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In Part V of our “Sustainable Building Blocks” series, The HBAR Foundation (THF) pulls back and examines in greater depth the complex regulatory and quasi-regulatory background conditions influencing whether the Sustainable Impact Fund’s (SIF’s) fast-growing list of ecosystem wins and technology “firsts” can successfully translate to real-world environmental progress. After all, bringing the balance sheet of the planet to the public ledger is more than just a slogan. It reflects our shared conviction that innovative new digital tools enabled by advances in distributed ledger technology (DLT) running on ultra low energy, carbon negative public networks such as Hedera will catalyze transformative new pathways to climate action. DLT may not be a panacea, but operationalizing the principles of auditability, data discoverability, and liquidity across a broad range of ESG use cases is not hype, either. Broad adoption promises workable, cost-effective fixes for an array of previously intractable blockers to climate action. In theory.
In practice, implementation will be harder than it looks. Like many new environmental technologies at introduction, DLT’s utility for climate action depends on parallel implementation of an array of enabling technologies, infrastructure requirements, legislative and regulatory frameworks, and B2B cooperative arrangements. And this will have to occur across jurisdictions, operating regions, enterprises, facilities, systems, and value chains. Developing, integrating, and scaling up a new DLT-enabled climate solution might be blocked or cause disruption at any point. An interrelated product or service might be slower in reaching maturity; its level of market readiness might lag; or its costs might be falling too slowly to match DLT’s growth curve, which could block implementation of a DLT-enabled climate solution outright, or simply misalign its growth curve with the Paris Agreement’s 1.5℃ temperature trajectory.
Similarly, as innovators in the Regenerative Finance (ReFi) community are building this new open-source ecosystem for climate finance defined by the principles of audibility, data discovery, and liquidity, existing value chains will be strained, and some broken. Legal and quasi-legal rules and standards necessary to de-risk and incentivize financial flows to climate may negatively impact legacy interests, triggering resistance and protectionism. Government oversight and enforcement scrutiny may also increase as policymakers scramble to save aging legal frameworks at risk of obsolescence.
To navigate these headwinds, THF has developed and, over the last quarter, begun to implement a comprehensive public-policy engagement strategy focused on enabling catalytic change by removing blockers to web3 innovation at every point of intersection with environmental sustainability. Designed to be proactive and collaborative, our approach has signaled a willingness to assist policymakers at every governance level, from city administrators, to national environmental regulators, to central banks and financial oversight agencies. The transition to a low-carbon economy will place new and escalating demands on these officials. It is critical for them to understand DLT’s practical utility beyond meme coins; its modern variants beyond Bitcoin; and how our innovations are enhanced by an array of interdependent digital infrastructure technologies currently emerging – from AI and machine learning, to internet of things (IoT) and remote sensing using LIDAR and satellite data, to nested accounting and digital Monitoring, Reporting, and Verification (dMRV) systems.
All signs point to a rising political commitment to address climate change, and yet as nearly 200 world leaders at COP27 debate increased ambition in their nationally determined contributions (NDCs) under the Paris Agreement – the heart of Paris’ decarbonization strategy but perennially inadequate to achieve its goals – we cannot afford to wait for governments. McKinsey research suggests, conservatively, that at least 40% of the emissions reductions the world needs to stabilize the climate will rely on technologies not yet invented. Within five years, aided by significant first-mover advantage, we see the DLT-enabled climate-tech innovations being accelerated by the SIF and built on Hedera today as becoming indispensable to the world’s decarbonization toolkit. THF policy team aims to ensure – using a mix of direct engagement, advocacy, technical assistance, thought leadership, and industry partnerships – that new regulatory policies and quasi-regulatory standards enable rather than unduly hinder their development and deployment.
Here are some of our recent and on-going policy initiatives, which are aligned with our strategic priorities of making climate finance auditable, digitizing open source methodologies, scaling validation and verification, discovering a global carbon price, and making ESG reporting credible:
Clarifying misleading environmental narratives to avoid false technology choices.
The period between Q4 2021 and Q1 2022 was arguably a high-water point for negative media storylines about cryptocurrencies and the environment, with the public – including climate activists and environmental regulators – getting saturated across more than 18 months of pandemic isolation with increasingly alarmist rhetoric suggesting, in essence, that crypto represents the straw that would break the back of global climate action. Articles such as Cryptocurrency makes the climate crisis worse (The Hill 08.25.21), NFTs Are Hot. So Is Their Effect on the Earth’s Climate (Wired 03.06.2021), Why Bitcoin Is Bad for the Environment (The New Yorker 04.22.2021), Is Bitcoin Inherently Bad For The Environment? (Forbes 10.08.2021), and Bitcoin, NFTs and other crypto fads are destroying our planet (MSNBC, 03.15.2021) were commonplace.
It was certainly true and remains true today that Bitcoin mining with its energy-intensive proof-of-work (PoW) consensus protocol can be highly carbon-emissive. But details matter. Where mining is conducted in regions that source their electricity from renewables, emissions could be much less significant. Many articles badly oversimplified Bitcoin’s sustainability profile. They often ignored cases of PoW mining co-located off-grid with renewable generation; dismissed arguments that miners were injecting badly needed CapEx, long unavailable through democratic processes, into grid modernization and new solar and wind project starts; and obscured the reality that Bitcoin’s true environmental impacts simply were not (and with then-available data arguably could not have been) fully known, often using headline-grabbing but misleading comparisons to nations or legacy industries.
Biden White House.
Inevitably, pushed by crypto skeptics internally and environmental NGOs externally, the Biden Administration waded into the fray. Kicking off a fact-finding exercise that can form the basis for future Executive Branch regulatory action or legislative recommendations to Congress, President Biden issued Executive Order 14067, which posed – and subsequently led to an interagency agency process seeking public comment on – four key questions:
This represented a valuable opportunity to educate President Biden’s climate team about the wider world of DLT, of which blockchains and energy-intensive PoW mining are but subsets; in which low-power, carbon-neutral (or carbon-negative) networks are becoming commonplace; and where fast-emerging use cases for ESG disclosure, carbon trading, and environmental monitoring had already transformed crypto’s social utility far beyond pre-2022 “store of value” analogies to gold. The best approach when engaging with officials at regulatory agencies is to offer practical, data-rich comments supported by references to scientific evidence or authorities, and narrowly tailored suggestions for concrete action. And that is precisely what we did.
Our comprehensive response, available here, clarified that to achieve positive climate impacts, the Government must reimagine DLT as more than digital currency, Instead, DLT must be seen as a new utility pathway for improving the accuracy and lowering the cost of carbon footprinting; bringing transparency, credibility, and accountability to corporate ESG disclosure; facilitating growth in Paris-aligned sustainable investing and ESG-integrated Wall Street offerings; and enabling new and streamlined implementations of existing policy solutions for achieving NDCs (e.g., cap-and-trade or carbon tax programs).
Accelerating voluntary carbon markets.
In responding to President Biden’s request for input, the goal was narrow: urge the Administration to resist a knee-jerk over-regulatory response that, in theory (to be optimistic) might reduce environmental harms caused by the Bitcoin network, but at the cost of pro-climate DLT innovations that in the near- and medium-terms could be far more helpful to climate action.
Nowhere is this more true than the voluntary carbon markets (VCMs). Across the four major carbon registries, Verra, Gold Stand, ACR, and CAR – the four NGOs responsible for applying methodologies to verify and issue tradable carbon credit for the majority of carbon reduction and removal projects worldwide – there are an estimated 600,000,000 mtCO2e worth of carbon credits live and circulating. Unfortunately, this is enough to offset global GHG emissions for just four days. Massive new investment in VCMs will be essential to reach the world’s climate goals – upwards of US$400B by 2030, over US$500B by 2050. To date, however, myriad frictions around liquidity, transaction clearing, price discovery, trust and transparency, environmental integrity, uptake and adoption, and regulatory uncertainty have prevented VCMs from rising to meet this need.
In the view of the SIF and our grantee partners, tokenization of carbon credits – either natively by the registries themselves or via third-party web3 platforms certified by the registries to bridge their credits on chain – is the indispensable key to unlocking the full potential of VCMs. With composable tokens reflecting CO2e reduced or removed stored and traded on fast, low energy, high throughput, cost-effective public ledgers with transparent, immutable recordkeeping and the capacity to integrate dMRV, it will be possible to disintermediate VCMs, expand liquidity and price discoverability, and mobilize capital towards efficient decarbonization activities. But early attempts by some web3 companies to bridge carbon credits on ledger met with sharp criticism and public confusion. This led Verra and Gold Standard to invoke contractual provisions suspending tokenization of their respective credits until public consultations could be completed.
Gold Standard.
Because of weak regulatory oversight of VCMs (so far), their vulnerability to gaming and fraud, and the potential for emissions leakage, engagement with quasi-regulatory standard-setting bodies like Verra and Gold Standard to protect carbon-credit tokenization was among THF’s top priorities. We submitted an extensive response to Gold Standard, available here, which addressed issues of retirement timing, safeguards for pooling and fractionalization, permissible de-tokenization, forward contracts and ex-ante crediting scenarios, KYC/AML compliance assurance requirements, as well as minimum sustainability credentials of DLT networks authorized to engaging carbon-credit tokenization and trading.
Verra.
Four days later, THF submitted a broadly similar response to Verra, but this time we did not speak alone. Collective action can be a potent tool of policy; multiple voices singing in unison and from the same hymn book carry farther and will usually be accorded significantly more weight than an equal number of parties speaking separately, even where messaging is identical. To forge the broadest possible coalition, the SIF attended the Blockchain Infra Carbon Offset Working Group (BICOWG) GreenHouse Retreat in Medellin, Colombia. This was a seminal gathering of key players at the intersection of web3 and climate focused on “Interoperability - Code, Tokens & Language.” The result: what we called the “Medellin Statement,” a statement of consensus and shared values on accelerating VCMs with tokenized carbon, joined by 25 prominent members of the ReFi community.
The Medellin Statement Signatories
Aniseed, BICOWG, Climate Collective, CorpStage, Digital Carbon Bank, Dovu, Envision Blockchain, Filecoin & Protocol Labs, Global Blockchain Business Council, The HBAR Foundation (Sustainable Impact Fund), Hedera Network Governing Council, KrypC, LOA LABS, Mercy Corps Ventures, MRV Collective, Operal AG, Porini Foundation, Rearden Digital Assets, Regen Network, Ripple, Swirlds Labs, Tamuwa Limited, Tolam Earth, Topl, TYMLEZ
Commodity Futures Trading Commission.
Of course, as VCMs scale using the power of DLT, two comparatively small NGOs are not likely to have the only or final say. Regulatory agencies in the United States, the European Union, and many other national and sub-national jurisdictions can be expected to consider what safeguards may be needed to protect consumers, reduce the risk of greenwashing by major corporates, and hopefully how government action might help to support a healthy, efficient market for natural assets, as well.
This was precisely what the Commodity Futures Trading Commission (CFTC) sought to achieve this summer, when they issued a Request for Information (RFI) on Climate-Related Financial Risk – in essence, what if anything ought the CFTC to do within its statutory authority promote responsible innovation, ensure the financial integrity of all transactions subject to the Commodity Exchange Act (CEA), and avoid systemic risk in connection with climate-related financial risk, specifically with respect to carbon-asset derivatives and their underlying carbon-credit commodities markets.
Invitations to engage with and help to channel accurate information to a potential regulator are low cost opportunities to shape the legal landscape far into the future. They should almost always be accepted. After all, regulatory oversight is not undesirable per se; only rules that are rushed, inadequately researched, that deprived the regulated community of an opportunity to be heard in advance of promulgation, that are unduly hostile to innovation in the name of entrenched legacy interests, or which are long signaled by an agency but never finalized. Here again, THF magnified its advocacy by responding jointly, in this case with Hedera. Our recommendations to the Commission may be found here.
Making Article 6 of the Paris Agreement a success.
UNFCCC Supervisory Body.
VCMs exist in proximity to compliance carbon markets – which is to say, mandatory carbon pricing, including carbon taxation (fixed price) as well as emissions trading systems (market price) – but standing adjacent to both is the long-awaited maturity of Article 6 of the Paris Agreement, the market-driven cooperative mechanism by which countries subject to NDCs may be able to more efficiently reach them by operationalizing a scaled up, interconnected, global trading-based approach to emissions reduction and removal. The idea is this: UN-recognized carbon credits will be issued to companies in one country from climate projects in that country (e.g., restoring a degraded forest), companies in another country may buy those credits to comply with their emission reduction obligations at home, and in doing so private capital flows can be leveraged in the aid of national-level compliance.
However, questions arose. Offset projects have to create “real, measurable, and long-term” emissions reductions in their host country. Intensifying fire, drought, and flooding increasingly threaten to reverse the environmental benefits of the nature-based solutions (afforestation and reforestation, soil carbon sequestration, etc.) from which they typically originate, casting a cloud over their future value. Fortunately, DLT and DLT-enabled tools can solve this, at least to a certain degree, and THF joined with OpenEarth to provide guidance. Specifically, in our joint submission to the UNFCCC, we explained how the audibility of immutable, open-source, public DLT networks like Hedera, combined with the automated data flows possible with dMRV will extend the temporal scope of effective project-level monitoring, reducing double counting risk over longer time horizons, and protecting the rights of indigenous peoples and local communities as climate impacts worsen.
Looking ahead.
This relatively fast cadence of public comment and industry consultation processes is unusual. But public policy’s status as an essential building block of the SIF’s sustainability approach will not change. We need not wait for invitations. In the coming months, in addition to continued participation in a wide array of working groups, THF intends to engage actively and comment publicly on such topics as enabling integration of VCMs with the 64 national ETSs currently in operation around the world, leveraging audible DLT tools to lower the cost and improve the quality of compliance with mandatory ESG disclosure rules widely anticipated in 2023-24, as well as give major corporates tools to lower the litigation and enforcement risks attendant to inadvertent greenwashing. In short, our policy efforts are just getting started. We look forward to sharing more in the new year as the SIF works to bring the balance sheet of the planet to the public ledger.
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