Distributed Ledger Technology-Based Carbon Asset Trading Platform in Shanghai
Implementation: 2021
Technology type: Distributed ledger technology (DLT)
ITD’s Partner Department: East Asia Department (EARD)
Partner in People’s Republic of China: Shanghai Environment and Energy Exchange (SEEE) is a state-owned company that specializes in climate change mitigation and adaptation services to the public and private sectors. It facilitated the design and implementation of the proof-of-concept implementation.
Technology service provider: Zhongchao Blockchain Technology Research Institute (ZCBTRI)
Other Partners: Timing Carbon Asset Management Co. Ltd.—business consultancy services
In line with ADB’s Operational Approaches:
Using a country-focused approach
Promoting digital development and innovative technologies
The People’s Republic of China (PRC) has become one of the world's largest emitters of carbon dioxide in recent years. This mainly stems from its coal use (e.g., coal-fired power stations, coal mining, blast furnaces producing iron and steel). As of 2019, PRC’s greenhouse gases (GHG) emissions reached 14,093 million metric tons of carbon dioxide, passing the 14 gigaton threshold for the first time. This is over triple of its 1990 emissions and a 25% increase over the past decade. PRC alone contributed to over 27% of the 52-gigaton global emissions. It also surpassed the combined emissions of all developed countries (OECD) for the first time.
In 2017, PRC decided to implement a national emission trading scheme (ETS) to limit and reduce CO2 emissions in a cost-effective manner. The Asian Development Bank provided technical assistance in designing the national ETS. The national trading scheme became operational in 2021, with its scope including annual emissions close to 4.5 billion tons of CO2 per year, or around 40% of PRC’s total emissions, mostly carbon, from the power industry. The national ETS obligated over 2,000 big emitters in the power sector to account for their 2019 and 2020 emissions.
Carbon assets trading commenced on the platform operated by the Shanghai Environment and Energy Exchange (SEEE) in July 2021. However, the carbon market infrastructure faced some challenges:
Double counting of carbon credits. The registries and exchanges maintained manual records in silos. There was no master ledger to verify the entries in real time.
Issues with manual verification. Carbon emission tracking and verification was done manually, which was time- and labor-intensive, as well as prone to erroneous recordkeeping.
Information asymmetry in carbon markets. The carbon markets were scattered, work in silos, and were characterized by information asymmetry, making it difficult for regulators to efficiently supervise carbon issuances for every project application per registry and monitor trading per exchange.
SEEE collaborated with ADB’s Digital Learning Labs (formerly the Digital Innovation Sandbox), which provides a safe and neutral environment for ADB to pilot innovative and relevant emerging technology solutions, to develop and test a solution to address these challenges. Zhongchao Blockchain Technology Research Institute (ZCBTRI), was engaged as the technology service provider, while Timing Carbon Asset Management Co. provided business consultancy services.
The result was a distributed ledger technology (DLT) based-platform. The DLT-based ledger served as a master database and acted as a single source of truth on carbon assets and credit issuance. All relevant transactions and data related to the carbon units on the ledger, including their origin and ownership, could be tracked by potential buyers in real time, enhancing transparency and verifiability of records to address issues on double counting and duplicate trading of carbon assets. Automation improved efficiency and lowered associated costs while reducing the likelihood of errors. The technology did not require end users to be on the blockchain to trade carbon units; instead, their point of contact was the web application.
Figure 1 shows the carbon trading process used in the test. User A (Timing Carbon) possessed carbon credits registered on Verra Registry in the US that User B, based in PRC, wished to purchase. The conventional process saw User B going through the cumbersome process of opening a trade account with Verra Registry to interact with User A and complete the transaction (selling or exchanging carbon credits). This process was subject to several regulations and associated risks, making the account opening drawn out (3 –6 months). A DLT-based solution provided a quicker and more cost-efficient alternative. User A could upload voluntary carbon assets on a web application that could be directly bought by User B, thus shortening the account opening process.
While the test showed the viability of using DLT in carbon trading, its use does not exist in a vacuum. There are compliance and regulatory gaps related to the international carbon trading that need to be addressed should this initiative be scaled up and rolled out in the future.