Intense focus on the carbon emissions attributable to mining Bitcoin has united in common cause among cryptocurrency critics and climate activists. Their goal: ban cryptocurrencies – particularly Bitcoin – to avoid carbon emissions. Cryptocurrency and carbon reduction each have a role in global growth and stability: crypto being the latest in a line of financial innovations that bring efficiency and security; lower emissions support sustainable and resilient growth. The intersection of these two pressing global issues deserves, and requires, clear thinking based on sound data in assessing the net benefits and environmental impact of cryptocurrencies.
Bitcoin is the world’s leading cryptocurrency. Its popularity stems from its security and privacy. These benefits are afforded by the computationally-intensive verification process and the distributed ledger of the blockchain. Much of this is provided by “miners” who are rewarded with new Bitcoins. Mining has been up this year with Bitcoin trading at new highs until recently. Incentives matter.
More mining means greater energy consumption because of the sheer energy intensity of Bitcoin’s verification process. Bitcoin miners seeking to reduce variable energy costs have found low-cost power in remote corners of the world like Central Asia, Eastern Europe, and Northern Europe. Others have found it in the U.S., using stranded wind power in Texas, curtailed solar power in California, and natural gas that would otherwise be flared in Montana. These net-zero emissions solutions both promote renewable investment and benefit miners.
The existing data about electricity usage and emissions attributable to Bitcoin mining is foggy at best. The estimates attribute mining locations to IP addresses and assign average electricity grid mixes to the activity, but do not provide a precise mining carbon footprint. Indeed, the incentives and trends suggest that Bitcoin’s carbon footprint is far greener than some critics allege.
Alarmism based on extrapolating limited data does not aid prudent policy-making or inform sensible investment decision-making. The difference between upper and lower bound estimates can be an order of magnitude. In this case, the widely-cited Cambridge data shows a range of Bitcoin electricity consumption from 25 to 164 terrawatt hours in 2021. In concrete terms, the uncertainty about Bitcoin mining energy use is enormous – on the order of the annual consumption of Sweden.
China is an important piece of the puzzle. In recent years, a majority – as much as 75 percent – of Bitcoin mining has been inferred to be in China. This spring, the Chinese government banned Bitcoin mining. The ban was ostensibly based on market stability risks and carbon emissions concerns, even though China’s financial regulators have the tools to address market risks, and China has enormous pools of curtailed renewables. Perhaps not coincidentally, the ban came as China was promoting its own digital currency (one that raises concerns over pervasive control over capital flows and financial data privacy, and presents risks to China’s own domestic financial stability), not to mention U.S. concerns over the sanctity of its sanctions program.
The outright Bitcoin ban affected mining provinces like Xinjiang, Sichuan, Inner Mongolia, and Yunnan. Those provinces put up a fight against the mining ban. A less severe policy would have been to limit mining only to those employing zero-emissions solutions.
In the thick of the China tussle, Elon Musk tweeted that Tesla suspended Bitcoin payments because of environmental concerns. Crypto critics and climate activists took heart. Fewer than 100 words brought a 15 percent drop in Bitcoin prices. But Musk soon reversed himself when faced with the ambiguity of claims about Bitcoin emissions, and the price recovered to its original level. Such episodes do nothing to foster crypto market stability.
Bitcoin and other cryptocurrencies are not climate villains. They deliver demonstrable benefits in excess of their costs. Bitcoin has positively disrupted market trading and payments systems and enhanced financial access and inclusion, not to mention the blockchain’s powerful tools to trace illicit finance. Production by definition requires energy consumption. And, of course, the utility of production must measure energy and environmental factors. However, even the highest estimates of crypto mining account for less emissions than other valuable enterprises, like cloud computing. Nobody is seriously proposing eliminating the cloud – or paper currency or traditional banking – due to their carbon footprints.
If there is a problem to be solved, it is how to foster financial innovation in an energy-efficient and carbon-neutral manner. The market is already heading in that direction. Bitcoin miners are already utilizing carbon neutral mining techniques, known innovators and investors crowding into the green mining space. If China does not welcome Bitcoin mining, then so be it. Let the flowers of digital currency innovation blossom right here in the U.S. in places like Texas and Montana, or any other liberal economy in the world where stranded or curtailed carbon-neutral power is abundantly available.
Mitchell Silk was Assistant Secretary for International Markets at the U.S. Department of the Treasury, 2019-2021. Timothy Fitzgerald is an Associate Professor in the Rawls College of Business at Texas Tech University.