Please describe your proposed solution.
8% of global CO2-emissions come from steel
Transform, don’t greenwash! The steel industry's sustainability and fair market shift is hindered by insufficient availability of sustainable steel and self-serving CO2-accounting due to a lack of standardization. ACCO2 is an open-source blockchain and science-based framework on Cardano that introduces a forgery-proof carbon accounting methodology for the steel industry. This is crucial as green steel is scarce in the market and will remain so for at least another 5-15 years. The European Green Deal and other regulatory challenges will require a complete transformation of the giant steel industry.
Transformation is not possible without a mass-balanced process
Mass balancing, the potentially powerful transformation tool on the road to a world of green steel, will only be permissible without a hint of greenwashing but is often abused for exactly that. It is currently the only way to distribute the little green steel available and to create incentives that lead to a higher percentage of “green” steel. This is particularly problematic for smaller companies, as they often do not have the necessary resources or market position to gain access to these limited resources.
There is currently no standardized, transparent, and secure procedure for tracking CO2 emissions along the entire supply chain. Treating CO2 emissions like other accounting parameters could be a practicable solution, but it has not yet left the “academic world”. At the present moment, all this leads to complex and inefficient production and storage logistics. Imagine that sustainable and conventional products have to be produced and stored separately, even though the only difference between them is the emissions they cause.
Steel manufacturers are not sitting tight, using this grey zone and marketing their products as more environmentally friendly than they really are and applying non-transparent and self-made assessment standards.
> “The market for fossil-free steel is still in its infancy. Reliable information is crucial for the smooth functioning of this new steel ecosystem.” - Oliver Sonst, CEO Stahlo GmbH
No greenwashing and accountable transparency
These self-made assessment standards all differ, are not easily reproducible, and only provide a rough standardization of incoming and outgoing goods. The marketing of these methods varies greatly, and the observation period - i.e., when the goods arrive and leave - is crucial. It is clear that the goods cannot be “greener” at goods issue than at goods receipt. The entire warehouse cannot be more environmentally friendly at goods issue than it was at goods receipt.
You can only balance ecological improvements from a specific period and not combine them from different sources and times. Some companies go back to 2008, or balance their reduced flight activity due to Covid on the green share of their goods or include the switch to a few e-cars in their green balance. This is dubious, to say the least.
All of this is further called into question by the vagueness of the Greenhouse Gas Protocol (GHG), which is intended to realize and promote climate-friendly goals:
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Multiple counting of the same emissions: Companies often report the same emissions multiple times, leading to inaccuracies.
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Unreliable Scope 3 emissions: Estimating emissions from upstream and downstream activities (Scope 3) is highly inaccurate due to the complexity of supply chains.
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Greenwashing: Companies selectively present their emissions data to appear in a better light, which undermines the credibility of ESG (Environmental, Social, Governance) reports.
According to the Greenhouse Gas Protocol, both the steel manufacturer and, for example, a car manufacturer must include the steel manufacturer's emissions in their reports. This leads to double counting and makes it difficult to accurately attribute emissions. Without clear standards for carbon management through mass balancing, it is difficult for companies to offer sustainable steel products, which requires significant production changes. It eventually slows down the green progress of the steel industry. This is where the Green Steel Rulebook comes in, using smart contracts to establish sensible and tamper-proof rules for mass balancing practices.
ACCO2 and the Green Steel Rulebook
That's why we want to introduce ACCO2, an open-source blockchain and science-based framework for carbon accounting in the steel industry on the Cardano blockchain. It expands the Greenhouse Gas Protocol with comprehensive and real-world implementation tools based on the independent Green Steel Rulebook. It aims to provide small and large companies with clear guidelines on how the mass balance procedure may be carried out.
The regulatory and compliance guidelines of the Green Steel Rulebook are carefully reviewed and evaluated by an independent committee that will ask for participation of university professors such as Robert Kaplan (Senior Fellow and Marvin Bower Professor of Leadership Development, Emeritus at Harvard Business School. ), European lawyers, regulatory and industry experts such as the Fraunhofer Institute who are familiar with the challenges and the Cardano Community.
> "The E-liability system provides a more reliable way of calculating the total pollution from assets under management as a weighted total of the portfolio companies’ end-of-period E-liabilities." - Robert S. Kaplan, ©Harvard Business Review
Cardano blockchain-based framework
Of course, all of this needs to be supported and made verifiable, and this is where the Cardano blockchain-based framework will provide tamper-proof transparency. It will establish the science-based Kaplan mass balance method for carbon accounting (e-liability) on the Cardano blockchain-based framework and execute it with smart contracts.
The process method, including the associated framework, is intended to make a fundamental contribution to the green lead market for the low-emission to emission-free production and distribution of green steel and, after appropriate modification, is able to also potentially serve other energy-intensive sectors such as the chemical, plastics and energy industries. The Cardano blockchain ecosystem can therefore have an extremely large and direct impact on achieving sustainability and the future of humanity!
> "Our proposed approach recognizes the integrated nature of pollution activities across the economy and encourages all businesses, regardless of sector, to take GHG emissions into account in their product design, purchasing, and selling decisions." - Robert S. Kaplan, ©Harvard Business Review
Currently, there is no standardized, transparent, and secure method to track CO2 emissions throughout the entire supply chain and treat them as other financial metrics. Companies wishing to offer sustainable products must prove that all parts of the product are made from sustainably produced steel. Since CO2 is linked to the physical object, this leads to a complex and inefficient production and storage logistics, as sustainable and conventional products must be produced and stored separately, even though they only differ in the emissions they cause.
Example: A manufacturer produces both sustainable and conventional steel products. Although both products have identical material properties, the manufacturer must operate two separate production lines and organize storage accordingly, leading to increased costs and logistical complexity.
Solution: mass balance method according to Kapplan
To meet these challenges, STAHLO and its partners rely on the mass balance method according to Robert S. Kaplan. This method makes it possible to treat CO2-emissions in the same way as other accounting parameters. Companies that purchase steel must include both the steel and the resulting CO2-emissions in their balance sheet. If a company wants to manufacture sustainable products, it buys sustainably produced steel, which means that fewer CO2-emissions are accounted for. The emissions saved can then be allocated to the sustainable products, which enables the joint production of sustainable and conventional products.
E-liability accounting as an extension of the mass balance method
Kaplan's e-liability accounting system integrates modern technologies and cost accounting methods to precisely allocate emissions across the entire value chain. This system solves the problems of the GHG Protocol by:
Accurately measuring emissions
Using chemical and engineering methods to accurately capture emissions.
Avoiding double counting
By allocating emissions to the units produced and transferring them through the supply chain, double counting is avoided.
Reduction of manipulation
Accurate allocation of emissions reduces incentives for greenwashing.
How it works
A company measures its total emissions during a reporting period and allocates them to the units produced. With each material transfer within the supply chain, the corresponding e-liability is passed on to the next actor. This creates a transparent and traceable system that records emissions along the entire value chain.
Advantages of the e-liability system
Transparency
All emissions are precisely recorded and traceably allocated along the entire supply chain.
Reliability
The system offers a high degree of accuracy and reliability in recording emissions, comparable to financial reports.
Efficiency
The precise allocation of emissions enables companies to take more efficient and targeted measures to reduce emissions.
Weaknesses of the mass balance procedure
Although the mass balance method is promising, it harbors risks of fraud and misconduct. Without strict controls and transparency, companies could manipulate emissions figures. In addition, implementing the method requires accurate recording and verification of all emissions along the entire supply chain, which poses a significant logistical challenge. Despite the many advantages, there are also challenges when implementing the e-liability system:
Technical challenges
The precise collection and processing of large amounts of data requires advanced measurement technologies and IT infrastructure.
Regulatory challenges
Clear and standardized reporting requirements and international cooperation are needed to establish the system worldwide.
Manipulation risks
Without strict controls and transparency, companies could continue to attempt to manipulate emissions data.
Development of the Green Steel Rulebook (GSR)
To address these weaknesses, STAHLO is developing the Green Steel Rulebook (GSR) in close cooperation with experts and industry partners. This set of rules is intended to identify all potential points of manipulation and implement appropriate measures to prevent them. The GSR is created in workshops and scientifically based working groups and is intended to meet the practical requirements of industry. It serves as the basis for carbon accounting using the mass balance method and prevents systematic greenwashing.
Technical implementation and framework development
Technical requirements and conditions are defined on the basis of the GSC. A framework with an SAP connection is developed to create a fully automated CO2-balancing system. This system is secured by smart contracts based on the public Cardano blockchain and offered as an open source solution. The blockchain technology ensures that the emissions of each production stage are recorded transparently and verifiably.
Practical implementation of smart contracts
Smart contracts play a crucial role in the implementation of e-liability accounting. For example, a smart contract could automatically update the corresponding e-liabilities for each material transfer within the supply chain. When a steel producer buys sustainably produced steel, the reduced carbon footprint is automatically recorded and integrated into the system. This transparency prevents manipulation and ensures that CO2-emissions are accurately tracked and accounted for.
Another use case for smart contracts is monitoring compliance with the rules set out in the GSC. A smart contract could automatically check whether all participants in the supply chain are reporting their emissions data correctly and in full. In the event of irregularities, the smart contract could trigger sanctions or generate reports to the relevant authorities.
Integration of the entire supply chain and transferability
The first proof of concept (PoC) is being developed in the steel industry. The successful tamper-proof documentation of the CO2-mass balancing process with smart contracts can then - with carefully controlled modification - be transferred to other economic and industrial sectors.
Impact and validation
The impact of the project is demonstrated by the publication of a scientific paper and the implementation of a PoC at STAHLO. This enables the measurability and extrapolation of the impact. The result will be a robust set of rules and a smart-contract-supported technical system that can be validated and further developed by others.
The integration of Kapplan's theses on e-liability balancing and the use of blockchain technology and smart contracts will create a transparent, verifiable and tamper-proof system. This not only promotes sustainability in the steel industry, but can also serve as a model for other industries.