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How Blockchains can Help Solve the Climate Finance and Transparency Gaps

By: , Posted on: June 28, 2018

Experts at the World Resources Institute estimate that developing countries will require $300 billion annually by 2020—growing up to $500 billion annually by 2030—to adequately mitigate their carbon emissions, plus several hundred billion additional dollars to adapt themselves to the impact of climate change. The $100 billion a year by 2020 pledged by developed countries through international agreements is obviously far from what is required.

Further, recent research reveals that donor countries as a group are becoming less transparent in reporting their public climate finance investments. Despite the increased attention paid to the transparency gap at the 2015 United Nations Climate Change Conference, the distance between donor countries’ pledged climate adaptation finance and trackable reality show that the “finance gap” has widened. The research found that donor countries’ average level of compliance towards UNFCCC climate finance transparency requirements declined from a poor average of 58% for reports filed in 2014 to an even worse mean of 52% in 2016.  If the mechanism for accountability on climate action – upon which the success of the Paris Agreement hinges, in the stead of any binding legal agreement – is to have any hope for success, transparency in the reporting of climate finance is absolutely crucial.

Intermediaries in the Current Transaction Mechanism

Even worse is that many of the smallest and most at-risk countries, and especially sub-national entities, now claim that they do not have the means to access these international funds directly. The inability of poor countries to promptly satisfy many funds’ stringent accreditation requirements means that they cannot develop smarter renewables grids, credible cap-and-trade schemes, and other essential climate investment projects in time. Such “accreditation culture” in international climate finance management may stem from the traditional, centralised transaction mechanism in which all exchanges of financial resources between donors/investors and recipients must go through financial “intermediaries.” In global climate finance these intermediaries are typically international (climate) funds that manage public investments and financial institutions that handle private investments.

Blockchain – the Beacon to Fill the Climate Finance Gap

Blockchain can address these institutional problems by enabling trustworthy and transparent “peer-to-peer” transactions. With this type of transaction, every participant in a network can transact directly with every other network participant without involving a third-party intermediary.  Transactions are no longer stored in a central database but distributed to all participating computers, which store the data locally. The first high-profile blockchain application was Bitcoin. Bitcoin has subsequently spawned other blockchain applications, most of which are being developed in the banking and financial services industry. Currently, the five major developments in blockchain use cases include smart contracts, smart assets, clearing and settlement, payments, and digital identity, which will diminish the importance of traditional financial intermediaries.

For example, SWIFT is developing projects around blockchain for payments transactions. Its lead player, R3, backed by 42 banks, already started experiments with Microsoft’s Azure-based Blockchain-as-a-Service to develop Ethereum as a bank-to-bank global transaction system in spring 2016. This new system will not only facilitate global bank-to-bank transfers but also any exchange of value over the internet. The emerging value exchange models between players in Africa are likely to result in digital currencies that avoid the high exchange costs of Western Union or other remittance players.  A Santander’s study suggests that blockchain technology can save banks $20 billion a year by 2022 by eliminating central authorities and bypassing slow, expensive payment networks.  If blockchain is deployed for green and sustainable finance, the implications on filling the current climate finance gap are likely to be tremendous.

Transforming Climate Finance and Green Investment with Blockchains presents an array of ideas and use cases for adoption by stakeholders in both developed and developing countries to achieve their Nationally Determined Contributions (NDCs) or climate investment strategies. Each of its sections can inspire stakeholders of climate and sustainable finance in their decision-making processes. It provides a potential shortcut for countering climate change—the “defining challenge of our era,” according to former UN Secretary-General Ban Ki-moon—and for reaching a greener future.

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“The beauty of Transforming Climate Finance & Green Investment with Blockchains is that it brings together top experts from different backgrounds and presents a cohesive, considered and powerful exploration of blockchain’s potential in tackling our planet’s most pressing challenge. It is a must read for those of us involved in financing and putting resources into green investments, because it’s clear that this technology has the potential to positively change the way we work, govern and collaborate in this space.” –Andrew Shaw, FMO – The Dutch Development Bank

Alastair Marke is currently a senior climate finance consultant with a listed company in London. He is a seasoned sustainability policy researcher with publications covering a wide range of policy issues, including food and energy security, climate finance, low-carbon investment planning, emissions trading, and associated green growth issues in Europe, Africa, China, Southeast Asia and Australasia. Seeing the dire need to accelerate global efforts to fill the current climate finance gap, on top of his consultancy work, Alastair has recently created the International Core Group on Blockchain Climate Finance, composed of over 40 experts from 20 countries, to study the potential of Blockchain technology to upscale sustainable, environmental and climate finance for developing countries, encompassing energy finance, carbon trading, and new cryptocurrency-based multi-level climate finance transfer mechanisms.

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