Writing about bitcoin and climate change these days is similar to writing about religion or politics — it’s almost impossible to find a safe middle ground.
Environmentalists and others are sounding the alarm about the already-high and rapidly-growing electricity consumption involved in the mining and transaction processing of bitcoin and other cryptocurrencies. They see the trend lines and argue that cryptocurrencies could end up undermining all of the hard work of climate change mitigation across the rest of the global economy, leading to environmental disaster.
Cryptocurrency proponents argue that by driving up electricity consumption, these mining and transaction activities encourage more adoption of renewables. They cite statistics from industry surveys suggesting that a lot of bitcoin miners already use renewable energy. And anyway, they argue, even if bitcoin does use a lot of electricity it’s worth it — by replacing also-wasteful traditional banking, and encouraging less consumption.
If you want to immerse yourself into the details of both arguments, here’s a white paper with a comprehensive take on the anti-cryptocurrency arguments, and here’s a great tweet thread with links to lots of the pro-cryptocurrency arguments.
Both sides of the argument engage in the kind of heightened rhetoric one would expect given how passionate everyone on all sides are about the topic. Add into that the anonymous and decentralized nature of cryptocurrency activity, and it makes it difficult to get real data other than anecdotes and self-reported surveys. As a result, investors may find it difficult to parse through the rhetoric to get to actionable takeaways.
What both sides get wrong, of course, is that they each argue their points as if the genie can go back into the bottle. As if they want or fear (as the case may be) that the end result might be shutting down cryptocurrencies. That is not going to happen at this point.
As this article today from the New York Times
So who’s right?
Unfortunately, looking more deeply at the arguments on both sides, the arguments for bitcoin being inherently good for the environment don’t hold water. These arguments essentially rest on three crucial assumptions:
- That bitcoin miners will migrate toward the cheapest form of electricity;
- That the cheapest form of electricity is increasingly renewables; and
- That the rate of retirement of older fossil fuel power generators will be the same regardless.
These last two assumptions are not true.
Yes, while in many parts of the world renewables are now the cheapest form of new power generation, existing power generation stations are often cheaper still. They only have to sell power at their marginal fuel and operating costs to breakeven, versus any new capacity of any type, which will require significant capital expenditures.
And when bitcoin miners are drawing power from their local grid, because those grids have a mix of both renewables and fossil fuel generation, the mining activity does not just promote new clean power generators. By significantly raising demand on that grid, it generally buoys the price for all generators on that grid. Which will have the effect of propping up the economics of existing fossil fuel generators. Which will then delay their retirement.
To illustrate this point, we need only look at the very same survey data that bitcoin proponents like to cite. In one recent study, the headline is that 76% of cryptocurrency miners use some renewables in their power mix, and that this proportion is growing. However, the same survey notes that only 39% of the actual power consumed is from renewables. Much of the “renewables” being counted here, of course, are hydropower from China, and that is seasonal; in dry times of the year those same regional miners are using mostly coal-fired power.
And while it’s anecdotal, there are clear examples where fossil fuels are being directly propped up as a generation fuel by new crypto activities. The Kazakhstan example mentioned above is a good illustration — that is a fossil fuel-rich country looking to use more of those resources, not less.
In the end, the climate doesn’t care what percentage of your electricity mix is from renewables and which is from fossil fuels. The atmosphere only cares about how much absolute fossil fuel emissions are released. To make this point extremely clear with an extreme hypothetical — if fossil fuels drop from 60% of the electricity consumption mix of bitcoin miners to 30%, but the amount of electricity consumption goes up 4x, you’ve still doubled the amount of related fossil fuel emissions. Yes, along the way you help further drive down the cost of new renewables, which could have some long term benefits. But in the more important immediate term you are making things much worse.
The conclusion here isn’t that cryptocurrencies are inherently bad for the climate, but that it doesn’t make sense that they are inherently good for the climate, as many proponents like to argue. If you want bitcoin to actually be good for the climate, there’s significant work to be done.
So what can be done?
If the goal is to have bitcoin mining electricity consumption directly benefit the renewables industry, the simple answer is to mandate that all miners either co-locate with and draw power directly from specific renewables projects (or other climate-beneficial generators, such as for example otherwise-vented methane emissions, although that is controversial). For those who can’t co-locate with a specific project, they could utilize green power purchases, just like so many corporate data centers have been turning to. That would promote renewables adoption without so much direct price-buoying of incumbent fossil fuel generators.
But the reality is, of course, not so simple. The very decentralized and anonymous feature of cryptocurrencies makes it impossible to think about tracking down all bitcoin miners, auditing their electricity mixes, and somehow certifying that their mined bitcoins and transactions are “green”. A bitcoin is a bitcoin, there will be no premium price for a producer of a “green bitcoin” versus someone who anonymously sets up a mining rig in their closet (or: 50,000 rigs in Central Asia) and just plugs it into the grid.
Which, as the NYT article from today illustrates, is soon going to be a big dilemma for the major tech, corporate and investor community as they continue to rapidly accept cryptocurrencies as a real asset. In all other aspects of their businesses and investment approaches, these highly visible entities are already under an ESG microscope.
What happens to their cryptocurrency investment activities if ESG and “net-zero” reporting standards start to treat bitcoin transactions as a significant carbon emissions creator?
Because of the inherently self-regulated, non-governmental design of cryptocurrencies, this is a challenge that the corporate and institutional investor community are going to have to tackle on their own. It’s a popular science-fiction trope to describe a world where governmental authority has broken down and corporations fill the void of collectively regulating markets. Now we’re about to test such visions, at least as regards cryptocurrencies. Because corporations and institutional investors are going to have to self-regulate, if the worst feared climate impacts of bitcoin et al are to be avoided.
What can the large corporate adopters and institutional investors into cryptocurrencies do?
First, they could voluntarily adopt “green crypto practices”. By partnering directly with or hosting mining activities, they could dictate the power source for those activities that they are involved in. As noted above, they would not fetch a premium from the market for doing so. So this would be purely a defensive cost. And it wouldn’t fix the whole market, just their little corner of it. But it could be a starting place.
Second, they could form a collaborative effort along the same lines. A coalition of corporate adopters and institutional investors who together dictate adherence to “green crypto practices” in the parts of the market that they collectively touch. As noted above, there would be nothing to prevent other bitcoin miners around the world from “defecting” from this agreement. But as major institutions become bigger players in cryptocurrencies, they could increasingly have influence on industry practices.
That said, it’s difficult to be confident that either of the above approaches would really solve the problem. The oil and gas industry is increasingly enamored with cryptocurrencies, and major petro-states around the world are too. Given how challenging it has been for high-profile banks to simply pull back from financing the coal industry, while under mounting pressure to do so, it’s hard to see a truly effective, universal voluntary coalition across the financial world arise around green crypto practices.
Third, these players could launch an alternative cryptocurrency, one that leverages the blockchain to track coins and transactions back to specific miners and require them to have their electricity purchases audited. Essentially, a certified green bitcoin alternative, and thus one that actually could theoretically fetch a premium as a preferred currency by the climate-conscious. But this is pretty antithetical to the principles behind the rapid adoption of cryptocurrencies. It’s hard to see something like this being developed, and even if so, gaining traction. Meanwhile, bitcoin and the other established currencies aren’t going away.
No, it seems more likely that in the near-term corporations and investors will fall into three camps: Those who independently try to impose “green crypto practices” on what little portion of the marketplace they can control, taking on added cost as the voluntary price of doing business; those who simply reject crypto activity altogether; and those who just plow ahead despite the environmental concerns. There’s little evidence of any efforts yet around collective action.
Perhaps some more elegant solutions will be found, because aside from the climate concerns, there is a lot to be said for the pro-cryptocurrency arguments, and innovators in this fast-growing market have been pretty innovative just to get to this point. Bitcoin doesn’t have to be a climate change disaster.
But as it stands right now, there are a lot of good reasons for concern. And as big companies and investors increasingly get into the cryptocurrency market, they’re going to have to wrestle with this reality.