Auburn University researchers propose blockchain solution for tracking greenhouse gas emissions

Accounting researchers from Auburn University and John Carroll University have proposed a theoretically viable solution for simplifying the tracking and reporting of Scope 3 greenhouse gas emissions within the value chain. This potential system utilises smart contracts and non-fungible tokens (NFTs) on a blockchain platform, which may significantly streamline the carbon reporting process while promoting increased automation in emissions management.

Entities operating under certain regulations—specifically within the European Union, California, and various other jurisdictions—are mandated to report not just their direct emissions from company facilities and vehicles (Scope 1) and the indirect emissions from energy consumption (Scope 2), but also the more complex Scope 3 emissions. These emissions stem from upstream suppliers and downstream consumers and are generally regarded as the most challenging to track.

The proposed solution is detailed in the paper titled “Using Blockchain, Non-Fungible Tokens, and Smart Contracts to Track and Report Greenhouse Gas Emissions,” published in the Accounting Review. It envisions a web-based interface through which companies can enter emissions data. With appropriate permissions, this data could be accessed by various third parties across the value chain, enabling them to report on their emissions, as well as those of their suppliers and customers.

The system suggests that every component of a tangible asset will have an associated NFT created via a self-executing smart contract when the component enters the value chain. The NFT would hold data relevant to the Scope 1 emissions linked to the production of that component, with a separate NFT capturing the Scope 2 emissions generated. As these components move through the physical value chain, the NFTs will also transfer between the firms on the blockchain. In manufacturing scenarios, smart contracts would “burn” the initial NFTs and create new ones that represent the updated status of in-process assets, including their cumulative emissions up to that point.

According to the researchers, this innovative setup will establish a “near real-time cradle-to-grave provenance for tangible assets and their associated emissions,” thereby permitting all participants in the value chain to ascertain the total emissions associated with a product, and its classification under Scope 1, 2, or 3. The proposed methodology also features configurable privacy settings to safeguard proprietary company information while allowing participants to view upstream and downstream Scope 3 emissions by categories such as transportation, distribution, and end-of-life treatments of sold products.

Greg Jenkins, one of the authors of the study, highlighted the burdensome nature of existing practices, stating, “In the process of conducting our research, we interviewed one [individual] who works for a large retail company, and he manually enters data from about 4,000 vendors into a spreadsheet and then performs calculations.” This method, described by Jenkins, is time-consuming and prone to errors, including potential double-counting of emissions.

However, the researchers caution that while the proposed solution is technologically viable, it is not without challenges. They have identified practical hurdles that need addressing, such as governance and coordination issues, trust in the blockchain technology, and inherent latency of the blockchain. Moreover, obtaining accurate emissions data for input into the blockchain presents its own difficulties, along with potential risks related to confidential information exposure and discrepancies in reporting schedules.

Despite these challenges, the researchers remain optimistic that the benefits of the proposed system will outweigh the obstacles. They assert that it could facilitate more accurate tracking and reporting of emissions across the value chain, enhance transparency, and improve the reliability of emissions disclosures. The researchers concluded that their proposed solution could pave the way for improved assurances regarding emissions declarations, transitioning from limited to reasonable assurance.

The innovation surrounding emissions tracking technologies is currently protected by a U.S. patent, filed in May 2024, for a “System, method, and computer-readable medium for using blockchain, NFTs, and smart contracts to track and report greenhouse gas emissions.”

As noted by study author Mark Sheldon, while the energy intensity of blockchain use is a valid concern, it is not necessarily inherent to all applications. He pointed out that consensus mechanisms differ, and the proof-of-stake model employed in their proposed solution is significantly more energy-efficient than the proof-of-work model associated with cryptocurrencies like Bitcoin. Following a recent transition to proof-of-stake, the Ethereum blockchain has reported a reduction of 99% in energy usage, emphasising the potential for environmentally friendly applications in emissions tracking.

Source: Noah Wire Services