How blockchain creates accountability in climate risk

As the world battles climate change, the role of technology in mitigating its effects becomes 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, meaning that no single entity controls the network. This makes them well suited to bring transparency and accountability to complex systems such as climate risk management. 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 scaling up of climate solutions.

Parametric insurance

One of the most important consequences 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 those losses covered by insurance programs—leaving a coverage gap of roughly 58% ($181 billion). These events can cause significant damage to property and infrastructure, disrupt supply chains and even lead to loss of life. Traditional insurance products have struggled to keep up with the pace and scale of these events, leaving many individuals and organizations without coverage.

Blockchain technology can help solve this problem by enabling the creation of parametric insurance products. Parametric insurance pays out based on predefined conditions, such as the occurrence of a particular weather event or the extent 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 by using smart contracts.

For example, a smart contract-enabled parametric insurance product could be designed to automatically pay out to farmers in the event of 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 a coded 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 trust between the insurer and the insured, reduce disputes and enable further widespread use of these critical risk management products.

Transparency

Reducing greenhouse gas emissions is one of the most critical actions needed to mitigate the effects of climate change. One way to stimulate emission 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 one investigation by The Guardian found that nearly 90% of the carbon offsets sold by Verra, the leading VCM certifier, are essentially worthless and do not represent legitimate emissions reductions.

Blockchain technology can address these challenges by enabling the creation of a transparent and reliable digital market for carbon credits. By creating an immutable record of carbon credits on blockchains, buyers and sellers can be sure that the credits they are buying represent legitimate emissions reductions. In addition, smart contracts can automate the process of verifying emission reductions, reduce the need for intermediaries and increase efficiency.

For example, a blockchain-based carbon market could enable a company to buy carbon credits from a farmer who has implemented sustainable agricultural practices that reduce emissions. The blockchain will track the issuance and transfer of carbon credits, provide a transparent and reliable overview of emission reductions and ensure that a carbon credit cannot be sold to multiple buyers. This will enable the company to achieve its sustainability goals, while also providing a source of income for the farmer, and stimulating further emission 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 reliable records of transactions, blockchain can help stakeholders better understand the environmental and social impact of their supply chains. This in turn can help drive more responsible and sustainable business practices.

Blockchains can also enable greater accountability in a company’s climate risk management by providing a transparent overview of a company’s environmental impact. This can help 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 for traceability in the supply chain. By tracking the movement of goods and materials from source to final product, blockchain can help identify areas where environmental and social risks may be present. This can enable companies to take measures to manage 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 effects of climate change. As the climate crisis becomes more urgent, it is important that we explore the potential of blockchain and other emerging technologies such as AI and machine learning to drive effective and verifiable climate action.