As Crypto Rises, Some Bemoan Its Carbon Footprint

But is crypto any less 'green' than fiat currency?

Representation of cryptocurrency Dogecoin is seen in this illustration taken on Nov. 29, 2021. Dado Ruvic/Illustration/Reuters

In the years since the still-anonymous “Satoshi Nakamoto” created the first cryptocurrency, bitcoin, crypto has proven to be polarizing.

Proponents argue that cryptocurrencies offer a transparent alternative to fiat currencies such as the dollar. Crypto transactions are permanently recorded on a decentralized ledger known as a blockchain, making them potentially resistant to censorship. For political dissidents, or for people living in economically unstable regimes, cryptocurrencies could enable free exchange and prosperity in spite of local oppression or instability.

“The majority of people on this planet do not have access to fair financial services, and Bitcoin fixes this,” Christopher Bendiksen, bitcoin research lead at the digital asset investment firm CoinShares, told The Epoch Times via email.

Crypto has also had its share of controversy. It’s known to be volatile—the price of bitcoin fell from nearly $69,000 to roughly $35,000 between November 2021 and early January 2022.

In addition, a wave of scams has vividly illustrated the potential for crypto fraud. On Feb. 8, federal agents seized $3.6 billion worth of bitcoin stolen in the 2016 Bitfinex hack. Ilya “Dutch” Lichtenstein and Heather Morgan were arrested in connection with an alleged conspiracy to launder the stolen funds.

Despite these concerns, bitcoin and other cryptocurrencies are making leaps and bounds. A 2021 Intertrust survey of hedge fund managers revealed that respondents anticipated holding more than 7 percent of their assets in cryptocurrency within five years. Today, the total market capitalization of all cryptocurrencies is nearly $2 trillion, according to TradingView—a decrease from November, but a marked increase just since 2020, when its market capitalization was in the hundreds of billions.

Crypto’s surge has prompted the government to explore new regulations. The infrastructure bill passed in November 2021 includes new tax reporting requirements for cryptocurrencies. Not everyone has celebrated the prospect. Forbes described the measures as a seed for “unintended tax nightmares.”

With the Biden administration and major international financial institutions such as BlackRock now emphasizing “environmental, social, and corporate governance” (ESG) and other environmental policies, the carbon footprint of cryptocurrencies has steadily gained attention, including from lawmakers in the Democratic-controlled House and Senate. On Jan. 20, the House Energy and Commerce Oversight and Investigations panel held a hearing on the environmental impact of cryptocurrency.

The Federal Reserve, the United States’ central bank, has articulated similar concerns. In a January publication outlining the potential for a central bank digital currency, the Federal Reserve listed crypto’s energy footprint among what it described as shortcomings of cryptocurrency.

The Fed’s stance is apparently in keeping with that of Biden’s latest nominees to it.

Sarah Bloom Raskin, Biden’s pick for vice chair for supervision of the Federal Reserve Board of Governors, has written for Ceres that “we must rebuild with an economy where the values of sustainability are explicitly embedded in market valuation,” in part by ensuring regulators promote measures “that will allocate capital and align portfolios toward sustainable investments that do not depend on carbon and fossil fuels.” The Wall Street Journal’s editorial board accused her of wanting to “politicize Fed bank supervision, especially on climate.”

Raskin and another Biden nominee for the Fed, Lisa Cook, drew unfeigned faint praise from the Hoover Institution’s John Cochrane.

“Lisa Cook is superbly qualified, by written word, experience, and connections—if the job is to bring the Administration and progressive supporters’ racial policies to the Fed. That might mean requiring DEI or ESG practices at banks,” Cochrane, a Chicago School economist, wrote on his blog, “The Grumpy Economist.”

Business columnist Chadwick Hagan has argued that the push for more laws on crypto is all about more government revenue.

“While regulators have blamed cryptocurrency for illegal uses like funding terrorism and funding illicit drug operations, the truth of the matter is that cash is mostly used for illicit activities, not cryptocurrency. The worry is that government will be unable to tax capital gains,” Hagan wrote in The Epoch Times.

“It is my opinion that cryptocurrency helps promote overall financial literacy and financial independence,” Hagan said later.

Environmental groups aligned with the Biden administration, including the Sierra Club and the Natural Resources Defense Council (NRDC), have also joined the push to regulate crypto. In its Explainer, “Crypto Has a Climate Problem,” the NRDC goes so far as to question whether crypto should exist in light of its purported risks to climate and the environment.

“Is it truly necessary?” asked Alfonso Pating, an NRDC financial expert, in the article.

Unsurprisingly, then, the White House is reportedly contemplating a “whole-of-government” response. Unnamed sources told Bloomberg that the White House intends to issue an executive order on cryptocurrency, possibly before the end of February. The executive order could also include comments on the central bank digital currency under consideration by the Fed.

The White House didn’t respond by press time to a request for clarification on whether the cryptocurrency executive order will include any language related to climate or the environment.

Now more than ever, it seems important to step back and seek out the facts. How “green” is crypto anyway?

Crypto and the Grid

A good place to start is cryptocurrency’s electricity consumption. How much juice does crypto use?

The most authoritative answer, at least for bitcoin, may come from the Cambridge Centre for Alternative Finance (CCAF). The CCAF pegs bitcoin electricity consumption at an estimated 125.13 terawatt-hours per year, within a possible range of 49.31 to 291.587 TWh. That would put bitcoin in the same league as Argentina when it comes to electricity use. (Cambridge researchers declined to comment to The Epoch Times due to time constraints.)

Other estimates have been fairly similar. Writing in 2020, a team led by Johannes Sedlmeir of Germany’s University of Bayreuth came up with lower and upper bounds of 60 and 125 TWh for the same figure. That’s somewhere between Austria and Norway, roughly speaking.

A 2022 report from CoinShares, motivated in part by rising ESG pressures in the past year, featured a lower guess for the bitcoin network’s power consumption: 75 TWh in 2020 and 82 in 2021.

China’s 2021 ban on cryptocurrency mining had an effect on CoinShares’s projections about network draw per country. The authors didn’t assume that all activity in China had ceased, however, as they attributed all activity supposedly originating in Ireland and Germany to China—the countries, popular locations for proxy IP addresses or virtual private networks, experienced an uptick in mining at that time.

Although China does rely on coal for many existing and future power plants, the report found something unexpected: the carbon intensity of bitcoin hashing, or transaction validation, actually rose following the ban.

“While China has heavily coal-based provinces like Xinjiang and Inner Mongolia, it also has provinces, Sichuan and Yunnan, that almost exclusively rely on hydroelectric power,“ Bendiksen told The Epoch Times. ”In China’s rainy seasons, miners often migrated and took advantage of cheap hydropower, so the chasing of cheap power by Chinese miners led to seasonal variances in emissions.

“We expect the longer-term effect of the Chinese ban will result in more steady carbon intensity, and also a reduction as miners set up operations in more welcoming political environments with abundant power that happen to have less carbon-intensive resources—the United States, with high concentration of renewables, and Russia, with nuclear and natural gas.”

Cryptocurrency’s carbon footprint is also influenced by the percentage of renewables and other lower-carbon energy sources, such as natural gas in place of coal.

Writing in Bitcoin Magazine, Alex Gladstein of the Human Rights Foundation argued that cryptocurrency mining could incentivize the development of solar, wind, and similar energy sources as well as the associated transmission infrastructure in remote parts of Africa, where corruption and dependence often make foreign aid counterproductive to development.

Crypto miners can also curb emissions by using ‘stranded’ dry natural gas in oil fields. That gas cannot be profitably transported elsewhere, meaning it would otherwise be vented or flared. Flaring generates methane, a greenhouse gas that is believed to have an even more powerful effect on climate than carbon dioxides. Bitcoin miners are beginning to take advantage of this byproduct of physical mining by siting their rigs near oilfields.

CoinShares’s analysis also situated cryptocurrency in the context of global finance by comparing its carbon intensity with that of the gold sector as well as that of minting and printing fiat currency. At 41 megatons of carbon dioxide emissions per year, crypto fell between fiat currency, at 8 Mts per year, and the gold industry, at 100 to 145 Mts per annum.

Bendiksen of CoinShares noted the difficulty of calculating all the emissions associated with fiat currency: “The energy/emissions of printing/minting fiat currency isn’t transparently published, so we reference what we have determined as comprehensive approaches to estimate these metrics.

“Information isn’t always released publicly by private banking companies and government agencies to do these calculations.”

Some analysts think the environmental costs of fiat currency, and corresponding savings from cryptocurrency, are greatly underestimated.

Peter St. Onge, an Austrian School economist affiliated with the Heritage Foundation, has written for CoinDesk that estimates of cryptocurrency’s carbon footprint should account for various wasteful or otherwise carbon-intensive features of the existing economic order—most notably, the recessions and associated boom-bust cycles that St. Onge attributes to fiat currency.

By that measure, central banking is, according to St. Onge, “vastly more polluting than Bitcoin, indeed more polluting than the worst industrial offender you could imagine. Bitcoin, by implication, is among the most green technologies humanity has ever invented.”

These prospective savings notwithstanding, bitcoin’s significant energy use in the here and now has caused blowback. In May 2021, Elon Musk announced that Tesla would no longer accept bitcoin for vehicle purchases.

“We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel,” Musk wrote in a Tweet.

In January, Musk revealed that Teslas could be purchased using a different cryptocurrency, Dogecoin. Musk, who has said per CNBC that he owns both bitcoin and Dogecoin, has heavily promoted the latter for years, as detailed by The Motley Fool.

Tesla didn’t respond by press time to a request for comment on its choice to accept Dogecoin.

Bitcoin’s heavy energy consumption is driven in large part by its consensus mechanism for verifying and securing transactions.

Bitcoin, like Dogecoin and many other cryptocurrencies, uses a mechanism called “proof of work” (PoW). Proof of work pits miners across the world against each other as they try to solve a complex mathematical problem. The fastest to the finish line wins digital currency.

Dogecoin, by contrast, relies on “proof of stake” (PoS), whereby miners stake a certain number of coins to be eligible for random selection to review a new block. If their review doesn’t contain any mistakes, the miners gain digital currency. In proof of stake, participants who stake more coins have more mining power.

Proof of stake uses far less energy than proof of work, spurring environmental organizations such as the NRDC to endorse it. One of the largest cryptocurrencies, Ethereum, is moving to a proof-of-stake model.

But Bendiksen of CoinShares thinks the mechanism could undercut some of crypto’s chief benefits.

“Compared to [proof of work], it is vastly inferior in terms of security, lacks trust [minimization], is not censorship-resistant, and is effectively no different than the current monetary system where those with the most money make all the decisions,” he said.

Controversial Claims and ‘Gee Whiz’ Statistics

While crypto’s overall energy impact is hard to pinpoint, it’s clearly making a dent on global electricity use. Yet some researchers have gone further in their criticism, arguing that cryptocurrencies alone could drive a significant amount of global warming.

In an 2018 paper, “Bitcoin emissions alone could push global warming above 2 C,” a University of Hawaii at Manoa team led by Camilo Mora projected an extremely high rate of adoption for Bitcoin. They asserted that the associated electricity use would be enough to cause 2 degrees Celsius of warming through the emission of carbon dioxide.

The paper and its conclusions have gone on to influence the discussion of cryptocurrency and the environment—the Sierra Club Pennsylvania, for instance, has cited 2 degrees Celsius of warming as a possibility in a 2012 blog entry.

The analysis has been controversial, to say the least.

“It is probably the single most discredited paper ever written on mining—to the point where it triggered no less than three debunking articles in the same publication as it was originally published. Its methodology is entirely inappropriate and indicates a complete lack of understanding of even the most elementary facets of mining,” said Bendiksen of CoinShares.

A 2019 “Matters Arising” paper from Northwestern University’s Eric Masanet and others outlined some of the analysis’s deficiencies, including out-of-date information on bitcoin mining efficiency and an implausibly rapid increase in bitcoin transactions.

In the years since the Mora paper was published, bitcoin transactions per day have remained relatively flat, at times decreasing, according to data from YCharts.

Echoing other criticisms, Sedlmeir and colleagues argued that Mora’s paper revealed a misunderstanding of the energy demands of crypto.

Reached for comment by The Epoch Times, Mora said via email that “as far as I know the paper remain[s] valid.”

Another co-author, Erik Franklin, defended the paper to The Epoch Times.

“At the time of the study, there was discussion about Bitcoin being adopted broadly for day-to-day consumer transactions. Our work provided a scenario that assessed what would happen if Bitcoin replaced credit card transactions and how the energy use from those Bitcoin transactions would contribute to greenhouse gas emissions,” he said in an email, noting he and his co-authors published a reply to the debunking articles.

“The main goal of the study was to generate discussion about the scale of potential environmental impacts of Bitcoin and other cryptocurrencies, which we achieved given the global attention it has received as well as the numerous follow-up studies that built on our work.”

In Erikson’s view, the environment is still at risk from the growth and concomitant energy demands of crypto, regardless of any changes in the composition of the grid or the adoption of PoS.

“In general, a move toward more efficient hardware and algorithms and greater use of renewables as a power source should decrease relative environmental impacts but these improvements are easily offset by the continued growth in the cryptocurrency sector, which just adds more overall energy demand,” he said.

The NRDC’s report on cryptocurrency has also drawn expert criticism, in part for advocating PoS over PoW.

“It’s likely legally difficult for governments to outlaw ‘proof of work infrastructure, but there are ways the government could incentivize switching over to the less computationally intensive (and therefore less carbon-consuming) verification process,” it stated.

Bendiksen of CoinShares told The Epoch Times that the NRDC is wrong to dismiss PoW on the basis of energy use, given its other advantages over PoS.

“As for PoS, it’s simply not appropriate for a global monetary system like bitcoin,” he said. “The whole point of bitcoin is to move away from the legacy oligarchic structures, so PoS is simply not a good fit for bitcoin. PoS may very well be appropriate for NFTs, gaming Apps, and other less-serious use cases, but not for something as important as global money.”

Extreme claims about the environmental impact of digital technology are nothing new. A commentary in the periodical Joule, “Does Not Compute,” outlines some of the ways analysts have been prone to overstating the negative consequence of innovations in IT such as the pace of data center growth. The authors cited the Mora paper as an example of erroneous research that has nevertheless been highly cited. Google Scholar records 177 references to the paper.

According to the commentary, breathless journalism may be partly to blame: “A recurrent theme is that well-intentioned research often overestimates IT’s electricity use and climate impacts, sometimes by orders of magnitude. These results then become ‘factoids’ that spread quickly as people share them and the media report them.”

“People are fascinated by ‘gee whiz’ statistics,” Jonathan Koomey, a researcher and author of the commentary, told The Epoch Times by email. (Koomey was a co-author on the paper from Masanet and colleagues critiquing the Mora paper).

Koomey pointed out the extremely wide range of projected electricity usage by bitcoin in the Cambridge statistics.

“There’s still a factor of 10 from the low to high estimates, so we really don’t understand these systems very well,” he said.

Koomey’s comments suggest a useful rule of thumb: When it comes to assessing crypto’s environmental impact, a little humility goes a long way.