Exploring a blockchain design for the European emission trading system: an interoperable, secure, and automatized data sharing architecture

Abstract

As the Earth's temperature rises, it is critical that countries address and adapt to climate change. The European Union (EU) is committed to achieving carbon neutrality by 2050 (European Commission, 2018).The cornerstone of the EU’s climate policy to combat climate change is the EU Emission Trading System (ETS). It is the world’s first major compliance carbon market and remains the biggest one. Currently, the focus of the EU is to strengthen the market of the EU ETS for the next decade and beyond (European Commission, 2022-a). An important development in this phase is the recognition of global carbon markets to reduce global GHG emissions effectively. Three main challenges of ETSs are identified in this research: lack of system compatibility to link with other ETSs, security issues, and (manual) monitoring of transactions. To realize the full potential of ETSs, the added value of a blockchain-based architecture to support the carbon trading market and counteract the current deficiencies is explored. Although the reviewed literature is useful to identify the possibilities of blockchain solutions to address the current challenges in ETSs, it is not clear how the current EU compliance market could allow extension by providing a large, transparent, verifiable, interoperable, and robust carbon system. Research about blockchain-based EU ETSs would contribute so that the development of global carbon markets could happen. This results in the following main research question: What blockchain-based design can be used by the European Union to improve the technical design of the EU ETS while allowing for the extension to other Emission Trading Systems?. For this research project, a Design Science Research (DSR) approach is taken to ensure a discipline-oriented creation of a successful design that addresses the challenges in the EU ETS. This research proposes a blockchain-based solution that is able to cover the core functions of the system while actively improving system compatibility, preventing security issues and non-transparency, and enable automatized monitoring of transactions. It is concluded that the proposed design is able to improve the current system by enabling extension to other ETSs, automatizing manual processes, providing data security through encryption, and providing transparency in the narket and trade of emission allowances. Additionally, this research provides a blockchain governance framework to align policy and stakeholder interests with governance and technical blockchain control points in the emission trading sector. Besides contributing to closing a gap in a growing research field, the use of the architecture offers a technological solution in which systems can be integrated with each other without having to throw away the existing principles. This is beneficial because these existing principles have been developed after a great amount of learnings, investments, and experience. Also, the design enables more authorities to join a system that is already running while also able to have a say in the governance. This could lead to convergence of market mechanisms and prices where as a result, a more efficient and unified carbon market will emerge.