DEVON TESORIERO
OUT WITH THE OLD, IN THE NEW: OPPORTUNITIES FOR BLOCKCHAIN TO ENHANCE TRANSPARENCY UNDER THE
PARIS AGREEMENT
LAWS 523: Special Topic: International Climate Change Law
Submitted for the LLB (Honours) Degree
Te Kauhanganui Tātai Ture | Faculty of Law Te Herenga Waka | Victoria University of Wellington
2021
Table of Contents
I Introduction………...………..…….. 5
II Paving the Way: the UNFCCC, Kyoto and Copenhagen………..7
A The United Nations Framework Convention on Climate Change
………..….. 8
B The Kyoto Protocol
………...………... 9
C Copenhagen: A New Approach ……….….. …....
11
III The Paris Agreement ………..……..….. …….12
A Climate change mitigation ………....…..……... ………..
12
1 Nationally Determined Contributions
………...13
2 Carbon markets
……….11
B Climate finance
……….………....16
C Transparency framework
……….……….. 18
D The Paris Agreement: reason for hope?
……….….……...20
IV Blockchain: a New Paradigm………….………....21
A What is blockchain technology?
...22
B The consensus mechanism
………...23
C Blockchain models: public, private and hybrid networks
………..24
D Smart contracts
………..25
E Summary: the central characteristics of blockchain technology
………….………...26
V Opportunities for Blockchain ………...27
A Blockchain for climate mitigation
……….27
1 Improved emissions tracking
………...28
2 Carbon markets
….………29
a Monitoring, reporting and verification of mitigation actions
…..………. 30
b Linking carbon markets with blockchain
………. 30
B Climate finance
…..……….. 33
1 Blockchain for the Green Climate Fund
…..………. 34
2 Summary: Blockchain potential for climate finance
….………..36
C Blockchain for climate action: overview
….……….. 38
VI A Double Edged Sword: Blockchain Challenges and Risks….…...,...39
A Technical challenges
...………....…. ……….39
1 Transaction Speed
………....…. ………....39
2 Energy Consumption
……… …………...40
3 Data security and confidentiality
……….….. …....42
B Political challenges
…..……….43
1 Data (in)accuracy
………...42
2 Exacerbate Existing Inequities
……….……...44
3 Lack of state buy-in
………....……….45
VII Conclusion ……….….………....48
VIII Bibliography………... 50
Abstract
The international climate change regime is exemplified by three key instruments: the United Nations Framework Convention on Climate Change, the Kyoto Protocol, and the Paris Agreement. Traditionally, international law has sought to address climate change through top-down solutions by settling multilaterally agreed emission reduction targets on developed countries. However, this approach proved increasingly controversial over time. Consequently, there has been a paradigm shift towards a more flexible, bottom-up approach, under which states determine their own contributions towards reducing global temperatures. This approach was most recently incorporated in the Paris Agreement, which relies on transparency, rather than sanctions, to promote ambition. This new approach in international climate change law intersects with the emergence of Blockchain technology; a digital ledger which is increasingly touted as a potential solution to the climate crisis. This paper will examine how blockchain could be utilised to implement two core objectives of the Paris Agreement; climate change mitigation and the provision of climate finance, both of which can be undermined by a lack of transparency.
This paper suggests that while blockchain does provide exciting opportunities to enhance transparency under the Paris Agreement, it is not a panacea to the climate crisis, and there are various challenges that need to be overcome before blockchain opportunities can be fully realised.
Word Count
The text of this paper (excluding the table of contents, abstract, footnotes, and bibliography) comprises approximately 11,500 words.
Key Words
The Paris Agreement; blockchain technology; climate change; climate finance; carbon markets;
Nationally Determined Contributions; transparency; international climate change law.
Every paradigm shift starts with terminology of which many make use yet only a few can make sense…. Climate change… is an example of a term constantly undergoing this process of
redefinition. Edging up the modern lexicon to meet it is “blockchain”...1
I Introduction
The world is in a state of climate emergency. The Intergovernmental Panel on Climate Change (IPCC) has found that human activities, in particular the release of greenhouse gases (GHGs), has unequivocally caused the climate to change.2 While the precise effects of the Anthropocene remain uncertain, there is no doubt that climate change will have profound consequences for the environment, economy, and human health.3 Predictions suggest that there is a risk of irreversible damage if temperatures increase to 1.5 degrees Celsius above pre-industrial levels.4Considering temperatures have already risen by approximately one-degree Celsius, urgent action is needed to prevent a catastrophic temperature increase.5
Despite these stark warnings, international law has struggled to effectively address the climate change challenge. Climate change has been aptly described as a “complex, polycentric, and seemingly intractable policy challenge”.6The complexity of the issue is difficult to overstate; the impacts of climate change are global, transcending state boundaries and generations.7 Consequently, effective climate action requires states with competing interests to act towards a common goal, which will come at a significant economic cost.8 Climate change also raises difficult ethical questions; developing countries often view international climate politics as part
8At 3.
7At 2.
6Daniel Bodansky, Jutta Brunnée, and Lavanya RajamaniInternational Climate Change Law(Oxford University Press, Oxford, 2017), at 209.
5Temperatures have increased by one degree Celsius compared to pre-industrial levels. See Intergovernmental Panel on Climate ChangeSpecial Report: Global Warming of 1.5 Degrees Celsius(Summary for Policymakers, 2018) at 4.
4Lenton TM and others “Climate Tipping Points - Too Risky to Bet Against” (2019) 575 Nature 592 at 592.
3David Hunter, James Salzman and Durwood ZaekleInternational Environmental Law and Policy(5th ed, Foundation Press, New York, 2015) at 6.
2Intergovernmental Panel on Climate Change Working Group IClimate Change 2021: The Physical Science Basis.
Contribution of Working Group I to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (Intergovernmental Panel on Climate Change Sixth Assessment Report, 2021) at [3.8.1].
1Alastair Marke (ed)Transforming Climate Finance and Green Investment with Blockchains(1st ed, eBook ed, Academic Press, 2018) at 15.
of a larger pattern of historical injustices and therefore assert that industrialised countries should bear the primary burden of combating climate change.9
These factors combine to create a “super wicked problem”.10Traditionally, international law has sought to address climate change through top-down solutions that impose multilaterally agreed, legally binding, emission reduction targets on Parties. This approach was first introduced in the United Nations Framework Convention on Climate Change (UNFCCC), and subsequently adopted by the Kyoto Protocol.11 These top-down emission reduction targets were expected to help build trust between states by deterring non-compliance and free-riding.12
In order to attract participation from developing states, the UNFCCC and Kyoto Protocol both limited emission reduction targets to developed states. These differentiated responsibilities reflected the historic, and present, contribution of GHG emissions by developed countries, as well as their access to technological and financial resources.13However, this proved increasingly controversial over time. Consequently, there has been a paradigm shift towards a more flexible, bottom-up, approach under which states determine their own contributions towards reducing global temperatures. This approach was most recently incorporated in the Paris Agreement, which relies on transparency, rather than sanctions, to promote ambitious climate action.
By moving away from this top-down approach, the Paris Agreement eliminated the “firewall”
between developed and developing countries, and avoided the distributional conflict inherent in negotiating top-down mitigation targets.14This reduced the sovereignty costs of a legally binding instrument, and ultimately resulted in broad participation from both developed and developing states.15
15Lavanya Rajamani “Understanding the 2015 Paris Agreement” inIndia in a Warming World: Integrating Climate Change and Development(Oxford University Press, Delhi, 2019) 205 at 210.
14Daniel Bodansky “The Paris Climate Change Agreement: A New Hope?” (2016) 110 AJIL 288 at 298.
13Ellen HeyAdvanced Introduction to International Environmental Law(Edward Elgar Publishing Limited, Cheltenham, 2016) at [4.5.7].
12At 1110. For more information on the rationale behind a top-down approach, see William Hare and others “The Architecture of the Global Climate Regime: a Top-down Perspective” (2011) 10 Climate Policy 600 at 601.
11Robert Falkner “The Paris Agreement and the New Logic of International Climate Politics” (2016) 92 International Affairs 1107 at 1110.
10Richard J. Lazarus “Super Wicked Problems and Climate Change: Restraining the Present to Liberate the Future”
(2009) 94 Cornell L Rev 1153 at 1159.
9At 9.
This paradigm shift in international climate change law intersects with the emergence of blockchain technology; a digital ledger which is increasingly touted as a potential solution to the climate crisis.16 The UNFCCC suggests that blockchain could “boost” climate action peer-to-peer renewable energy trading, improved carbon emission trading, enhanced climate finance flows, and better tracking of GHG emissions to monitor implementation of NDCs.17 This paper focuses on two core objectives of the Paris Agreement where a blockchain application could prove the most beneficial: climate change mitigation and the provision of climate finance.18
This paper begins by examining the developments in the international climate change regime that led to the eventual adoption of the Paris Agreement, before discussing the key provisions of the Agreement itself. Chapter IV will provide a brief introduction to blockchain technology; this will provide the background for the subsequent examination of how blockchain could be used to implement the Paris Agreement mitigation and financing goals. Finally, Chapter VI considers the technical and political challenges associated with the use of this nascent technology.
Ultimately, this paper will conclude that while there is potential for blockchain to enhance climate finance flows, improve carbon emission trading, and enable better tracking of GHG emissions, this new technology cannot overcome the political challenges inherent in international climate change law.
II Paving the Way: the UNFCCC, Kyoto and Copenhagen
18Climate change adaptation is outside the scope of this paper.
17UNFCCC “How Blockchain Technology Could Boost Climate Action” (01 June 2017) <www.UNFCCC.com>.
For information on how blockchain could be used in peer-to-peer renewable energy trading, f, see Manish Kumar Thukral “Emergence of Blockchain Technology Application in Peer-to-peer Electrical Energy Trading: a Review”
(2021) 5 Clean Energy 104; and Alastair Marke (ed)Transforming Climate Finance and Green Investment with Blockchains, above n, ch 5-9.
16See for example, Guillaume Chapron “The Environment Needs Crypto-Governance” (2017) 545 Nature 403;
Alastair Marke (ed)Transforming Climate Finance and Green Investment with Blockchains(1st ed, eBook ed, Academic Press, 2018); Climate Ledger InitiativeNavigating Blockchain and Climate Action: An Overview (December 2018); UNFCCC “How Blockchain Technology Could Boost Climate Action” (01 June 2017)
<www.UNFCCC.com>.
The United Nations climate change regime has developed through three phases.19The first phase is exemplified by the UNFCCC, the second by the Kyoto Protocol, and the third by the “global approach” first enounced in the Copenhagen Accord and subsequently adopted in the Paris Agreement.20
The Paris Agreement builds upon lessons learned from the UNFCCC and Kyoto. Therefore, any assessment of the Paris Agreement must first consider its predecessors. Accordingly, the following section will introduce the UNFCCC, Kyoto Protocol, and the Copenhagen Accord, all of which were instrumental in what would later be agreed on in Paris.
A The United Nations Framework Convention on Climate Change
The UNFCCC is the “foundation of the United Nations climate regime”, and both the Kyoto Protocol and Paris Agreement were both established “under its auspices”.21The UNFCCC was the first international environmental agreement to recognise climate change as a global issue.
The main objective of the UNFCCC, and any subsequent legal instrument, is to stabilise GHG concentrations in the atmosphere at a level that would prevent dangerous interference with the climate system.22
Notably, the Convention provided the climate change regime’s initial approach to differentiation through the annex structure, which broadly classified Parties as developed (Annex-I) or developing (non-Annex-I) and assigned obligations accordingly.23 Under art 4.1, all Parties were required to, inter alia, establish, and communicate national programmes to mitigate climate change. Comparatively, Annex-I Parties had more defined obligations to return their emissions to 1990 levels by 2000.24 Furthermore, developed states listed in Annex-II, a subset of Annex-I, were required to provide financial and technological resources to developing countries.25
25Article 4.
24Article 4.2
23Article 4.
22United Nations Framework Convention on Climate Change 1771 UNTS 101 (opened for signature 16 March 1982, entered into force 21 March 1994), art 2.
21Daniel Bodansky, Jutta Brunnée, and Lavanya RajamaniInternational Climate Change Law(Oxford University Press, Oxford, 2017), at 118.
20At 291.
19Bodansky “The Paris Climate Change Agreement: A New Hope?”, above n 14, at 291.
While the UNFCCC was relatively vague, it is only a framework convention, therefore, it was always contemplated that Parties would establish more detailed targets.26Accordingly, both the Kyoto Protocol and Paris Agreement were intended to operationalise the vague principles set out in the UNFCCC.27
B The Kyoto Protocol
The second phase of the United Nations climate change regime began in 1995, when negotiations for the Kyoto Protocol began. The Kyoto Protocol has been described as one of the most “complex and ambitious environmental agreements ever negotiated”.28 The Protocol maintained the annex structure of the UNFCCC by committing developed countries to legally binding, multilaterally agreed, emission reduction targets.29 Annex-I Parties were required to ensure that their total GHG emissions did not exceed their assigned level of emissions over the commitment period.30
While the international climate change regime would later depart from this top-down approach, the Kyoto Protocol nevertheless provided key lessons that would be influential in the Paris Agreement. Most importantly, the Kyoto Protocol “catalysed a vibrant carbon market” that will likely “leave an enduring imprint on the climate regime”.31The Protocol enabled Annex-I Parties to add to or subtract from their initial assigned amount by trading emission units with other Parties using the so-called Kyoto mechanisms; joint implementation, the Clean Development Mechanism (CDM) and emissions trading.32 Joint implementation and CDM operate similarly;
both allow developed countries to offset their emissions by investing in emission reduction projects in another country.33 The difference is that a CDM activity occurs in a developed
33See Bodansky, Brunnée and RajamaniInternational Climate Change Law, above n 20, at 180-184.
32Andrei MarcuGovernance of Article 6 of the Paris Agreement and Lessons Learned from the Kyoto Protocol (Centre for International Governance Innovation, Fixing Climate Governance Series Paper No. 4, May 2017) at 2.
These mechanisms are defined in the Kyoto Protocol to the United Nations Framework Convention on Climate Change, above n 29, arts 6, 12 and 17.
31Bodansky, Brunnée and RajamaniInternational Climate Change Law, above n 20, at 203.
30The Kyoto Protocol to the United Nations Framework Convention on Climate Change 2303 UNTS 214 (opened for signature 16 March 1998, entered into force 16 February 2005), art 3.1.
29At 166-167.
28At 161.
27Bodansky, Brunnée and RajamaniInternational Climate Change Law, above n 20, at 119.
26Article 17.
country, whereas joint implementation occurs in another developed country.34 Furthermore, developed countries could fulfil their Kyoto targets by trading the following: excess emission units (emissions that are “allowed” but not used), a removal unit, a certified emission reduction (generated by the CDM), or an emission reduction unit (generated by a joint implementation project).35 These mechanisms allowed Annex-I Parties to “take advantage of lower-cost emission reductions outside their territories”.36
Under the centralised approach of the Kyoto Protocol, rigorous monitoring, verification and reporting was seen as necessary to uphold the integrity of the market mechanisms.37 To be eligible to participate in these mechanisms, Annex-I Parties were required to meet specific reporting requirements.38Under art 5, each Annex-I Party was required to establish and maintain a national system to estimate the anthropogenic emissions and removals according to specified methodologies accepted by the IPCC and agreed upon by the Conference of the Parties. The national monitoring system was intended to facilitate Annex-I countries in preparing an annual inventory of greenhouse gas emissions and removals as required under art 7, and ultimately support developed country Parties in complying with art 3.39
To facilitate communication between different carbon market registries, the Kyoto Protocol utilised an International Transaction Log, which had a “mandate to carry out the centralized function, including a clearance process for transactions” and was overseen by the UNFCCC.40 While largely successful, this approach has been criticised as being expensive and overly rigid.
40Shishlov, Morel and Bellassen, above n 33, at 775.
39Bodansky, Brunnée and RajamaniInternational Climate Change Law,above n 20, at 194; and United Nations Framework Convention on Climate ChangeKyoto Protocol Reference Manual on Accounting of Emissions and Assigned Amount, above n 35, at 15.
38The Kyoto Protocol to the United Nations Framework Convention on Climate Change, above n 29, arts 5.1, 5.2, 7.1 and 7.1. See also United Nations Framework Convention on Climate ChangeKyoto Protocol Reference Manual on Accounting of Emissions and Assigned Amount, above n 35, at 15.
37Bodansky, Brunnée and RajamaniInternational Climate Change Law,above n 20, at 193.
36United Nations Framework Convention on Climate ChangeKyoto Protocol Reference Manual on Accounting of Emissions and Assigned Amount(2018), at 15.
35See Bodansky, Brunnée and RajamaniInternational Climate Change Law, above n 20, at 180.
34The Kyoto Protocol to the United Nations Framework Convention on Climate Change, above n 29, art 17. See also Igor Shishlov, Romain Morel and Valentin Bellassen “Compliance of the Parties to the Kyoto Protocol in the First Commitment Period” (2016) 16 Climate Policy 768 at 775.
Overall, the Kyoto Protocol generated “valuable experience” on well-functioning carbon markets, including “national inventories, a common accounting system, common time frames and uniform reporting formats”.41 However, the Protocol’s ambitious, top-down, approach came at a cost. The Kyoto Protocol took eight years to come into force without the support of the United States of America (the United States), who refused to ratify the Protocol, and negotiations for the second commitment period took an additional seven years. One commentator suggests that Kyoto “sought to do too much too quickly… in advance of the requisite political will to maintain the regime”.42
One of the key issues with the Protocol was the sharp differentiation between developed and developing Parties, which became increasingly contentious over time.43 This tension was especially apparent during negotiations for the second commitment period; developing countries wanted to maintain the differentiated approach, whereas developed countries were reluctant to bind themselves to strict targets, particularly considering China, the United States, and other major economies, were not.44 Consequently, Canada withdrew, while Japan and Russia stated they would not be bound by new targets.45Kyoto’s coverage was now limited to approximately fifteen percent of global emissions.46
Kyoto’s first commitment period was set to end in 2012. Therefore, in 2005 Parties began to discuss what to do post-2012. These discussions culminated in the 2009 Copenhagen Conference.
C Copenhagen: a new approach
The 2009 Copenhagen conference was expected to result in a successor agreement to the Kyoto Protocol.47 However, this conference suffered from a “severe dichotomy of interests,”48and the resulting document, the Copenhagen Accord, was a “poor political compromise...rather than a
48At 168.
47Ulrich Beyerlin and Thilo MarauhnInternational Environmental Law(Hart Publishing, Oxford, 2011) at 168,
46Bodansky “The Paris Climate Change Agreement: A New Hope?”, above n 14, at 301.
45Falkner, above n 11, at 1111.
44At 292.
43At 166.
42At 207.
41Bodansky, Brunnée and RajamaniInternational Climate Change Law, above n 20, at 207.
fully-fledged legally binding international agreement”.49 This was a blow to the United Nations climate change regime, with one commentator concluding that “multilateral climate diplomacy had reached a dead end”.50
However, despite being considered a “disaster” the Copenhagen Accord laid the foundations for much of what was eventually implemented in the Paris Agreement.51The Accord abandoned the differentiated annex structure of UNFCCC and Kyoto Protocol in favour of a more flexible approach, under which parties determined their own emission reduction measures.52 This attracted much broader participation than Kyoto, and for the first-time emerging economies established emission reduction pledges.53
However, an issue with the bottom-up approach in Copenhagen was that the national commitments lacked transparency, and were therefore difficult to understand, which made progress difficult to measure.54 This made it impossible to hold states accountable for their pledges and would prove influential in what was subsequently agreed on in Pairs.55
III The Paris Agreement
Paris is a treaty, therefore, while certain provisions articulate non-binding obligations, the overall instrument is binding on the 190 parties who have adopted it.56
Prior to Paris, negotiations had focused on a “fruitless” effort to establish a global emission target, which only exacerbated tensions between states.57 Despite the apparent end of climate diplomacy, the Paris Agreement emerged “like a phoenix from the ashes” to provide renewed optimism for the international climate change regime.58 Paris sought a “solution that is neither
58Bodansky “The Paris Climate Change Agreement: A New Hope?”, above n 14, at 296.
57Falkner, above n 2 at 1124.
56At 296.
55At 301.
54At 301.
53At 301.
52Bodansky “The Paris Climate Change Agreement: A New Hope?”, above n 14, at 300.
51Navroz K. Dubash and Lavanya Rajamani “Beyond Copenhagen: next steps” (2011) 10 Climate Policy 593 at 593.
50Faulkner, above n 11, at 1107.
49At 169.
too strong (and hence unacceptable to key states) nor too weak (and hence ineffective)”.59By moving away from the traditional top-down approach, Paris eliminated the sharp divide between developed and developing countries, representing a major advance in the international climate change regime.60
A Climate change mitigation
The Paris Agreement aims to limit global warming "to well below two degrees Celsius above pre-industrial levels”.61 Article 2.1(a) adds that states should pursue “efforts to limit the temperature increase to 1.5 degrees Celsius above pre-industrial levels”, acknowledging that this would “significantly reduce the risks and impacts of climate change”.62This mitigation objective aligns with current scientific understanding; the IPCC reported in 2019 that limiting global warming to 1.5 degrees Celsius would significantly reduce the risk of heavy precipitation events, extreme drought, floods, species, and ecosystem loss, as well as water and food scarcity.63While the 1.5 degrees Celsius goal may be more “aspirational” than realistic, it “nevertheless… sets a direction of travel for the climate regime” and signals solidarity with vulnerable states who will bear the brunt of climate impacts.64
1 Nationally Determined Contributions
The UNFCCC notes that “mitigation lies at the heart of Parties’ efforts to achieve the…
long-term temperature goals”.65In order to realise the long-term temperature goal, set out in art 2.1(a), the Paris Agreement utilises NDCs. NDCs are pledges by Parties which outline the mitigation actions they are taking to achieve the temperature goal.66States are required to submit NDCs every five years, and it is expected that each one is more ambitious than the last.67 To ensure countries are on track to meet the temperature goal, a “global stocktake” will occur every
67The Paris Agreement, above n 59, art 4.
66United Nations Environment ProgrammeEmissions Gap Report 2020UN Doc DEW/2310/NA (09 December 2020) at x.
65UNFCCC “Mitigation in the negotiations” <www.unfccc.com>.
64Bodansky, Brunnée and RajamaniInternational Climate Change Law, above n 20, at 299.
63Intergovernmental Panel on Climate ChangeGlobal Warming of 1.5°C(Special Report, 2019), at ch 3.
62Article 2.1(a).
61The Paris Agreement (opened for signature 22 April 2016, entered into force 4 November 2016), art 2(a).
60At 298.
59At 289.
five years.68 The global stocktake will assess Parties’ progress towards the temperature goal, the result of which shall inform subsequent NDCs, ideally promoting greater ambition.69
During negotiations, there was general agreement that procedural commitments to communicate NDCs should be included, however, the legal status of NDCs was more controversial.70Some states suggested that making NDCs legally binding would give them greater credibility.71 However, other states argued that a strong transparency framework could promote ambition and compliance without compromising broad participation.72 Daniel Bodansky notes that “legal bindingness can be a double-edged sword, if it leads States not to participate or to make less ambitious commitments”.73 It was ultimately decided that parties would have procedural obligations to prepare, communicate and maintain successive NDCs.74 However, given the resistance to top-down targets, particularly from the US, India, and China, it was agreed that parties would not be bound to implement their nationally determined pledges.75In other words, it is an “obligation of conduct rather than an obligation of result”.76
This approach represents a significant departure from the top-down approach to mitigation provisions in the UNFCCC and Kyoto Protocol, which created a rigid dichotomy between developed and developing countries. While the mitigation obligations under the UNFCCC were broad, both UNFCCC and Kyoto Protocol included substantive legal obligations for Annex-I countries to reduce emissions.77 Neither agreement contained any binding emission reduction obligations for developing countries.
77United Nations Framework Convention on Climate Change, above n 21, art 4; and the Kyoto Protocol to the United Nations Framework Convention on Climate Change, above n 29, art 3.1.
76At 304.
75Bodansky “The Paris Climate Change Agreement: A New Hope?”, above n 14, at 304.
74The Paris Agreement, above n 59, art 4.2.
73Daniel Bodansky “The Legal Character of the Paris Agreement” (2016) 2 RECIEL 142 at 150.
72At 297.
71At 297.
70Bodansky “The Paris Climate Change Agreement: A New Hope?”, above n 14, at 304.
69Article 14. See also Marjan Peeters “Article 14: the Global Stocktake” in Leonie Reins and Geert van Calster (eds) The Paris Agreement on Climate Change: A Commentary(Edward Elgar Publishing Limited, Cheltenham, 2021) 326 at 327.
68Article 14.
Comparatively, the Paris Agreement commits all parties, regardless of their level of development, to submit NDCs, in which they self-select the climate actions they are willing to take.78 Countries are not legally bound to meet the substantive commitments pledged in their NDCs; if parties do not meet their nationally determined targets, they will not have violated a legal obligation.79 This avoided the distributional conflict that was “inherent” in the Kyoto Protocol negotiations, and as a result near universal participation was achieved, with 191 Parties adopting the Agreement.80
However, because NDCs are voluntary, and the compliance mechanism is “expert-based and facilitative… in a manner that is transparent, non-adversarial and non-punitive”, the Paris Agreement relies on transparency to hold states accountable.81
2 Carbon markets
Climate change mitigation under art 4 is supplemented by the carbon market provisions in art 6.
Cost-effective mitigation of GHG emissions will be crucial for achieving the temperature goal agreed to in the Paris Agreement.82Carbon markets, which place a price on emissions, are widely considered to be an economical way to reduce GHG emissions.83 The rationale behind such schemes is that emission reductions have the same effect regardless of where they occur, and therefore reductions should be made where it is most cost-effective to do so.84As of 2021, there were 64 carbon pricing instruments in operation, and another three scheduled to be implemented.85 This accounts for 21.5 percent of global GHG emissions, an increase from 15.1 percent in 2020.86
86At 21
85The World BankState and Trends of Carbon Pricing 2021(2021), at 21.
84Carbon Market Solutions “History of Emissions Trading” <www.carbonmarketsolutions.com>.
83Marissa Santikarn and othersA Guide to Linking Emissions Trading Systems(International Carbon Action Partnership, 2018) at 9.
82Marco Schletz, Laura A. Franke and Søren Salomo, “Blockchain Application for the Paris Agreement Carbon Market Mechanism—A Decision Framework and Architecture” (2020) 12 Sustainabilty 1 at 1.
81At 1121.
80Faulkner, above n 11, at 1107.
79Patrícia Galvão FerreiraClimate Finance and Transparency in the Paris Agreement: Key Current and Emerging Legal Issues(Center for International Governance Innovation Papers No. 195, October 2018) at 2.
78The Paris Agreement, above n 59, art 4.2.
If carbon markets are well designed, they have the potential to increase the mitigation ambition, which is particularly important if the temperature goal set out in art 2 is going to be achieved.87 Therefore, despite some opposition to market-based approach during Paris negotiations, art 6.1 recognises that Parties, in implementing their NDCs, may choose to pursue voluntary cooperation “to allow for higher ambition in their mitigation and adaptation actions and to promote sustainable development and environmental integrity”.88 More than half the intended NDCs submitted contemplated the use of carbon markets, which suggested there is “broad support for inclusion of a market-based provision”.89 While art 6 does not explicitly refer to
“markets”, it effectively provides for two market mechanisms; first, parties may engage in
“cooperative approaches” (essentially emissions trading) under art 6.2, while art 6.4 establishes a
“centrally governed crediting mechanism”, similar to the CDM.90 However, the focus of this essay will be on art 6.2.91
Article 6.2 states that Parties can, on a voluntary basis, enter into “cooperative approaches that involve the use of internationally transferred mitigation outcomes (ITMOs)” to achieve their NDCs.92In contrast to the Kyoto Protocol, which relied on comprehensive rules and centralised accounting, art 6.2 of the Paris Agreement instead establishes a decentralised approach which requires Parties to unilaterally ensure “environmental integrity and transparency”, and “apply robust accounting to ensure, inter alia, the avoidance of double counting”. This aligns with the bottom-up nature of the Paris Agreement, which places heavy reliance on strong transparency provisions to track climate action.
B Climate finance
92The Paris Agreement, above n 59, art 6(2).
91This paper focuses on art 6.2 because the decentralised nature of this market mechanism has the greatest potential for a blockchain application.
90At 307.
89At 307.
88Bodansky, above n 11, at 307.
87Matthieu Wemaërein “Article 6: Voluntary Cooperation/NDCs” in Leonie Reins and Geert van Calster (eds) The Paris Agreement on Climate Change: A Commentary (Edward Elgar Publishing Limited, Cheltenham, 2021) 148 at 150.
The Paris Agreement recognises that structural transformation of the global economy is needed to effectively address climate change.93This is reflected in art 2.1(c), which states that one of the key objectives of the Agreement is to make finance flows consistent with a pathway towards low GHG emissions and climate-resilient development. To achieve this objective, increased mobilisation of climate finance will be needed. This is addressed in art 9 of the Agreement.
Climate finance generally refers to “all finance flows aimed at reducing emissions, enhancing carbon sinks, as well as reducing vulnerability and supporting resilience to the adverse effects of climate change”.94It is estimated that developing countries alone will require 500 billion dollars each year by 2030 for mitigation, and an additional several hundred billion for climate change adaptation.95 While the provision of climate finance has increased over the years, it continues to fall short of what is required.96
Traditionally, developed countries have faced unilateral climate finance obligations, which reflects their greater financial means, and historic responsibility for GHG emissions.97However, prior to Paris, some developed country Parties suggested that the distinction between developed and advanced developing countries had become increasingly blurred, and thus should be reconsidered.98 However, this was met with resistance from developing countries, especially China.99The Paris Agreement therefore affirms that developed country Parties have an obligation to provide financial resources to developing country Parties.100 The preservation of this distinction has been described as the “core of the compromise that enabled broad global consensus toward the Paris Agreement”, as developing countries would only agree to undertake significant climate actions if developed countries were required to provide climate finance.101
101Ferreira, above n 77, at 2.
100The Paris Agreement, above n 59, art 9.1.
99At 226.
98At 225.
97At 225.
96Michael Mehling “Article 9: Finance” in Leonie Reins and Geert van Calster (eds) The Paris Agreement on Climate Change: A Commentary (Edward Elgar Publishing Limited, Cheltenham, 2021) 218 at 220.
95Alastair Marke and Bianca Sylvester “Decoding the Current Global Climate Finance Architecture” in Alastair Marke (ed)Transforming Climate Finance and Green Investment with Blockchains(1st ed, eBook ed, Academic Press, 2018) 35 at 37. All figures are presented in USD.
94UNFCCC Standing Committee on Finance2014 Biennial Assessment and Overview of Climate Finance Flows (2014) at 5.
93Halldór Thorgeirsson “Objective (Article 2.1)” in Daniel Klein and others (eds)The Paris Agreement on Climate Change: Analysis and Commentary(Oxford University Press, Oxford, 2017) 123 at 128.
However, other Parties are encouraged to provide or continue to provide financial support voluntarily.102 While this is weaker than what developed countries had sought, it “signals the desirability of support from developing countries”, and in doing so “softens the traditional divide between donor and recipient countries”.103
However, art 9.3 requires developed countries to “take the lead in mobilising climate finance from a wide variety of sources, instruments and channels, noting the significant role of public funds”. This provision acknowledges that increasing climate finance to the necessary levels will require mobilisation from a range of sources, including domestic and international sources, as well as private funds.
Furthermore, art 9.3 of the Agreement states that mobilisation of climate finance should represent “a progression beyond previous efforts”. During the 2009 Copenhagen Accord, developed countries agreed to jointly mobilise 100 billion dollars a year by 2020, which was formalised by the following year in the Cancún Agreements.104 While the text of the Paris Agreement does not explicitly provide developed countries with a concrete funding commitment or goal, this provision indicates that developed countries must not only deliver on the 100 billion dollar pledge, but that this should be seen as a floor, not a ceiling.105This is supplemented by the
“quantified and firm” financial commitment established during the twenty-first session of the Conference of the Parties, which extended the collective mobilisation goal of 100-billion-dollars per year to 2025 and asks that a new collective goal be set before 2025.106
Again, transparency is of central importance; one of the biggest issues in the context of climate finance is a “lack of transparency to recipient communities… and trust among stakeholders”.107 This results in “unnecessary barriers in raising funds plus delays in approving and implementing climate change projects urgently needed in the most vulnerable countries”.108
108Marke and Sylvester, above n 22, at 35.
107Alastair Marke and Bianca Sylvester “Decoding the Current Global Climate Finance Architecture” in Alastair Marke (ed)Transforming Climate Finance and Green Investment with Blockchains(1st ed, eBook ed, Academic Press, 2018) 35 at 35.
106At 227; UNFCCCAdoption of the Paris Agreement(Decision 1/CP.21) at [53].
105At 227.
104At 223.
103Mehling, above n 95, at 226.
102The Paris Agreement, above n 59, art 9.2.
Overall, an effective climate finance regime relies heavily on adequate transparency.
Transparency enables improved understanding of the amount and characteristics of climate finance flows, and how mobilisation could be optimised.109 Transparent monitoring, reporting, and verification (MRV) of climate finance can also generate trust between developed and developing countries.110 Therefore, art 9.5 requires developed countries to biennially communicate indicative information on the future provision of climate finance to developing countries, while art 9.7 requires developed countries to report financial support provided to developing countries.
C Transparency framework
Transparency has been described as an “indispensable backbone” of the international climate change regime.111 The success of the bottom-up pledge and review approach in the Paris Agreement largely depends on the efficacy of the so-called “enhanced transparency framework”, which aims to “to build mutual trust and confidence and to promote effective implementation”.112
In contrast to the UNFCCC and Kyoto Protocol, the Paris Agreement’s transparency framework on climate action applies, in principle, to all Parties. Developed and developing countries must provide information on their emissions by establishing national greenhouse gas inventories, as well as the necessary information to track progress made towards their NDCs.113 However, the transparency framework does provide for “built-in flexibility”, taking into account developing countries’ different capacities.114 Article 13.3 further suggests that the transparency framework will be implemented “in a facilitative, non-intrusive, non-punitive manner, respectful of national sovereignty, and avoid placing undue burden on Parties”.
While the transparency framework for action applies to both developed and developing countries alike, albeit with built-in flexibility, the transparency framework for support is only mandatory
114Article 13.1.
113Article 13.
112The Paris Agreement, above n 59, art 13.1.
111Harro van Asselt and Kati Kulovesi “Article 13: Enhanced Transparency Framework for Action and Support” in Leonie Reins and Geert van Calster (eds)The Paris Agreement on Climate Change: A Commentary(Edward Elgar Publishing Limited, Cheltenham, 2021) 302 at 304.
110Yulia Yamineva “Climate Finance in the Paris Outcome: Why Do Today What You Can Put Off Till Tomorrow?”
(2016) 25 RECIEL 174 at 182.
109Climate Ledger InitiativeNavigating Blockchain and Climate Action: An Overview, above n 16, at 40.
for developed country parties.115 Article 13.9 states that “developed country Parties shall provide information on financial, technological transfer and capacity-building support provided to developing country Parties”. Comparatively, other Parties that provide support only “should”
supply such information.116 Furthermore, there is no mandatory requirement for developing countries to provide information on support required or received.117 Developed countries’
commitment to provide financial support to developing countries was central to the compromise that led to broad participation in the Paris Agreement.118Transparent reporting of climate finance will be essential to maintain trust between Parties, and give developing nations confidence to undertake more ambitious mitigation targets”.119
The rationale behind the enhanced transparency framework is that, by making information on Parties’ emissions and climate policies transparent, this will provide confidence that Parties are working towards implementing their NDCs, and are providing the necessary financial and technological support.120 This in-turn will increase the likelihood of reciprocal action by other Parties.121 Moreover, the transparency framework is expected to generate pressure on Parties domestically and internationally, which will incentivise countries to increase the ambition of their NDCs.122 At the domestic level, NDCs “have an important signalling effect to domestic constituencies, indicating a government’s green credentials at home and environmental leadership internationally”.123 Governments will be subject to scrutiny by the media, public, environmental groups, as well as transnational non-governmental organisations.124 Furthermore, where international pledges are incorporated into domestic legislation, they will be subject to scrutiny through parliaments and courts.125 Overall, civil society can be expected to monitor,
125At 1122.
124At 1122.
123At 1122.
122Faulkner, above n 11, at 1121-1122.
121At 304.
120Asselt and Kulovesi “Article 13: Enhanced Transparency Framework for Action and Support,” above n 107, at 304.
119Romain Weikmans, Harro van Asselt and J. Timmons Roberts “Transparency requirements under the Paris Agreement and their (un)likely impact on strengthening the ambition of nationally determined contributions (NDCs)” (2020) 20 Climate Policy 511 at 513.
118Ferreira, above n 77, at 1.
117Article 13.10.
116The Paris Agreement, above n 59, art 13.1.
115Ferreira, above n 77, at 2.
albeit informally, the climate agreement, using naming and shaming tactics to target free-riders.126
Peer pressure can also occur at the international level. Ian Johnstone argues that “states care about collective judgment of their conduct because they have an interest in reciprocal compliance by and future cooperation with others”.127 Transparency as to how a Party has implemented its NDC “could highlight… that it needs to, or could, do more to avoid reputational costs.128Robert Falkner suggests that, ideally, leaders in climate action will use the transparency mechanism to signal high ambition, while laggards to increase their commitments, in the hope that this “will create a positive spiral of strengthening trust and enhanced cooperation”.129
D The Paris Agreement: a reason for hope?
Relying on transparency to promote ambition, rather than sanctions, is controversial; some commentators argue that a top-down regime is the most effective option, because “only a strong and effective top-down regime” can deter non-compliance and free riding.130 While an ideal system would see states agree to mandatory and ambitious mitigation targets, this is not realistic in the current international climate regime, where states prioritise sovereignty and are hesitant to bind themselves to enforceable commitments. Dudash and Rajamani acknowledge that:131
It is doubtful whether an ideal top-down climate regime with adequate commitments and strong compliance procedures can be negotiated in the time-scale required to meaningfully address climate change.
The Kyoto Protocol attempted to operationalise top-down architecture by setting mandatory emission reduction targets. However, to ensure support of developing countries, these targets could only apply to developed countries. This differentiation, while necessary, created significant
131Navroz K. Dubash and Lavanya Rajamani “Beyond Copenhagen: next steps” (2011) 10 Climate Policy 593 at 595.
130Hare and others, above n 12, at 603-604.
129Faulkner, above n 11, at 1121.
128Weikmans, van Asselt and Roberts “Transparency requirements under the Paris Agreement and their (un)likely impact on strengthening the ambition of nationally determined contributions (NDCs)”, above n 115, at 513.
127Ian Johnstone “The power of interpretative communities” in Michael Barnett and Raymond Duvall (eds)Power in Global Governance(Cambridge: Cambridge University Press, 2005) 185 at 187.
126At 1123.
tension between developed and developing countries, and international cooperation became strained.
Paris accepts the current reality of international law, and rather than attempting to negotiate top-down targets, it allows states to determine their own action through NDCs. This success of climate diplomacy justifies cautious optimism on the future of the international climate change regime.
IV Blockchain: a New Paradigm
The bottom-up nature of the Paris Agreement represents a paradigm shift in the international climate arena. This new approach intersects with the emergence of blockchain; a revolutionary technology that has the potential to facilitate implementation of the Paris Agreement.
However, before discussing how blockchain could be used to accelerate climate action under the Paris Agreement, the following section will provide a brief overview of how this revolutionary technology works and its key characteristics.132
A What is blockchain technology?
In 2008, Satoshi Nakamoto133 released Bitcoin: A Peer-to-Peer Electronic Cash System which would provide the blueprint for the development of blockchain technology.134The most well-known application of Blockchain technology is Bitcoin; an electronic payment system that allows parties to transact with each other directly, removing the need for banks to become involved.135 However, blockchain technology has already developed beyond cryptocurrency, and is now being hailed as the “Fourth Industrial Revolution”
135Zibin Zheng and others “Blockchain challenges and opportunities: a survey” (2018) 14 IJWGS 352 at 354.
134Satoshi NakamotoBitcoin: A Peer-to-Peer Electronic Cash System(White Paper, 2008). For a history of blockchain see generally Melanie SwanBlockchain: Blueprint for a New Economy(1st ed, eBook ed, O'Reilly Media, Boston, 2015).
133This is a pseudonym.
132The purpose of this section is to provide sufficient detail to understand how blockchain can be used to implement the Paris Agreement, however thecomplex technical details are outside the scope of this paper.For a more
comprehensive analysis of how blockchain works, seeAntonyWelfareCommercializing Blockchain: Strategic Applications in the Real World(John Wiley & Sons Ltd, West Sussex, 2019); and Imran BashirMastering Blockchain(2nd edition, Packt Publishing, Birmingham, 2018).
due to its potential to significantly disrupt the current “social, cultural, political and legal landscape”.136
Blockchain can be defined as:137
…. a peer-to-peer, distributed ledger that is cryptographically secure, append-only, immutable…. and updateable only via consensus or agreement among peers.
Blockchain is a type of Distributed Ledger Technology.138 This means that there is no central authority in the network, and all participants communicate directly.139 This decentralized environment is possible by integrating several technologies,140 all of which are discussed below.
Blockchain stores and transmits data in a growing list of packages known as “blocks”.141 Each “block” contains the following: data, a “hash”, the hash of the previous block and a timestamp.142 A hash is a unique code, effectively a “digital fingerprint”, that sets it apart from every other block.143 These blocks are then “chained” together in chronological order, which helps prevent tampering; if a block is tampered with, the hash will change, this will invalidate all subsequent blocks, as they no longer contain a valid hash of the previous block.144
144Karsten Schulz and Marian Feist “Leveraging blockchain technology for innovative climate finance under the Green Climate Fund” (2021) 7 Earth System Governance 1 at 3.
143Climate Ledger InitiativeBlockchain Potentials and Limitations for Selected Climate Policy Instruments(March 2019) at 19.
142At 354.
141At 354.
140Zheng and others, above n 131, at 354.
139Bashir, above n 125, at 16.
138This paper uses the word “blockchain” rather than “digital ledger technology” (DLT), although blockchain is only one application of DLT andnot all distributed ledgers necessarily use blockchain technology. See Harish Natarajan, Solvej Krause and Helen GradsteinDistributed Ledger Technology (DLT) and Blockchain(World Bank FinTech Note No. 1, Washington DC, 2017) at VII. See also Amarpreet Singh “Distributed Ledger vs Blockchain Technology: Do You Know the Difference?” Medium <www.medium.com>.
137Bashir, above n 130, at 16.
136Vincent Mignon “Blockchains – perspectives and challenges” in Daniel Kraus, Thierry Obrist and Olivier Hari (eds)Blockchains, Smart Contracts, Decentralised Autonomous Organisations and the Law(Edward Elgar Publishing, Cheltenham, 2019) 1 at 6.
B The consensus mechanism
Due to the decentralized nature of this technology, there is no single authority who can update the data on the blockchain, and a blockchain can only be updated where consensus is reached among all the nodes on the network.145 A “node” is the server in which the blocks are stored on, and “can be any kind of device”, such as computers or laptops.146 All nodes on the blockchain are connected to one another, and when a new block is added to the chain, it is broadcast to the other nodes on the network.147 In order for the new block to be added to the chain, the nodes must reach consensus as to the validity of the transaction, which will be executed only if all the nodes approve it.148
In a distributed system such as blockchain, reaching consensus among nodes is a realisation of the “Byzantine Generals Problem”.149 In this problem, a group of army generals circle a city; to proceed, all generals must come to a consensus to attack.150 However, there may be traitors among the generals. In such a trustless environment, reaching consensus becomes difficult.151 Similarly, the distributed nature of the blockchain network makes reaching consensus among untrusting nodes difficult.152 Therefore, a consensus strategy is needed to ensure that ledgers are consistent across the different nodes.153 This means that the data stored on blockchains is largely resistant to modification, as it is difficult to change any block retroactively without altering all subsequent blocks, which requires consensus.154 Consequently, blockchains are often described as “immutable”.155
155Shubhani Aggarwal and Neeraj Kumar “Basics of Blockchain” (2021) 121 Advances in Computers 132, at 140.
Note that there are rare cases where a blockchain can be tampered, for example a “fifty-one percent attack” can succeed where attackers gain more than half of the computing power on the blockchain. See Shubhani Aggarwal and Neeraj Kumar “Attacks on blockchain” (2021) 121 Advances in Computers 399.
154Schulz and Feist, above n 140, at 3.
153Zheng and others, above n 131, at 358.
152At 358.
151At 358. For more information on the Byzantine Generals Problem see L. Lamport, R. Shostak and M. Pease “The Byzantine Generals Problem” (1982) 4 Transactions on Programming Languages and Systems 382.
150At 358.
149Zheng and others, above n 131, at 358.
148Bashir, above n 125, at 17.
147S. “Blockchain: What are nodes and masternodes?”.
146Jimi S. “Blockchain: What are nodes and masternodes?” (06 September 2018) Medium <www.medium.com>.
145At 3.
The most common consensus mechanism is Proof of Work (PoW).156 This mechanism uses nodes to solve a cryptographic problem; these are known as “miners”, while the PoW algorithm is called “mining”.157 When the answer to the PoW problem is found, it is broadcast to the entire network of nodes, which all confirm the solution before working on the next block.158This calculation is time-consuming and requires a significant amount of computational power, however it is necessary to ensure the network is secure.159 The
“intrinsic difficulty” of mining, and the fact that the blocks are chained together, secures the blockchain, as it is “too costly in terms of computational resources” for an attacker to recreate a chain.160
C Blockchain models: public, private and hybrid networks
There are three distinct categories of blockchain networks: public networks, permissioned networks, and hybrid networks.161 The public-permissionless blockchain is a highly decentralised system where data is publicly available, and every node is permitted to verify and add transactions to the blockchain.162Bitcoin and Ethereum are both examples of public-permissionless blockchain models. In a public network, anyone can “join, read and write to a public network”, as there are no special permissions required to access the blockchain.163
Comparatively, a permissioned blockchain requires users to have special permission to access the network.164 These networks limit who can manipulate the blockchain to pre-approved participants.165
165Schulz and Feist, above n 140, at 3.
164At 39.
163At 38.
162At 37-38.
161Welfare, above n 128, at 37.
160At 27.
159Sebastien Meunier “What is Blockchain and How Does This Revolutionary Technology Work?” in Alastair Marke (ed)Transforming Climate Finance and Green Investment with Blockchains(1st ed, eBook ed, Academic Press, 2018) 23 at 27.
158At 359.
157Zheng and others, above n 131, at 359.
156Shubhani Aggarwal and Neeraj Kumar “Cryptographic consensus mechanisms” (2021) 121 Advances in Computers 211, at 212.
Lastly, there are two types of “hybrid” blockchain networks; public-permissioned network and private-permissionless networks.166A public-permissioned network contains components of both public and permissioned blockchains, as the data and transaction history are publicly available, but nodes in the network must have pre-approved permissions to verify and add transactions.167Comparatively, in a private-permissionless network, anyone can verify or add transactions, however, only pre-approved nodes can view the data or transaction history.168
D Smart contracts
Another technological development is the creation of blockchain enabled smart contracts.169 A smart contract is a “computerised transaction protocol” under which the terms and conditions of the contract are “embedded in computer code” and are automatically executed once the terms and conditions are fulfilled.170The utility of smart contracts can be illustrated by the following analogy to vending machines:171
Unlike a person, a vending machine behaves algorithmically; the same instruction set will be followed every time in every case. When you deposit money and make a selection, the item is released. There is no possibility of the machine not feeling like complying with the contract today, or only partially complying.
Because smart contracts are stored on the blockchain, they are distributed and immutable.
Furthermore, smart contracts remove the need for trust because contractual obligations are automatically executed by code.172 This can be contrasted with traditional contractual arrangements where parties need to trust each other to fulfil their obligations.
172Shubhani Aggarwal and Neeraj Kumar “Blockchain 2.0: Smart contracts” (2021) 121 Advances in Computers 301, at 307.
171Swan, above n 130, ch 2.
170At 370; Dong Xiaoqun and others “Blockchain and emerging digital technologies for enhancing post-2020 climate markets” (World Bank, Working Paper, 2018 ) at 17.
169It is worth noting that smart contracts and blockchain are distinct technologies and smart contracts do not necessarily require blockchain technology to be executed. See International Swaps and Derivatives Association Smart Contracts and Distributed Ledger – A Legal Perspective(White Paper, August 2017) at 8.
168At 4.
167At 4.
166At 3.
