28 Aug How blockchain could ease emissions tracking
Blockchain could be a nifty solution to tracking and taxing carbon emissions – a problem facing oil and gas, as well as the rest of Canadian industry. Here’s how.
The government position
Canada’s governments have adopted blunt instrument approaches to driving behavior change in carbon use. Some provinces are going with cap-and-trade schemes. Others are collecting a carbon tax on fossil fuels. Finally, the federal government will levy a tax on fuel where provinces have failed to act, to ensure equality across the country.
By taxing fossil fuels, the government takes aim at the biggest source of greenhouse gas emissions that we can control. However, the pressure will continue on industry to tightly monitor all their other GHG emissions and to report on those emissions so that companies do not relax their vigilance on operations to compensate for an increase in tax levies on fuel inputs.
There are many sources of green house gas emissions that are not fuel based, but are still problematic. In oil and gas, the equipment can be leaky. Valves, pipelines, tanks, and manifolds all have joints and interconnects, various moving parts, demanding use profiles, and are subjected to extremes in the environment. Some equipment is even designed to use minute amounts of gas under pressure to, say, open or close a valve, and that gas is discharged to the atmosphere.
I would not be surprised to learn that 80% of the emissions come from just 20% of the equipment. Measuring the emissions from the 20% is the challenge. Emissions are measured in a variety of ways using a range of sensors and equipment, satellite data, and engineering best guess. The data is not neat and tidy, since the emissions are hard to measure accurately.
Meanwhile, our governments are at cross purposes of their own making. They don’t want to appear to be soft on emissions as that creates its own pressures internationally, and so will want to see progress on the climate file. They will also become reliant on the tax revenues so generated, and may be motivated to increase both the tax rate and the sources of emissions to be taxed. They also don’t want to crush jobs in Canada’s important industries that are fossil fuel intense (oil and gas, manufacturing, transportation).
Some government departments that are measured on the provision of solutions to climate challenges will want to portray Canada as constantly improving its emissions (that is, keep the measured emissions volumes small). Other departments that are supposed to foster Canadian competitiveness and energy exports will want to minimize the impact of new taxes and will want to see a looser line on the climate file.
One thing is certain – the tax scheme rewards those who do not use fossil fuels and penalizes those who do. The right long term change to make, therefore, is to abandon fossil fuels which is going to be impractical for many industrial applications (baking) or take too long (adoption of electric trucks).
In my view, taxes on inputs are not a very precise way to drive innovation and adopt change. Taxes crowd out those emission solutions that are the result of changes to engine technology or exhaust treatment or carbon capture that reduce or eliminate emissions.
Lessons from Volkswagen
The Volkswagen diesel scandal has taught us that even well intentioned, principled and highly respected organizations can lose sight of their North Star. Volkswagen’s engineers, in a drive to be the world’s largest automaker, incorporated software into their diesel vehicles that yielded the false but desired measure of emissions that allowed their vehicles to be branded as best in class for fuel economy and emissions intensity.
I take a few lessons from this:
- Counting on people deep in the organization to hit demanding production targets and low emissions can cause choice conflicts
- The devices used for measurement must be accurate; their internals must be free from tampering, and the data generated by the measurement device or sensor cannot be subject to manipulation
- Self reporting in the automotive sector failed the test of compliance
- In the US, fines and jail time now await those who misrepresent climate data
- Activists and regulators are now alert to the possibility that emissions monitoring is a venue where misrepresentation can happen
- Taxes on emissions will rise to $50/ton in a few years time, creating an economic pressure on those organizations unable or unwilling to change their behavior or fuel choices.
We have a system, therefore, that features multiple points of low trust, high administrative costs, poor quality data that can be misrepresented, and intermediaries with a vested interest in exacting rents (tax).
Taxing Emissions rather than Fuel
Blockchain technology presents an intriguing and advanced solution to many of the key challenges of emissions monitoring and taxation.
Imagine a scenario where an independent sensor (or sensors) is placed near some plant or piece of equipment where it can measure the volume of emissions per unit time, the nature of those emissions (CO2, methane or other), the date and time of the measurement, the location of the sensor, and the nature of the equipment being monitored.
The sheer volume of data from hundreds of thousands of sensors, and how that data is changing over time, will overwhelm human analysis. And the costs to collect, analyse, report, supervise and monitor will be considerable. Errors will be costly, in brand, tax and penalties.
As a poorly understood problem, with no easy solutions, oil and gas companies will resort to spreadsheet based data capture and analysis.
Let’s introduce blockchain technology to this problem:
- To assure device integrity: the devices used to measure emissions can check that their internals are current by attempting to write a message about the state of its internals to a device integrity blockchain application. The blockchain can accept the message if the internals match the internals of other true measurement devices. A device that has been altered would find its message rejected by the blockchain, alerting company management.
- To minimise data manipulation: devices could record the actual measured emissions (volume, location, type, source, date stamp) to an emission blockchain application that is visible and transparent. The emission data can no longer be tampered with, adjusted or deleted.
- To simply tax administration: a smart contract on the emission blockchain could trigger an automatic tax payment based on the measured results once certain conditions are met (a cumulative threshold is reached, or a date has been met).
- To ease tax collection and disputes: tax authorities could also read the emission blockchain and determine how much tax they should expect to collect, on what basis, and from who.
- To simplify overall reporting on the climate file: various government departments that rely on climate information could work with a single reliable registry of emissions data.
- To advance the climate agenda: the data from the blockchain could be subjected to independent analysis to understand emissions hot spots, bad actors in plant and equipment, variances over time suggestive of either good or bad decisions, opportunities for high impact investment, and an overall sharpening of climate understanding.
- To capture competitive advantage: some companies may be able to use their blockchain data to precisely and convincingly prove that their emissions profile has improved, thus creating the potential for differentiating their investment profile.
The requirement to measure emissions timely and accurately is a business reality in Canada for the foreseeable future. Without some forethought, each company will be left to its own devices to solve this problem.
Certainly for oil and gas, carbon emissions are now a true and measurable cost of doing business, much like the use of that other “free” good, water. There is, frankly, limited upside for individual companies to devote much of their precious resources building elaborate solutions to something that customers are unwilling to pay for. Coming together to create a common solution will benefit the industry.
The next moves should include some of the following actions:
Cloud computing. The two blockchain solutions that I’ve outlined (a sensor integrity blockchain and an emissions blockchain), would rely on cloud computing to work properly. The blockchains would reside in the cloud. Alberta’s oil and gas companies need to step up their adoption of cloud computing.
Ubiquitous networks. For remote sensors to access the blockchain applications to test for integrity and to capture data, the industry needs to adopt better network solutions and technologies that help with managing in this internet of things solution.
Proof of concept. The industry needs a champion to drive this pan-sector solution, and should look to one of its many R&D hubs (university, trade association or other) to drive out an initial proof of concept to understand the viability of blockchain in this scenario.
Addendum: This has been edited from the original version as I was unhappy with the inference that industrial cheating is commonplace. It is not. While there are plenty of examples of Canadian oil and gas companies playing fast and loose with the rules, most strive to satisfy the regulatory requirement as a matter of business imperative.