By: Clare Adelgren, EY Global Head of Blockchain Sales and Operations

As companies globally accelerate their decarbonization journeys, scope 3 emissions—which include all indirect emissions originating from organizations’ upstream and downstream activities such as supply chain—present a significant challenge. Although scope 3 is often the largest portion of an organization’s carbon footprint, accounting for, it is also the most difficult to measure and reduce due to a shortage of reliable data and lack of operational control over value chain activities.

Obstacles aside, the pressure for organizations to accurately measure and track their carbon footprint—particularly scope 3 emissions—has never been greater, largely due to recent regulatory developments (e.g., Corporate Sustainability Reporting Directive “CSRD”) and the demand to set and validate ambitious, science-based emissions reduction targets. To address this impact, companies need to work together with their suppliers to set goals for measuring and reducing emissions. In this case, the ability to track and trace emissions consistently along a company’s value chain is critical. The tokenization of carbon emissions—using public blockchain technology—stands out as a powerful tool for companies to unleash the full potential of voluntary carbon markets and accelerate their own decarbonization efforts.

Addressing the trust problem in carbon markets

Increased net-zero commitments by individuals, businesses and governments have been accompanied by rapid growth in carbon market trading. The demand is likely to be met if a large-scale, voluntary carbon market takes shape. However, the scale up will need to be significant—according to estimates from the Taskforce on Scaling Voluntary Carbon Markets (TSVCM), the voluntary carbon markets will need to grow more than 15-fold by 2030 and 100-fold by 2050 from 2020 levels, to support the investment required to deliver the 1.5 degree pathway.

To dramatically scale open markets for high-quality carbon products, supply for carbon credits will need to grow rapidly without sacrificing integrity. This issue of ensuring a quality supply of carbon credits at scale is tightly coupled with the need for standards and regulation in this space.

At the same time, trust and transparency will become even more vital as consumer expectations for businesses to demonstrate their commitment to sustainability grow. The 13th edition of the EY Future Consumer Index (FCI), which surveyed more than 22,000 consumers across 28 countries, found that 73% of respondents feel companies should drive positive environmental and social outcomes, and 72% feel businesses must ensure suppliers comply with high sustainable standards of practice. These findings show that consumers are increasingly holding companies accountable for their activities and role in delivering a sustainable, low-carbon future. As a result, companies will need to think critically about how they update consumers on the progress of decarbonization efforts to build confidence and trust.

Trust, but verify: blockchain’s role in unleashing the potential of carbon markets

Blockchain technology could have been designed for this exact use case—to help companies implement their decarbonization goals and make tangible progress.

Public blockchain technology is distinct in the benefits that it delivers—its inherent immutability is key and establishes the essential foundation of trust. In the case of carbon markets, companies need trust on both sides of the equation: in their measure of reduced negative impact (i.e., emissions reduction) and in their measure of positive impact (credits).

When data is shared on a public distributed ledger, a company is also able to create much-needed transparency. In addition, blockchain technology enables greater traceability of carbon credits through the supply chain, reducing the risk of double counting, as well as the reduction of the risk of human error or fraud through use of smart contracts.

Looking Ahead

There is tremendous promise in blockchain technology’s ability to bring greater trust and transparency to a space clouded by a lack of clear standards and systems for defining quality credits. The challenge now is to gain consensus on those standards and systems to strengthen the integrity of the entire chain. This is especially important as carbon credits expand into new and diverse formats, such as how they are created, what they represent, how they gain value, and other differentiated attributes.

Blockchain analytics is another bright spot. Its use is somewhat limited right now given there isn’t enough usable data to analyze. But as the carbon market matures—and regulation comes to fruition as early as this summer—companies have a significant opportunity to leverage blockchain analytics to provide a full picture and more comprehensive analysis and reporting of the carbon market value chain.

About EY OpsChain ESG

Our EY OpsChain ESG solution, launched earlier this year, is focused specifically on helping enable emissions and carbon credit transparency. Built to the data standards of the InterWork Alliance for Carbon Emissions tracking, the solution allows companies to track and report their scope 1, 2 or 3 emissions data at a product level. Similarly, an organization can also tokenize their carbon offsets data providing transparency. Immutable reporting on an enterprise’s current emissions levels that are independently verifiable through the integration of key emissions validators allows organizations to track their emissions through the supply-chain and make informed decisions that will accelerate their plans to net zero. 

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.