How blockchain is creating accountability in climate risk
As the world grapples with climate change, the role of technology in mitigating its impacts is becoming increasingly important. One technology that has emerged as a potential game-changer is blockchain, which can bring transparency, efficiency, and scale to climate risk management.
Blockchains are decentralized, digital ledgers that record transactions in a transparent and tamper-proof manner. They operate on a distributed network of computers, which means that no single entity controls the network. This makes them well-suited for bringing transparency and accountability to complex systems such as climate risk management. By using blockchain technology, stakeholders can access a shared and immutable record of transactions, reducing the risk of fraud and improving transparency.
Blockchain technology can also bring efficiency and scale to climate risk management by automating processes and reducing administrative overhead. This can lead to cost savings and enable the scaling-up of climate solutions.
Parametric insurance
One of the most significant impacts of climate change is the increasing frequency and severity of extreme weather events. According to Aon, economic losses from natural disasters totaled $313 billion in 2022, with only 42% ($132 billion) of these damages covered by insurance programs – leaving a concerning 58% ($181 billion) coverage gap. These events can cause significant damage to property and infrastructure, disrupt supply chains, and even result in the loss of life. Traditional insurance products have struggled to keep up with the pace and scale of these occurrences, leaving many individuals and organizations without coverage.
Blockchain technology can help to address this problem by enabling the creation of parametric insurance products. Parametric insurance pays out based on predefined conditions, such as the occurrence of a specific weather event or the magnitude of a natural disaster. Blockchain can provide transparency and efficiency in this process by enabling the creation of a tamper-proof record of the triggering event, as well as automating the claims process via the use of smart contracts.
For example, a smart contract-enabled parametric insurance product could be designed to automatically pay out to farmers in the event of a drought. The smart contract would use data from a trusted, public data source like NASA or the National Weather Service to determine if a drought had occurred based on predetermined triggers, and if so, automatically send the payment to the farmer. Such an encoded mechanism reduces the need for manual claims processing, increases efficiency, and reduces the risk of fraud. Moreover, the transparency of the blockchain can work to increase the trust between the insurer and the insured, reduce disputes, and enable further widespread adoption of these critical risk management products.
Transparency
Reducing greenhouse gas emissions is one of the most critical actions necessary to mitigate the impacts of climate change. One way to incentivize emissions reductions is through the use of carbon markets, which allow entities to buy and sell carbon credits. However, the voluntary carbon market (VCM) has struggled to scale due to the lack of transparency and trust in the market. A recent investigation by The Guardian found that nearly 90% of carbon offsets sold by Verra, the leading certifier in the VCM are essentially worthless and do not represent legitimate emissions reductions.
Blockchain technology can confront these challenges by enabling the creation of a transparent and trusted digital market for carbon credits. By creating an immutable record of carbon credits on blockchains, buyers and sellers can be confident that the credits they are purchasing represent legitimate emissions reductions. Additionally, smart contracts can automate the process of verifying emissions reductions, reducing the need for intermediaries and increasing efficiency.
For example, a blockchain-based carbon market could enable a company to purchase carbon credits from a farmer who has implemented sustainable agriculture practices that reduce emissions. The blockchain would track the issuance and transfer of carbon credits, providing a transparent and trusted record of emissions reductions and ensuring a carbon credit could not be sold to multiple buyers. This would enable the company to meet its sustainability goals while also providing a source of revenue for the farmer, incentivizing further emissions reductions.
Accountability
Blockchain technology can play a critical role in bringing accountability to corporate climate risk management and supply chain traceability. By enabling the creation of transparent and trusted records of transactions, blockchain can help stakeholders to better understand the environmental and social impact of their supply chains. This, in turn, can help to drive more responsible and sustainable business practices.
Blockchains can also enable greater accountability in corporate climate risk management by providing a transparent record of a company’s environmental impact. This can help to ensure that companies are held accountable for their actions and can be incentivized to reduce their carbon footprint.
In addition, blockchains can be used to create a more efficient and transparent system of supply chain traceability. By tracking the movement of goods and materials from the source to the final product, blockchain can help to identify areas where environmental and social risks may be present. This can enable companies to take action to address these risks and ensure that their supply chains are responsible and sustainable.
Blockchain technology has the potential to bring transparency, efficiency, and scale to climate risk management. By using blockchain in applications such as parametric insurance, the voluntary carbon market, and corporate climate risk management, we can better protect vulnerable communities, reduce emissions, and mitigate the impacts of climate change. As the urgency of the climate crisis grows, it is vital that we explore the potential of blockchain and other emerging technologies like AI and machine learning to drive effective and verifiable climate action.
