Making the Polluter Pay: How Blockchain Can Aid Climate Adjudication

Proving causation is a major impediment to effectively implementing environmental law. In providing greater traceability, blockchain allows courts to better adjudicate on the source of pollution.

The Growing Need for Exact Accountability

The current regime for finding causation in climate adjudication is not working due to the trickiness of attributing liability. 

We can see this from the following example:

• FIRM X, a company from importing country A;  
• Puts legal headquarters (HQ) in EU country B; 
• And pollutes country C, with damages.

According to current jurisprudence, “firm X” is not polluting country C despite its activities in the country. This is because its shell company or subsidiary (in-country B) creates a veil of corporate liability. Shell companies by definition (like an empty shell) have no business operations, no employees, nor even a physical office. They do not make money and do not provide products or services to customers. Instead, they own assets in one or more companies and act as an inactive company. 

A subsidiary is a company controlled by the holding company. Often created to organize, supervise, and manage a portfolio of companies, they have the power to hire and fire managerial directors and administrators of its company. This, therefore, represents a form of management liability as a subsidiary is used for operational purposes in contrast to mere administrative requirements.  

Finding Causation

This kind of setup makes it difficult to attribute causation. Currently, only neighbouring states have an opportunity to find causation for what is termed transboundary harm. They could prerequisite the notification, negotiation, and mediation mechanism, or they could make a  claim via the Environmental Impact Assessment. In theory, they could raise human rights, trade, or labour positive obligations, yet in practice, it is extremely difficult to attribute blame. 

This is made considerably more difficult due to loopholes. If, for example, I were to create a subsidiary company that would remove the polluting and non-ethical aspects of my company’s portfolio, I could divide the liability, management, and responsibility. This would allow “me” to exploit the legal breaches and loopholes available between jurisdictions. While used primarily for tax, this approach is just as effective for environmental, human rights or labour law breaches. 

This was highlighted in research done by Harvard Business Review where they found that in strict domestic jurisdictions, companies have 29 percent lower domestic emissions on average. This coincided, however, with a 43 percent higher export of emissions abroad. In other words, many companies were reacting to tougher regulations by moving polluting activities abroad. 

This is problematic from a causation perspective because the country at a loss can never sue the parent company as the causation or “legal link” to the “significant damage” is not clear, even when formal legal hearings are undertaken.

In trying to prove that damage originates from company X, the opposing counsel could simply argue that there are plenty of other factors that could lead to pollution, including geographic distance (lack of transboundary harm principle), the multitude of countries polluting or affecting air pollution (unclear liability and lack of causation) and the lack of correct “scientific admissible evidence” for damages.

This is despite evidence of shared responsibilities and climate change occurrences, and the clear and indicative data pointing to a clear polluter pays principle – a well-established pillar of environmental law: that torts or criminal damages causers should pay remedies for their causal wrongs.

The First Step: Agreeing on Environmental Data

The first step in addressing this problem would be to reach an agreement on the environmental data that can be used for adjudication. Shell companies will not cease to exist as tax havens are legal. Nonetheless, if you want to see the environmental harm, don’t follow the clouds – follow the money. If the money can go from country A, transit via country B and reach country C – so can pollution. If one link is made with a financial chain, the idea of polluting causation can be reconciled with the former. 

For instance, if company A clearly paid for oil platform costs, poor cleaning costs, or poor sanitary costs, this would be a clear acknowledgment of liability. That is where blockchain comes in handy. By digitalizing the operational processes it provides authenticity, transparency, and tractability.

One way to quantify the current biggest threats affecting climate change is in carbon units, yet no one agrees on their real value. We, therefore, need a different framework of methodology. Whether parties or the courts, the compensation must be adequately approved altogether when calculating damages and remedies. Standards will be the units to mark or progress our improvement technologically. 

Those online “CO2 standards” would allow for mechanisms such as the Paris Agreement to function or more practically for a carbon market, such as the European Union Emission Trading Scheme, to be harmonised. For this to work, we need to ensure accurate, secure, and efficient transfer of units between registry systems. Those registry systems may include, for instance: the Nationally Determined Contribution (NDC) submission of the UNFCCC, the report submissions for the Sustainable Development Goals of the UN, smart contracts, and carbon markets.

This is important because the current regime for tracing pollution is unsatisfactory. Take the requirement that any large emission process is recorded on say a US or British server. That would be expected of a modern compliant of international law under new international law norms. Nonetheless, they could be avoided by using third party countries or companies as umbrella proxies. By delocalizing the problems, the national or regional reports remain untouched. By using a blockchain to trace pollution damages, a liability regime could be put requiring the product to go from step A to Z, all traced electronically. 

More than any representations today. We need modern global, harmonized standards applicable to all parties wishing to remedy and accurately measure climate change. This starts by correctly measuring the data (CO2); analysing and treating the information under one set of international standards developed by our novel technology. 

Why Blockchain is Effective

Blockchain is a public ledger that can store transaction records or any other data. It is owned by no one, with a copy of it being stored on many personal computers around the world. Anyone can use it and support the running of the network. This often removes the need for middlemen and allows users to interact in a peer-to-peer way while reducing transaction costs and increasing efficiency. Due to its decentralization, this kind of network is difficult to take down or corrupt.

The advantage of blockchain over self-regulation is that it removes arbitral decision-making and misrepresentations. As it is defined by a common trust that is automatic and transparent, instead of relying on institutions and human decisions. With technology, we could change this data to exact percentages. Rather than a simple arbitral yes or no, the question is scientific, modern, and applicable, as opposed to archaic, depending on a number of contested factors. 

In this technical interlude of no carbon data and large transparency gap on measurement standards and techniques around the world. A self-regulated, self-sufficient, and universally endorsed way of establishing causation would be welcomed. Whether in court, litigation, by-laws, reputational models, or any compliance, there is plenty of room for accurate and transparent data. Blockchain would make climate law a whole lot more compliant.