Cryptocurrency is a hot topic these days, but studies and several prominent figures have expressed concern that crypto mining’s carbon dioxide footprint will heat up the planet, too. Although crypto mining consumes a substantial amount of energy, that doesn’t necessarily make alternative currencies an environmental foe. In fact, the rise of cryptocurrency and blockchain technologies could help accelerate electric sector decarbonization.
As a quick introduction, cryptocurrencies like Bitcoin are digital currencies that have no central bank. Transactions are recorded and verified using blockchain technology. Blockchain is a distributed, decentralized ledger where individuals add new blocks to the blockchain by verifying crypto transactions through a process called mining. Mining uses high-powered computers to solve extraordinarily complex math problems, and each verified transaction adds block of data to the blockchain. Miners receive Bitcoin (or other digital currencies) as compensation for their work. The use of blockchain ensures digital currencies’ security and makes them extremely difficult to counterfeit.
Given the computer power necessary to mine cryptocurrency, the process is very energy intensive, raising questions over digital currency’s climate impact. Bitcoin alone consumes more energy than Argentina, and if it were a country, Bitcoin would be among the top 30 energy users in the world. Bill Gates recently told CNBC, “Bitcoin uses more electricity per transaction than any other method known to mankind, and so it’s not a great climate thing.” Senator Elizabeth Warren called for a crackdown on “environmentally wasteful cryptocurrencies.”
Allegedly, since that energy is not being used to manufacture some material product, it is wasteful. Politicians and pundits should not make arbitrary decisions about cryptocurrency’s value but instead leave that to the market.
Nevertheless, putting crypto’s energy use into context is important. Bitcoin’s energy use is somewhere between .1 and .3 percent of global electricity consumption, and all digital currency energy consumption is far less than traditional banking, albeit representing a much smaller percentage of the overall system. Dan Held, marketing director for the crypto exchange Kraken, facetiously responded to Senator Warren by calling for a ban on Christmas lights, pointing to a study that Christmas lights in America also consume more energy than many countries.
Rather than demonize specific industries’ energy consumption, a more prudent discussion should focus on how competitive markets can meet growing energy demand (wherever it comes from) while protecting and improving the environment. In reality, in many ways the digital currency industry has been a force for good.
Driven in large part by a demand for cheap energy, crypto miners are driving trailers out to oil patches across the country. Lacking pipeline infrastructure to transport natural gas, energy companies flare or vent the gas, emitting carbon dioxide or methane. Instead of truly wasting energy, energy companies sell it or give it to miners. While that energy use still results in emissions, Mark Le Dain, vice president of strategy at oil and gas software company Validere, noted, “It helps cut emissions at (an oil) producer level, but also globally by reducing mining in parts of the world where coal is likely the power source.”
However, coal is not always the likely energy source, either. Miners have relocated to Iceland, Sweden and Norway because of cheap hydroelectric power. Another mining company, Argo Blockchain, recently purchased data centers that will be powered by hydro in Quebec. Even during China’s wet season, half the crypto mining takes places in Sichuan, which derives almost all its power from hydro power.
Several factors explain how digital currency mining could accelerate the deployment of clean energy. Since energy is a considerable input cost, crypto miners want cheap, reliable electricity. As the costs of renewable energy continue to fall, more emissions-free power could meet the rising demand for power. Increased use of affordable, cleaner natural gas in the U.S. and around the world could displace coal usage. A competitive electricity market, undistorted by mandates and subsidies, can meet increasing energy needs while lowering greenhouse gas emissions. Green technologies will win out if they’re cost competitive.
Moreover, because energy is a major cost to crypto mining, companies have a strong incentive to improve energy efficiency and reduce their consumption.
Another advantage is mobility. Rather than rely on transmission lines to take power from remote locations to suburban and urban areas, computing power can travel to the energy-generating location. That flexibility provides opportunities to saddle up to oil and gas operations or solar arrays in the middle of nowhere. They can take advantage of excess supplies and help solve duck curve challenges for utilities.
Yet another reason is consumer preference. The federal government shouldn’t strong-arm crypto miners into using specific energy sources with regulations or the threat of regulations. However, crypto companies and investors may have non-financial reasons for preferring that miners use certain energy resources. A greener digital currency could be a motivating factor for investors. Leaving motives aside, Elon Musk said Tesla would not accept Bitcoin until “there’s confirmation of reasonable (~50%) clean energy usage by miners with positive future trend.” Similar consumer-driven pressures could incentivize cryptocurrency companies to procure more emissions-free energy moving forward or risk devaluing their respective currencies.
Digital currency is one of countless energy-intensive processes. Everything from an iPhone to an electric vehicle has an environmental footprint, from mining activities to extract the resource, to manufacturing the product to end-use energy consumption. Congress and the administration should not subjectively place a target on the back of certain energy consumers but should instead implement policy that adequately protects public health and safety. Doing so risks the government interfering in the legitimate functions of businesses, stunting innovation and environmental improvement in the process.