In recent years, 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 have made an effort 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 methane, and many companies simply do not report . Even if they do this information is stuck in data silos, making it difficult to share and verify reported values. As a result, each year at least $50 billion worth of methane is flared rather than being sold as a commodity (natural gas) and extracting rents from investing in infrastructure to capture it.
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In this project, we will work on using blockchain technology 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 fuels delivered to customers. It could then be used as part of the Supply Chain Decarbonization Project to incentivize the use of fuels with lower embedded emissions.
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A CI certificate is simply a transferrable claim of origin backed up by data. The NFT(s) provide a methane performance certificates for the output fuel tokens, helping producers with lower carbon intensity to obtain greater value for their products. It is similar to a Renewable Energy Certificate (REC), but whereas a REC attests that electricity produced is from a renewable source, the CI certificate attests the total emissions of the fuel produced. The consumer can reduce their fuel CI by purchasing carbon tokens from a low methane emission supplier. Emission profile certificates tied to carbon tokens could 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 transferring, with the aid of a smart contract, fuel tokens between the certificate sender and receiver and 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.
As an example:
- Supplier has 1 million gallons of diesel with a carbon intensity of 9.88 kgCO2e per gallon (see EIA estimates.)
- Customer has 100,000 gallons of diesel with a measured carbon intensity of 12.88 kgCO2e per gallon, from a high methane flaring producer.
- The customer wants to lower the carbon intensity of their fuel to 7.9 (20% below average), so they need to purchase -(12.88 - 7.9) * 100,000 = -498,000 kgCO2e carbon intensity from supplier through a certificate.
- After the transaction, the supplier still has 1,000,000 gallons of diesel, but they can no longer sell them with a carbon intensity of 9.88. Having sold the customer -498,000 kgCO2e carbon intensity, they now have 9.88 * 1,000,000 + 78,987 = 10,378,000 million kgCO2e of carbon intensity.
- So in future sales, the supplier must now claim carbon intensity 10.378 per gallon and pass them to its customers..
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.
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