Crypto & Climate Change

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The situation 

As of writing, the market capitalization of all cryptocurrencies in circulation is around $1.1 trillion (USD), about the same as Mexico and Indonesia’s gross domestic product. In the effort to procure digital currencies, like Bitcoin, the alternative to buying off of exchanges, comes by “mining”. Since the advent of this practice in 2009, it has become more sophisticated, using complex machinery to speed-up operations, all while tapping into existing energy grids.   

The complication 

Mining involves investments in hardware to complete computational proof-of-work puzzles, which then introduces new coins into circulation which are recorded onto the blockchain, and credited to the miner. This process focuses on the hashrate, which represents the total combined computational power, being the energy input, used to mine a digital coin and process the transaction. From this rate, the type of energy used can hold significant implications for the environment. For example, one energy unit derived from renewables will have much less impact on climate change than the same expensed unit of coal-based energy.

The common metric used for describing major energy production or consumption for entire countries is a terawatt-hour (TWh), being a unit of energy equal to outputting one trillion watts per hour. For Bitcoin, the Cambridge Bitcoin Electricity Consumption Index has tracked the upward trending cumulative usage, which currently totals at 373 TWh. In relative terms, per year, Bitcoin uses an equivalent energy draw as Malaysia or Sweden. Columbia University’s Climate School has estimated that Bitcoin mining emits some 65 megatons of carbon dioxide into the atmosphere annually, being comparable to the emissions of Greece, a country of nearly 11 million people.  

In response, crypto apologists contort in the most amusing game of statistical gymnastics. Based on consortium data accounting for half of the entire mining network, the annualized hashrate is up 137 percent in Q2 2022. The consortium proudly notes that the sustainable energy mix stands at 59.5 percent of all production. They argue that of the 34.8 billion metric tons of total carbon dioxide generated globally, only 0.03 can be attributed to mining, which is less than amounts created by household tumble dryers in America, or even gaming platforms like Playstation. 

The problem with this analysis is that we are not comparing apples to apples, which masks an understanding of the real impact Bitcoin is having on climate change. Furthermore, it is hard to get a true sense of impact, as energy sources used in different geographies, does not necessarily illustrate a clear outlay of carbon emitted.

The resolution

Yes, Bitcoin is a contributor to climate change. But if the recent crypto price rut has proved anything, Bitcoin isn’t going anywhere, anytime soon. Despite the price collapse, both its faithful retail class and growing institutional players are holding on. Furthermore, when it comes to mining, crypto apologists adhere to a market efficiency hypothesis. 

If left to its own devices, crypto purists argue that a natural pathway to energy sustainability exists. As Bitcoin’s price increases, demand for application-specific integrated chip (ASIC) systems (the mining hardware used) will increase in parallel, thus manufacturers will be obliged to develop more efficient ASICs, finding the best capitalized miners upgrading to the latest technology, and therefore the less profitable machines forced to drop-out of the market, making the network more energy efficient. For policy-makers, waiting for this long-run to materialize is not ideal for the climate, nor our sanity.  

So how do we short circuit this process? Even amongst crypto purists there exists an acknowledgement that some form of a regulatory framework is eventual, if not a necessity. There exists a hunger for Bitcoin to be seen as legitimate, as the state’s acknowledgement arguably would help Bitcoin increase its value. Understanding the continued growth and interest in mining, for policy-makers leveraging a climate impact angle to establish a regulatory framework for the entire crypto space should be a priority. Not yet signed into law, New York State recently passed a bill to ban new crypto mining firms unless they completely use renewable energy, and the European Central Bank has zeroed in on the climate transition risk posed by mining, notably highlighting the important role prudential standard-setters have to play. Regulating cryptocurrency would help mandate standardized measurements for energy use and carbon emissions, thus helping compare apples of similar magnitude. 

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How Much Energy Does Bitcoin Actually Consume?, Nic Carter - Harvard Business Review

“If you believe that Bitcoin offers no utility beyond serving as a ponzi scheme or a device for money laundering, then it would only be logical to conclude that consuming any amount of energy is wasteful. If you are one of the tens of millions of individuals worldwide using it as a tool to escape monetary repression, inflation, or capital controls, you most likely think that the energy is extremely well spent.”

Why The Debate About Crypto's Energy Consumption Is Flawed, World Economic Forum

“Worldwide crypto adoption is projected to hit 1 billion by the end of 2022. As that number continues to grow and crypto becomes socially accepted as an essential tool for a flourishing human civilization, the debate about crypto's energy consumption will reorient towards environmental sustainability solutions that crypto can meaningfully contribute to.

“Average Monthly Hashrate Share by Country, (Dec 21)”, Cambridge Bitcoin Electricity Consumption Index