Using the Blockchain to Reduce Carbon Emissions in the Visitor Economy

Abstract

The visitor economy is responsible for a substantial percentage of the global carbon footprint. The mechanisms used to decarbonize it are insufficient, and the industry is relying on carbon trading with substandard credits that allow businesses to outsource the responsibility to decarbonize. We aim to transform carbon markets, help finance climate investments, and support decarbonization strategies. We identify and define the problem, outline the components and their interactions, and develop a conceptual model to transform carbon markets. The new, blockchain-based Carbon Tokenomics Model rolls out a decentralized database to store, trade, and manage carbon credits, with the goal of enabling sustainable climate finance investment. We outline the criteria needed for an industry-wide carbon calculator. We explain the process needed to increase rigor in climate investments in the visitor economy and introduce a delegated Proof of Commitment consensus mechanism. Our inclusive and transparent model illustrates how to reduce transaction costs and how to build consumer and industry trust, generating much-needed investments for decarbonization.

1. Introduction

The visitor economy (VE), defined as tourism and its value chain, is a major driver of income and jobs in many countries. Simultaneously, it is a substantial contributor to greenhouse gas emissions. Current technologies are unable to deliver carbon dioxide equivalent (CO₂-e) reductions or removals in line with the Paris Agreement targets [1,2]. The current trajectory indicates that the tourism industry is likely to deplete 40% of society’s total CO₂-e budget over the period of 2022–2050 in order to not exceed 1.5 °C [3].

Current efforts to finance decarbonization fall short, and more effective and efficient methods are required in order to mobilize public and private finance to address the climate crisis [4]. Organizations can offset or neutralize emissions that cannot be abated by buying carbon credits (i.e., tradeable permits that allow organizations or countries to produce carbon emissions) from Green Project providers, who reduce or remove CO₂-e on their behalf. However, critics have pointed to various conceptual flaws in carbon trading in the context of ‘net zero emissions’ [5,6]. Issuers of carbon offsetting standards, which are meant to be stewards of these climate investments, have been criticized for not ensuring the integrity, longevity, and additionality of the projects they have chosen to invest in [7,8,9,10,11]. Voluntary carbon offsetting, as we know it, has been severely criticized for failing to deliver the CO₂-e reductions promised [10], instead supporting business as usual [7].

A case in point is the Carbon Offset and Reduction Scheme for International Aviation (CORSIA), which is a voluntary system intending to offset only additional annual emissions beyond the 2019–2020 benchmark (adjusted after COVID-19). CORSIA has been criticized for: (i) its lack of effect on net emission reductions [12]; (ii) its diversion from regulations that encourage, or require, mitigation of gross emissions at source [13]; and (iii) its failure to eliminate the risk of double counting, whereby carbon credits retired by airlines might also be used by countries to balance their national greenhouse gas inventories [14]. Reducing demand for air travel and the VE is politically challenging [3]. Hence, we will need to find climate financing solutions within the current system to serve as interim solutions [4].

We acknowledge that the decarbonization of the VE is a wicked problem, which is a complex and challenging task that is difficult or impossible to solve due to incomplete, contradictory, and changing requirements. Hence, we propose the following research question:

How can a carbon offset model for the VE be designed that is transparent, traceable, efficient, fair, and effective?

The proposed conceptual model is the first step in the Design Science Research methodology of creating a conceptual model to gather stakeholder feedback on token creation, management, and removal from the system. We followed the Design Science Research methodology [15] to create new iterations of the artifact, which was subsequently presented to stakeholders to gather feedback. This study is the result of two years of teamwork to develop a working concept for a mechanism that can generate climate investments. The conceptual presentation of the Carbon Tokenomics Model in this journal is the first iteration, and the academic and industry response to this paper will inform the design of a proof of concept. The model was unveiled at COP28 in Dubai in November 2023 and then ITB Berlin in March 2024. It has already attracted attention from numerous industry and government stakeholders, as well as from international, specialist, environmental media. As the team moves from the conceptualization to the prototyping stage, we share the logic behind its development in the hope to generate a constructive dialogue between academics that helps us test its feasibility.

2. Carbon Tokenomics Model (CTM)

We suggest developing a blockchain-based financial ecosystem in combination with smart contracts to enable transparent, traceable, and secure peer-to-peer financial transactions and services. To achieve this, we developed an innovative Carbon Tokenomics Model (CTM) to help finance climate projects from funds raised in the VE, while simultaneously remedying the shortcomings of previous approaches.

Tokenomics refers to the science of token creation, management, and removal from the system [16]. Our proposed CTM uses blockchain technology (i.e., a decentralized ledger) to generate, store, trade, and erase carbon credits, and to manage an efficient incentive mechanism that is supported by artificial intelligence, with the goal of creating traceable, real, and permanent climate finance investments. This model can deliver benefits for VE clients and service providers by generating investments for commercial decarbonization projects while offering transparent processes and low transaction costs. Climate finance offers an opportunity to generate much-needed investment for projects that offer promise in decarbonizing and the likelihood of being scalable.

The current uptake of voluntary carbon offsetting in the VE is small, due to: (i) customers believing that businesses should bear most of the carbon offset costs (financial concern); (ii) a lack of confidence in carbon offset projects (trust concern); and (iii) the misuse of carbon offsetting to make claims that the business has achieved carbon reductions (greenwashing concern) [5,6,7,8,9,10,11]. We argue that the proposed CTM can help to address all these concerns.

Figure 1 illustrates how to generate, store, and trade the CArbon Token (CAT) in the proposed CTM, and shows the circularity of the model, which starts with the Client. The green arrows (Figure 1, right) represent financial transactions funding a Green Project up to the tokenization of its value in CATs. The entities in the middle column of the model are informed by services provided by the entities on the right-hand side of the model, which are independent, but necessary for the CTM to operate. The blue arrows (Figure 1, left) depict ‘on-chain’ activities (i.e., steps involved in the creation of CATs utilizing smart contracts on the blockchain).

When the Client pays an amount (calculated by the carbon footprint calculator) to the Service Provider, as an extra fee correlated with the quantity of CO₂-e emissions released into the atmosphere by the service accessed, three things happen instantly. First, the money is transferred directly to the Green Holding account. Second, the blockchain registers data for both the new Client and the new Service Provider, and the data feed several artificial intelligence systems deployed on the blockchain, which oversee monitoring issues and services provided by the blockchain in different circumstances. Third, the blockchain releases a Smart Contract that guarantees all the rights and obligations of both sides (Client and CTM) and puts into movement all the procedures required to provide the equivalent value of the CAT back to the Client. Quantifiable and assured carbon removals by Green Projects result in carbon credits, which are tokenized in the blockchain to generate CATs for the Client.

Next, we discuss three core components of our proposed model that we argue can substantially improve functionalities and that have proven to be problematic for current carbon trading models: (i) the carbon footprint calculator; (ii) climate investments; and (iii) the governance mechanism.

3. The Three Core Components of CTM

3.1. Carbon Accounting: The Carbon Footprint Calculator

The CTM needs a source of information regarding each VE service provider’s CO₂-e emissions that provides streamlined calculation methods, with low-cost data collection and retrieval in the marketplace. We propose that an independent entity must own the intellectual property for the carbon footprint calculations and provide carbon data to those VE entities that agree to take part in the CTM through a data interface system with functionalities of minting (verified carbon offsets on Blockchain—CAT) and burning (selling CAT, or conversion to INT) carbon tokens, which is commonplace in blockchains [17]. The CTM needs a source of information regarding each VE service provider’s CO₂-e emissions that provides streamlined calculation methods, with low-cost data collection and retrieval in the marketplace, while remaining scientifically robust. At present, approximately 35 carbon calculators have been tailored for tourism enterprises and destinations, with an additional 100+ devised for clients to understand the carbon footprint for one or multiple components of a trip [18]. There is little standardization or consensus between the different calculators, which limits the comparability of the results, and only a few studies have published the details of the methodologies used [19,20]. When calculators charge for access, they may be unaffordable to SMEs or cater to their needs poorly, and if they are created without ongoing funding, they are not maintained or updated [18]. To solve these issues, we propose an optimal carbon footprint measurement system which needs to encompass three elements.

First is a standardized approach for business-level CO₂-e emission measurement for each VE subsector. Tourism carbon calculators yield significant variation in emissions results due to the different nature of the emissions included (scope 1, 2, and 3), the quality of emissions metrics, and the scope of climate impacts considered (e.g., effects from non-CO₂ emissions via contrail cirrus and cirrus cloudiness) [18]. One international flight between London and Faro can range from 0.3 to 1.5 tons of CO₂-e (a 540% variance), depending on the calculators used [19].

Second, the carbon footprint calculator requires a comprehensive, global database of business emission metrics with a unifying accounting standard that elucidates roles, boundaries, emission types, data sources, and utilized metrics (e.g., absolute versus relative) [18]. Given the international nature of travel, the calculator needs to recognize the regional differences in climate impact for carbon calculation. For example, the carbon intensity of electricity, a main energy source for hotels, attractions, and souvenir stores, differs greatly among countries. It can range from the renewable-focused Finland, at 66 g CO₂-e/kWh, to the coal-reliant South Africa, with 719 g CO₂-e/kWh [21]. Given the wide spectrum of tourism businesses worldwide, the carbon footprint measurement system mandates a holistic database of country-specific emission matrices. This allows for accurate reflections based on local parameters. For air transport, this VE subsector now adopts the CORSIA’s Eligible Fuels Life Cycle Assessment Methodology as the default framework for airline emission calculation, while consumers can see comparable flight emissions, for example, in Google Flights and Skyscanner [22,23]. For all other subsectors (land and water transport, accommodation, restaurants, tour operator, recreational activity, attractions, and retailing stores), a standardized, globally recognized accounting approach is required based on the ISO 14040 [24] and ISO 14044 [25] Life Cycle Assessment standard principles. This would help to ensure the rigor and compatibility of the results.

Third, the calculator needs to encompass a user-friendly interface to evaluate and record CO₂-e emissions effortlessly. This would allow data to be shared amongst online distribution channels for tourism, such as Expedia or Booking.com, with an interoperable system and seamless application programming interfaces that would allow the industry to integrate product, energy use, and carbon data [26]. Engaging with carbon calculators often demands exhaustive data input, and an optimal interface should strike a balance between input effort and output accuracy. The shared and trusted environment of a blockchain would be effective and efficient for carbon accounting [27]. Pairing blockchain with digital accounting tools would improve the measurability and traceability of sustainability information, allowing corporations to better respond to the need for standardized corporate sustainability reporting [28].

Currently, there is no standard to guide us on both intellectual property and carbon footprint information ownership. We suggest that some elements of the calculator could be designated as Creative Commons and made public following a freemium model. Transparency of methodology is required for credibility; however, some of the requisite data may be proprietary, and the user interface should be considered proprietary intellectual property owned by the agency managing the CTM system. In addition, some transaction costs should be charged, as this would support the development and ongoing maintenance of the calculator.

Emissions from Operating CTM Blockchain Infrastructure

We further reflect on the energy requirements from operating the CTM blockchain: First, the CO₂-e emissions of blockchain technology have been shown to be very significant, with Bitcoin estimated to consume more than 87.1 TWh of electrical energy annually [29]. However, the vast majority of the documented energy consumption of blockchain technology results from use of the Proof-of-Work consensus mechanism, with some alternative mechanisms being far less energy-intensive [30,31]. For example [32], it is estimated that Ethereum’s energy usage was reduced by 99.95% by switching from a Proof-of-Work to Proof-of-Stake consensus mechanism. In Section 3.3, we show how the proposed consensus mechanism in the CTM differs from the energy-hungry Proof-of-Work approach.

Second, our society is projected to generate over 10 billion personal trips annually in the post-COVID era [33]. Even with minimal market penetration of VE, the CTM system will demand substantial computational resources. Emissions from operating the CTM system will be quantified and disclosed, with offsetting costs internalized through carbon fees paid within the system itself. These costs will not be passed on to consumers, but will be absorbed as part of the social responsibility of managing the CTM system.

3.2. Carbon Investment: The Proposed Methodology to Finance Climate Projects

Each carbon credit represents a reduction, avoidance, or removal of one metric ton of CO₂-e from the atmosphere. However, the voluntary carbon offsetting market is flooded with carbon credits that overstate their impact [34,35]. Many projects backed by these carbon credits lack additionality: optimistically, only 20% of the offsets on the market could be reducing emissions [10]. A growing concern regarding transparency in the generation and effectiveness of carbon credits calls for more transparent and robust accounting and evaluation [9,11]. We argue that the CTM can provide this.

We are not the first team to propose the use of blockchain models to trade carbon (e.g., [36,37,38,39]). However, only a handful of the 39 blockchain-powered carbon market projects in existence by 2022 had reached the stage of being technology-ready solutions for carbon offset tracking and trading [40]. Even the most advanced applications (e.g., Klima DAO, Toucan, Single.Earth) only improve the marketplaces through which carbon is traded, but they still trade the very carbon credits that are not fit for their purpose. Trading on a blockchain platform with the same carbon credits that have been heavily criticized for being ineffective is a flawed concept from the outset. The alternative is for the CTM to identify and invest in its own projects.

These projects need to generate both negative carbon emissions (i.e., carbon removal from the atmosphere) and profits (to keep the blockchain running and incentivize participation). Some of the projects currently used in carbon credit schemes could meet one of these two criteria and not lead to the desired quality thresholds [41]. Due to a variety of factors, such as fast-evolving technologies, policy regulations, and market conditions, we need further research to determine which projects the CTM should invest in. We propose an experiment with artificial intelligence technology to evaluate the monetary value of technology-rich startup companies [42], and adapt it to measure the likelihood of success of proposed Green projects. How the Green Holding determines how to invest in the funds raised by the Clients will be informed by two critical criteria.

First, the commercial viability of the projects will be assessed and their likelihood of generating profits will be determined by an Advisory Committee and an Investment Bank. Generating sufficient profits to cover operational costs is frequently an issue with current carbon trading models. The efficiency, transparency, and robustness of the tokenized system [28] will reduce operational costs for CTM. To be more specific: (i) by leveraging blockchain technology and smart contracts, transactions can be executed more efficiently, minimizing the required time and resources, and this efficiency will translate into cost savings for CTM; (ii) the transparency of the tokenized system not only enhances the trust and integrity of the carbon market, but also reduces the risk of costly disputes and legal challenges, ultimately lowering operational costs for the CTM; (iii) the robustness of the tokenized system can attract more investments and reduce disruptions and security breaches, thus reducing the operational costs for CTM. However, multiple layers of quality assurance will be essential to overcome the failures of current carbon offsetting investments, which are costly. Underestimating the maintenance and governance costs, verification costs, data collection and reporting costs, adoption costs, etc., for any mechanism to become scalable can explain some of the compromises made in the carbon offsetting marketplace [7,8,9,10,11].

Second, a balanced portfolio approach of guaranteed carbon reductions and carbon removals will be determined by a robust Standard Issuer. We are aware that a transition from carbon reduction and removal investments towards Net Zero is necessary, but complex [5,6]. Hence, the CTM will start by investing in carbon reduction projects that lower the overall amount of anthropogenic greenhouse gas emissions released into the atmosphere and that generate profits both to maintain and update the CTM and to incentivize Service Providers to participate. We are aware that both parties involved (the Green Project that reduces its emissions and the stakeholders in the CTM that buy the carbon credits) should reduce their emissions, and that ‘netting’ with carbon offsets is increasingly problematic [43]. As the CTM becomes established, the profits generated may be used to cross-subsidize riskier and less profitable (but more needed) carbon removal projects that actively capture and remove carbon, storing it to prevent its release back into the atmosphere (sequestration).

3.3. Carbon Trading: The Proposed Governance Mechanism

Unlike the voluntary carbon offsets in today’s market, blockchains have the capacity to provide a traceable investment for the Client, who can see how their funds are used and the changes they generate [44]. CTM aims to quantify carbon reduction or removals by Green Projects in a better way than that which is currently used by the major voluntary offset registries. The model is designed as an independent and transparent market system that ensures additionality, prevents double counting, and eliminates non-permanence risks [14]. Such a market system can be realized by a tokenized mechanism (e.g., [35,36,37,38]). First, this mechanism can ensure, through decentralized governance and Smart Contracts, that the carbon credits are only issued when predefined additionality conditions are met. Second, each carbon removal is issued a sole and unique token, thus effectively preventing double counting, which is problematic with CORSIA and other voluntary carbon offsetting schemes [14]. Third, a tokenized system can include staking mechanisms as insurance against non-permanence risks and a dynamic token supply [17] that allows the burning of tokens in response to the loss of carbon reductions/removals.

The carbon token (CAT) will be tradeable through a second-tier INvestment Token (INT) for financial activities (sell/buy, or token value exchange). We propose that the CTM will have a decentralized, independent organizational structure, and that the use of the INT will be regulated with a third-tier GOvernance Token (GOT). This decentralized, independent organization will include each internet organization with a green project in place and owning GOT. The operational setting for the decentralized independent organization will be unlimited, but its governance will be structured from the planning phase through the Smart Contracts, making it more democratic and equitable than traditional organizations. The regulatory compliance framework of INT and GOT uses a scalable and transparent consensus mechanism known as HotStuff consensus. However, the decentralized independent organization entity facilitating GOT compliance will use a reputation-based mechanism on top of the consensus protocol (HotStuff), namely, Proof of Commitment. Reputation utilizes the individual’s commitment score of their financial activities to ensure fairness in validator selection, and it can be used as an additional parameter within our consensus mechanism to mitigate security risk [45]. A governance framework uses a hybrid decentralized autonomous organization, which leverages cooperative decision making acting as a semi-autonomous construct, and so the decentralized independent organization supports transparent and traceable financial activities for the Green Project companies.

We propose that trading will take place using Radix’s consensus protocol [46], which uses the HotStuff consensus mechanism [47]. Radix aligns with our established criteria for blockchain selection, as it addresses the deficiencies in balancing atomic composability [48,49] and scalability [50,51] observed in existing blockchains such as Ethereum, Solana, and Avalanche. In CTM, the interplay and transaction states (alteration in transaction data) across each tier of the tokens follow varying levels of operations, and so the Radix’s consensus protocol fulfills the operational complexity to cater transactions via multi-tier tokens. HotStuff is a streamlined voting process that ensures everyone has their say, decisions are made quickly, and the system keeps running smoothly. We outline the HotStuff consensus process in Figure 2. For each new transaction event (called View Event in blockchain language), an individual (known as Leader or Proposer) proposes a decision (a block), and everyone else votes on it. This keeps the system fair and prevents anyone from having too much power. To ensure fairness in voting, HotStuff uses a receipt system showing who voted for what, which provides transparency and prevents fraud, called a Quorum Certificate (QC). HotStuff works even if some people are slow or offline. This makes it robust and dependable.

To enable transparency, the CTM will employ Proof of Commitment to incorporate transactional activity identifiers for GOT holders via commitment scores, reflecting their feedback and perceptions of the individual’s reputation. In Proof of Commitment, the creation of blocks is random and sequential. Upon successful commitment of a block, nodes (computers that synchronize with a blockchain network to store transactions record) are entitled to collect the transaction fees associated with the transactions within that block. The likelihood of a node being selected to append a block is contingent on its commitment score, with wallets possessing higher commitment scores having an increased probability of being chosen. The notion of commitment scores on the Radix blockchain network is utilized to estimate real-time reputation scores for INT holders. The process of reputation scores is based on data from the collected commitment scores, which will be fed as an input to the CTM’s reputational artificial intelligence model to dynamically assess CTM users. These scores can be integrated into the decentralized application’s governance mechanisms (such as within the decentralized independent organization), thus influencing decision making and rewarding, or penalizing, users based on their reputation.

Clients involved in carbon offsetting and tokenization activities will adhere to the prerequisites introduced within the regime of the CTM. During every transaction verification process, participating Clients will receive rewards from the network. Clients meeting the stipulated eligibility criteria for validator membership within the blockchain network will be concurrently regarded as validators. These entities will assume the responsibility of creating blocks for each network transaction, with one validator generating a singular block subject to subsequent validation by the entire validator network. The validator responsible for producing the valid block will be subsequently rewarded. Notably, validators, being the predominant token holders in the network, will receive more substantial rewards whenever they partake in block creation compared to the rewards which clients receive for individual transactions [52]. To increase the rigor of the CTM, we propose a secure and scalable ‘delegated’ version of Proof of Commitment to solve the problem of malicious actors within the blockchain network [53]. The delegated Proof of Commitment will employ a distinctive algorithm designed to ascertain the significance of each participant to the network.

4. Conclusions

In this paper, we describe how an integrity-focused, voluntary carbon market would serve as an interim and supplementary mechanism to lower and eliminate emissions beyond what would be achievable otherwise, while also directing funding toward climate-resilient development in the VE. The CTM that we outlined in this paper is the first iteration of a concept that will change over time, and at this stage, we focus on three key elements: carbon accounting, carbon investment, and carbon trading.

Academics have developed models proposing the use of blockchains to power carbon market mechanisms and to make trading faster and more transparent (e.g., [36,37,38,39]), and some early commercial applications are already in the marketplace [40]. However, these do not address the fundamental shortcoming of the unreliability of carbon credits [10], nor do they determine the value of carbon tokens in the blockchain [54]. Our proposed CTM model addresses these issues by showing how it is transparent, traceable, efficient, fair, and effective. The increasing pressures for transparency and traceability of carbon calculations, the mechanisms to reduce carbon emissions, and the reliability of carbon trading make our study timely. In this regard, the EU legislation part of the Green Claims Directive will increase the urgency of developing reliable and transparent carbon accounting methods to reduce greenwashing [55], and the private sector is facing more threats of lawsuits for their inappropriate mechanisms and carbon neutrality claims [56].

The model is in its early stages, and we acknowledge some limitations, especially given the focus on the VE that depends on high levels of mobility. One such limitation pertains to the development of mechanisms to verify the actual reduction in the carbon footprint. In this regard, we believe that blockchain technology will be able to increase the traceability and transparency of climate investments, as illustrated in this paper, but further research is needed to verify and assess our claims.

To meet the Paris Agreement targets, there will need to be a reduction in international travel (with the present technology). Our model applies to the type of traveling that cannot and should not be reduced to avoid complete economic disruption and collapse. However, the tools currently used to account for and manage the carbon footprint are not fit for the purpose [18], and there is both a lack of appetite to curb growth and limited scope to make the technological advances which are required [13,57,58]. Furthermore, while we appreciate the valid criticisms of voluntary carbon offsetting as we know it [7,10,12,13], we argue that the model outlined here is needed because, without it, the VE will not achieve the 2030 targets required to make a fair contribution to the Paris Agreement goals [1,3]. Finally, we acknowledge that the financing of climate protection and credit-generating projects is an interim contribution to global climate goals, whilst ‘in-sector’ carbon reductions can be realized, the cap-and-trade systems can be upgraded, and systems can be shifted away from activities that generate hard-to-abate emissions.