Distributed Ledger Technology for Carbon Trading Marketplace in Bhutan: Digital technology to support carbon reduction
Start of implementation: 2022
Technology type: Distributed ledger technology (DLT)
ADB Partners:
· Druk Holdings and Investments (DHI)—commercial and investment arm of the Royal Government of Bhutan
· InfraBlocks Technologies Pte Ltd (IBT)—technology service provider
ITD’s ADB Partner Department: South Asia Department
In line with ADB’s Operational Priorities:
· Tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability
o Mitigation of climate change increased
o Environmental sustainability enhanced
· Fostering regional cooperation and integration
o Greater and higher quality connectivity between economies
o Global and regional trade and investment opportunities expanded
The concept of carbon markets, wherein countries can buy and/or sell carbon credits to meet their emission reduction targets, was introduced in the 1997 UN Kyoto Protocol. Carbon credits represent measures that prevent greenhouse gases from being released into the atmosphere. These credits can be earned in a variety of ways, including investing in renewable energy projects and reforestation efforts.
As the first carbon-negative country in the world, Bhutan has a strong potential for selling carbon credits. It sequesters more carbon than it emits, producing less than 4 million tons while absorbing over 9 million tons, thanks largely to its forests. Also contributing to its low carbon emissions is its reliance on renewable energy for electricity. Approximately only 6% of the country’s potential hydropower capacity has been tapped, but it is already generating surplus power, which the country exports to India. These power exports significantly contribute to Bhutan’s total GDP. Bhutan also has the potential to exploit other renewable energy sources, including solar, wind, and bioenergy, providing it with additional means to generate carbon credits.
Bhutan, however, faced various challenges in entering the carbon market. Carbon credit issuance was time-consuming and expensive: the end-to-end process could take between one to two years and cost $200,000 to $300,000. The high cost was primarily due to the paper-based and manual processing of transactions: issuing one carbon credit involved auditors, brokers, professional services firms, and national agencies. In addition, Bhutan has limited access to international markets. It engages brokers to find buyers, adding to the already high costs.
These issues were compounded by other challenges in carbon trading:
· Scattered carbon market. The carbon markets were scattered in silos, making it difficult for regulators to efficiently supervise carbon credit issuance per registry and monitor trading per exchange.
· Potential errors in recording. Because the registries and exchanges were managed in silos, record-keeping was prone to error and double counting.
· Traceability and transparency issues. There was no master ledger, making it difficult to determine whether the same carbon credits were repeatedly resold. This led to uncertainty among buyers on whether their purchased carbon credits could offset their carbon footprint.
· Quality issues. Carbon credits differed in quality, leading to issues on whether purchasing these will be sufficient to offset actual carbon emissions.
Bhutan, through Druk Holding and Investments (DHI), which is fully owned by the Royal Government of Bhutan, sought to develop a digitized national carbon credit issuance portal for the registration and trading of carbon credits. The platform would be used to issue, validate, and verify existing and/or new carbon credits across several carbon credit standards. It would also be able to provide real-time data and include a tool that could be used to calculate greenhouse gas emissions reduction following international carbon standard methodologies.
DLT can be used to develop a shared database of transactions where data and/or documents that are generated at every step of the carbon trading process, including verification, can be stored. The process can also be automated, which means fewer people need to manually process transactions, leading to reduced costs and shortened processes. All data entries are timestamped for transparency and auditability. In addition, a DLT-based platform can verify entries across registries and exchanges in real time, reducing the risk of erroneous recordkeeping, double counting, and duplicate trading of carbon credits. In short, the DLT-based carbon trading platform can serve as a single, equally shared source of truth on carbon asset and credit issuance. Furthermore, DLT can offer an added layer of security as changes and additions to the chain need to be confirmed by users, thus helping improve trust in the system.
The first phase covered the development of proof of concept, which included a comprehensive report on Bhutan’s hydropower capacity, the components and limitations of DLT for carbon markets, and the technical requirements and process to produce a minimum viable product (MVP). The second phase saw the development of the MVP, which utilized the Ethereum network as hosting infrastructure and focused on the Dagacchu hydropower project, which is an existing carbon credit project in Bhutan.
The MVP served as the first step into launching the Carbon Credit Platform of the Royal Government of Bhutan. It had the following modules:
• Real-time carbon data gathering. The carbon platform collects data, which will serve as the basis for carbon credit metrics.
• Automated greenhouse gas calculation and data analysis module. The platform comes with a tool to calculate greenhouse gas reductions following international carbon standards.
• Carbon credit issuance and verification module. The platform enables seamless carbon credit issuance and verification, which are also aligned with international carbon standards.
• Collaboration module. The platform enables collaboration between internal and external teams, including auditors.
Several mechanisms were put in place to ensure that “proof of origin” of data can be verified to safeguard the integrity of the carbon credits.
A third phase of the testing was proposed to cover the launching of the National Carbon Credit Aggregation Platform, which will serve as a marketplace with access to international markets. It also aims to test whether the platform could be used to make a live transaction, as well as assess what other assets of Bhutan has the potential for generating nature-based credits.