Innovation Tagline: Using the blockchain to create supply chain incentives to reduce the 1 Gt CO2e of Greenhouse Gas emissions
Project Keywords: #NFT #TokenEconomy #ValueChain #CarbonEmissions #Flaring #Scope3
Project Members
Problem
While the world tries to avert the worst of climate change, most scenarios still show the oil and gas industry remaining a significant part of the global energy system for several decades to come. During this transition, however, we must do everything possible to reduce the climate impact from continued use of fossil fuels.
A top priority is to reduce the amount of methane that is leaked and flared during the production of oil and natural gas. Methane trapped in the geological formations of oil and gas wells, is often flared or vented. This is done as a safety measure, but also simply because infrastructure is not available to gather, process and distribute the methane as natural gas for a profit. This is often the case in remote and undeveloped areas where there is a lack of pipelines and other infrastructure to transport the natural gas. In those cases, it is simply burned (flared) or, worse still, released directly to the atmosphere.
Because methane has 25 times the climate impact of CO2, this methane leakage and flaring is a major source of global Greenhouse Gas (GHG) emissions. The Environmental Defense Fund estimates the total global oil and gas methane leakage and flaring at between 250 Mt to 1 Gt CO2e per year (Figure 1). The latter amount is greater than the total emissions of Germany or all the world's airlines combined.
Figure 1 Annual flaring and associated gas use, from EDF (2021)
In recent years, there has been a concerted effort on the part of The Environmental Defense Fund, major oil companies and the Oil and Gas Climate Initiative, international organizations such as the United Nations Environmental Program and the World Bank, and institutional investors to reduce methane leakage and flaring. Nevertheless, this remains a difficult goal to achieve because of a lack of data and proper financial incentives. Many oil wells do not have equipment to record how they are handling excess underground methane, and many companies do not report on the level of the methane that is released. As a result, each year a significant amount of methane is wasted through venting, leakage and flaring, rather than being used as a valuable commodity (natural gas). measuring the value of the wasted methane is needed to determine the returns from investing in infrastructure to capture it.
Fortunately, there has been progress. EDF (2021) is urging investors to engage energy companies to improve flaring transparency, requiring collaboration to establish clear metrics. Several new data sources ranging from satellite imagery to instrumentation at oil wells will be made available. Independent tracking tools are being introduced (for waste emissions). Converting this data into useful fuel value chain metrics requires integration with production data. Flaring Monitor, an open source project, has made some progress on this, and will provide key part of our solution to bridge reporting silos for waste emissions. (this effort could align with the World Bank's Imported Flared Gas Index).
In this project, we will work on using the blockchain to provide trusted data on methane and transfer that data to fuel consumers to incentivize methane reduction at the point of production. The first part of the project will integrate data from different sources to arrive at the best estimate of the methane emissions of a facility. The second part of the project will use Value chain (scope 3) reporting standards to calculate the impact of methane emissions reduction on the fuel used by customers. It could then be used as part of the Supply Chain Decarbonization Project to incentivize the use of fuels with lower embedded emissions.
Through this we hope to help provide greater visiblity to the oil producers, their investors, and government agencies and NGO's involved in reducing methane flaring and leakage. We also hope to create an additional lever, where fuel consumers could actively participate in reducing methane emissions.
Solution
We propose to use a blockchain oracle, such as Chainlink, to integrate the different sources of data from methane emissions. Several independent sources, such as GGFR, Flaring Monitor, MethaneSat, UNEP IMEO, flare-intel, could be combined with company reported figures to arrive at an answer. A blockchain oracle is designed for this purpose: It assigns tokens for each source of data and weighs the data according to the tokens held by its source. It could then also increase or decrease the tokens for each data source as the data is subsequently validated or refuted.
Once the combined data is used to derive the methane emissions of an oil producing facility, a non-fungible token (NFT) contract could track the additional emissions from the fuel produced. This carbon tracker NFT (C-NFT) has been implemented using the ERC-721 standard as part of the Hyperledger Labs Net Emission Token (NET) network to issue, transfer, and retire carbon tokens by different accounts. For example:
- Voluntary Carbon Tracker Token (VCT) could be used by industry members to note the amount of methane emissions associated with the oil or natural gas produced at the well.
- Audited Emission Certificate (AEC) could then be assigned to energy consumers based on the VCT. Fuel from high methane wells would have higher embedded emission for whoever consumes it.
- Credits similar could be issued to transfer the lower embedded methane emissions from one party to another, helping them meet their emissions reduction goals while providing incentives to reduce methane emissions at the well.
In this example of an energy value chain, imagine an oil & gas producer or well extracts the crude oil from the ground. A utility power plant then produces the heat and electricity which is used by a refinery to process the crude oil into fuel products, such as gasoline for cars, diesel for heavy transportation, and kerosene or jet fuel for aircraft. A C-NFT provides a digital emission profile for accounts owned by facilities, e.g., oil and gas field, power plant, refinery (Figure 2):
Figure 2 C-NFT illustration
Each step in this value chain (reporting "silo") consists of inputs and outputs, which are transacted using the Net Emissions Token (NET) network, in Carbon Dioxide equivalent (CO2e) of Greenhouse Gas emissions. Based on the Value chain (scope 3) reporting standards:
- Inputs are retired NETs for direct (scope 1) emissions due to fuel burned or indirect emissions for purchased energy (scope 2) or downstream emissions (scope 3).
- Outputs are tokens transferred downstream to the users of the fuel, such as freight companies or airlines.
- VCT are transferred as the CO2e of fuels sold to consumers (used in commercial trade).
- AEC are indirect emissions, e.g., from selling electricity/heat
Emission profiles can explicitly reference a source C-NFT (arrows in Figure 2) to track embedded emissions, for example the crude oil or the heat and electricity supplied by the power plant that went into the finished products.
In practice, we envision a supplier sends an emissions tokens (e.g. VCT) from this facility's emission profile to its customer using the oracle-validated methane flaring data. This emissions token is an NFT which allows organizations to bridge the internal boundaries of traditional data silos to get a complete view of the energy value chain. It is attached to each quantity of fuel it sells so that the consumer of the fuel could correctly calculate the emissions of the fuel it uses.
The consumer (e.g., Fuel user such as a freight carrier or airline) could then identify the embedded waste metahne emissions through public view functions of the NFT, such as carbon intensity metrics:
- CI of oil & gas supplied (Fuel trade out) -> flared gas + leakage / fuel outputs
- CI of Refined fuel trade -> other emissions (e.g., electricity/heat, flue gases) / refined fuel out
The consumer could also reduce its carbon intensity (CI) by purchasing a certificate from a low CI producer. This certificate could come in two forms: A certificate of carbon intensity, which would help producers with lower carbon intensity to obtain greater value for their output, or an actual offset, to provide funding for producers with high carbon intensity to reduce it.
A certificate of carbon intensity is simply a transferrable claim of origin backed up by data. It is similar to a Renewable Energy Certificate (REC), but whereas a REC attests that electricity produced is from a renewable source, the certificate of carbon intensity attests the carbon intensity of the crude petroleum. It could then be transferred between two users of fuel so that a user which is looking to reduce its emissions footprint could pay for a lower carbon fuel, without physically taking delivery of it. This would require simultaneously subtracting the embedded emissions of the fuel inventory of the consumer and adding back it to the embedded emissions of the fuel inventory of the producer. In future transactions, the producer would have to attach a higher CI to the fuel it sells as it sells certificates of lower embedded emissions. This creates a mechanism where a producer of lower carbon fuels could monetize greater value for their output.
In contrast, an offset is an accounting of emissions reduction in return for an investment, such as equipment for capturing, storing, and transporting methane This creates an incentive to make capital investments at high carbon intensity producers to reduce them. To be valid, an offset must follow the general principles of carbon offsets, such as Additionality, Correct Baseline, Permanence, Real, and Leakage protection – In other words, the emissions reductions must not have occurred without the investment from the buyers of the offsets. The offset would be a token which would transfer the emissions reductions to the buyers of the offsets, which again could be a fuel user.
Figure 3 Architecture for verifying waste emission.
Figure 3 depicts an ongoing effort by the blockchain carbon accounting team to collect emission data points into a database (orbitDB) using IPFS or Fabric. These are connected to Ethereum contracts (NET/C-NFT) using a ChainLink oracle service or DAO.
The next step will involve building tools to pull in different data sources to support independent auditing and verification (MRV cycle):
- company voluntary reports/ ERP sensors (gas flaring)
- independent tracking service focusing on Flaring Monitor
Other Value chain scope 3 tools/services
To our knowledge there is no system focused designed to bridge the MRV systems used by organizations to direclty identify value chain emissions.
The GHG Protocol provides a free tool to help measures cross-sector value-chain impacts. It provides inputs typically used in LCA practices, which may only provide historic/aggregate data from several years ago. It is more focused on providing measures for individual organizations as opposed to connecting reporting activities. However, according to the Carbon Disclosure Project (CDP), value chain reporting has not been very successful in reducing emissions (Patchell 2018).
Value chain reporting may use the Life Cycle Assessment (LCA) practice, which can be difficult for organizations to implement on their:
- Access the credible metrics restricted by data silos across emission measurement, reporting and verification (MRV) systems
- Rely on historic data based that may be several years old
- Employ of on model estimates that may be subjective and hard to validate
LCA applied to fuel carbon intensity standards have no been very effective in mitigating emissions (Plevin et al 2017).
CarbonChain is a comparable solution to help organizations assess emission impacts across commodity supply chains. However, it operates as a centralized services, focusing on gathering data into a bigger silo not connecting them.
Minimum viable product
Our target product is a portal where data from multiple sources of methane emissions could be viewed, and the final methane emissions for a production facility is calculated. Then an oil & gas producer could also:
- registers as an industry dealer of the NET network
- construct a (voluntary) emission profile (C-NFT) for current inventories (using VCT) based on the calculated methane emissions
- connects its C-NFT profile to the waste emission verification system (Figure 3)
- list inventories as digital VCT that can be transferred to other industry/consumer accounts.
Accomplishment and Team
Our team-members has been working on the Supply Chain Decarbonization Project for some time, with the Operating System for Climate Action providing much of the underlying code needed for this challenge.
Bertrand WILLIAMSRIOUX is an independent consultant with 15 years of experience in energy economics, climate science and computer programming. He has worked as an analyst and advisor on energy market and climate policy issues, and is currently creating a startup offering carbon accounting and management services for energy intensive commodity industries.
Si Chen is the founder of Open Source Strategies, Inc. and coordinates the Carbon Accounting and Certification WG of the hyplerledger Climate Action and Accounting (CA2 SIG). He is the author of the open source book, Open Climate Investing, and a co-editor of an upcoming book "Sustainable Carbon Economy with Blockchain: The Role of Oil and Gas Industry in The Energy Transition".
Sherwood Moore is currently acting Co-chair of the Climate Action and Accounting Special Interest Group (CA2SIG). He holds a Masters in Business Administration with 10+ years of experience planning and executing Go-to-Market strategies for early stage tech start-ups. He also has expertise in the field of internet governance, where he supports ICANN's (Internet Corporation for Assigned Names and Numbers) multistakeholder decision-making model to help the global community reach consensus around the protocols, standards and policies needed to support the security, stability and resiliency of the internet's Domain Name System.
b. Identify talent/resource gaps and needs (Do you need more support developing the blockchain solution? Do you need support with front end development? Do you need support developing the business model?)