for developing applications or solutions with a modular architecture. It allows interchangeable components, including consensus and membership services, enabling a plug-and-play environment. It is designed to meet diverse industry needs. Additionally, it offers a unique approach to consensus that facilitates scalable performance while maintaining privacy.
For the currency, we will be using the Ethereum coin. Because it employs a concept called “Proof of Stake” (POS).
Proof-of-stake is a way to prove that validators have put something of value into the network that can be destroyed if they act dishonestly. In Ethereum's proof-of-stake, validators explicitly stake capital in the form of ETH into a smart contract on Ethereum. The validator is then responsible for checking that new blocks propagated over the network are valid and occasionally creating and propagating new blocks themselves. If they try to defraud the network (for example by proposing multiple blocks when they ought to send one or sending conflicting attestations), some or all of their staked ETH can be destroyed.
For writing smart contracts, we will be using a solidity programming language. Solidity is an object-oriented, high-level language for implementing smart contracts. Smart contracts are programs that govern the behaviour of accounts within the Ethereum state. With Solidity, you can create contracts for uses such as voting, crowdfunding, blind auctions, and multi-signature wallets. 
Ethereum Virtual Machine or EVM is the main component on which Solidity works. The EVM is a virtual computer in the blockchain which runs the code as an application, which is inspired by human ideas. Solidity actually creates a machine-level code that runs on the EVM, which is then converted by the compiler for the processor to run the code. Remix online compiler, command-line compiler on a PC are some of the examples of compilers used in Solidity.
But why Solidity? 
Solidity is designed specifically for Ethereum, making it seamlessly integrate with the Ethereum Virtual Machine (EVM), the runtime environment for Ethereum smart contracts. This integration ensures that contracts can execute efficiently and securely within the Ethereum ecosystem.
Because it has a large and active developer community, which means there are plenty of resources, documentation, and libraries available for developers. This makes it easier for developers to find solutions to problems and collaborate with others. 
It is also designed to work specifically with Ethereum's blockchain, ensuring compatibility with Ethereum's consensus mechanisms, transaction processing, and other blockchain-specific features. Other languages may not be as well-suited for this purpose.
Finally, in order to give the system a usable interface, we will be using Flutter. It is a framework by Google that can be used to build cross-platform apps
3. Discussion 


3.1 Dataset Description: 

COVID-19 crisis: As a result of the Covid-19 crisis, the price of carbon allowances went down drastically, instead of countries to slow down their economies because this makes the emissions trading schemes more routinely.
Market Stability Reserve (MSR) introduced: The launch of the operation of Market Stability Reserve (MSR) in 2018 was targeted at dealing with over-allocation of carbon allowances hence the creation of higher carbon prices through price support.
Russia-Ukraine war: The current Russia-Ukraine war have caused an increase in carbon costs since entrepreneurs fear about possible interruption of energy supply.
4. Concluding Remarks 
The report demonstrates that the blockchain technology allows the needed operations and information transactions, to take place without the physical presence of the third party. through digitalization there will be higher levels of remuneration for carbon trading. Through employing a decentralised ledger, irreversibility, and transparency, the mentioned system promises to solve the challenges that plague traditional carbon markets. In the smart contracts and decentralised governance, the elimination of intermediaries will in turn reduce transaction costs and thereby minimising again the possibility of manipulation.
The voting process is not based on who has the important miners or the large reality but rather on who has the highest number of their cryptocurrency. Adopting the Proof of Stake (PoS) mechanism instead of the Proof of Work (PoW) system, which is based on energy efficiency, is helping achieve our target. In addition to environmental cost lessening, programmes such as these also engender a sustainable manner towards emissions monitoring and regulation.
The graphics in the report illustrate the fact that those systems might be constructed on the basis of blockchain, the whole thing will create an opportunity to integrate a blockchain into a carbon trading system. Via the incorporation of Hyperledger Fabric as foundation blockchain platform and Ethereum as crypto currency, the platform ensures scalability, interoperability and compatibility with existing technical and economic frameworks


5. Future Outlooks

Concluding Thoughts:
As we go ahead effectuating the carbon market system with blockchain technology, I would like to outline a number of future development and improvement avenues. Firstly, we must focus on research and development which will help us to increase the network performance and scalability for the process to be used for real-time carbon trading operations.
On top of it, coordination with regulators and other market participants helps build up a common ground and an aligned framework for regulating blockchain-based carbon trading. This will in turn make sure that regulations passed are followed and adoption closer to everyone.
Also, the endeavour should grow to maximise the user experience and refine the platform's interface, emphasising on ease and user friendliness.
The future prospect of application of blockchain technology in the trading of radiations seems to be bright and it has the ability of shaking up the way emissions are monitored, traded, and regulated. By taking care of existing challenges and by utilising correctly the distinct nature of the blockchain technology we can carve a way for the whole system of clean carbon transactions that is more transparent, more secure, and more efficient. This system can be a strong support for global efforts to stop climate change.


    References