Bitcoin mining is an industry that is easy to decarbonize
Robert Alloway is co-founder of Viridian Zero Carbon.
As world leaders gather in Glasgow for COP26, Bitcoin boosters and opponents continue to clash over its 50 million tonne – and growing – carbon footprint, and whether cryptocurrencies are a positive force on climate change or are part of the problem.
According to a recent 70-page report by Bitcoin pioneer NYDIG, a subsidiary of Stone Ridge Asset Management, Bitcoin does not have a carbon problem.
Rationalizations are not new. They have been affirmed time and time again by Bitcoin figureheads in presentations, white papers, tweets, and opinion pieces in newspapers around the world. These arguments generally fall into one of three groups: bitcoin exceptionalism, “whataboutism” and the inevitability of green energy.
Bitcoin exceptionalism refers to the idea that cryptocurrency is so revolutionary that it will replace the banking system, save us from hyperinflation, and achieve world peace. Therefore, any carbon emission is a minor cost compared to the benefits to humanity.
Proponents of “whataboutism” argue that what constitutes valid energy use is entirely subjective. Compared to refrigerators, air conditioners, the global banking system, and the US military, Bitcoin’s carbon emissions are relatively low and therefore should be ignored.
A final rationalization of Bitcoin’s current carbon footprint is that energy consumption drives investments in supply: humanity will generate ever greater amounts of cheaper and greener energy, and all Bitcoin mining. will eventually and inevitably use a surplus of renewable energy.
True or false? It does not matter. Debating these arguments is just a distraction. The simple fact is that the Bitcoin network does not need to be powered by fossil fuels. Crypto is an industry that is easy to decarbonize because the input is only electricity and the output is data. Participants at COP26 face a daunting challenge with industries that are difficult to decarbonize, such as aviation and steel. Bitcoin is a handy fruit.
So why are only 40% to 60% of Bitcoins, depending on who you think, are mined with renewable energy? Dirty miners continue to use fossil fuels due to four market failures.
First, the carbon content of electricity purchased by miners is not reflected in its cost – the idea that renewable energy is still the cheapest energy is a myth. Second, the carbon content of bitcoins produced by miners is not reflected in their selling price. This non-pricing of carbon content is a classic market externality.
Third, the cost of many carbon offsets reflects their poor quality. A Bitcoin miner could claim to be “carbon neutral” thanks to offsets that do not deliver the promised climate benefits. The cost of reducing a tonne of CO2 thanks to such offsets is therefore artificially low, making carbon “neutrality” a cheap greenwash.
Finally, despite the new concentration of equity investors on ESG criteria, the stock valuation multiples – and therefore the cost of capital – of Bitcoin miners do not reflect their carbon intensity.
Don’t be distracted by the carbon footprint of a US Navy carrier group or the possible threat of hyperinflation – the Bitcoin community must correct the market failures that perpetuate dirty mining. Bitcoin investors need to change the economic incentives of Bitcoin miners by allowing them to monetize their use of renewable energy. They can do this while taking responsibility for the network’s carbon footprint.
Bitcoin and cryptocurrencies are unique among investment assets because their value depends on the continuous mining of new coins, now and in the future, to consistently validate the ledger. The value of a kilogram of gold does not depend on the ongoing gold mining, but the value of a bitcoin depends on the continued operation of the Bitcoin network.
Therefore, no bitcoin can be “green” simply because it has been mined without emitting CO2. Each Bitcoin investor is responsible for their share of the ongoing carbon footprint of the entire bitcoin network, without which their bitcoins would be worthless.
Tyler and Cameron Winklevoss, the founders of the Gemini Trust Co. cryptocurrency exchange, acknowledged this responsibility in June when they spent $ 4 million to offset six months of their share of Bitcoin’s CO2 footprint – about 0.035% of the value of their holdings.
Sadly, the money has been spent to purchase excess U.S. regional greenhouse gas compliance credits for $ 11.79 per tonne, which will have negligible impact on atmospheric CO2 levels and zero impact on atmospheric CO2. encouraging miners to use renewable energy.
Instead, imagine if Bitcoin holders mitigate their share of emissions from the network, and in doing so, pay a subsidy to miners using renewable energy. Mining would quickly become a zero carbon industry, not just ‘carbon neutral’ and not by 2030.
We are not talking about “carbon neutral” cars because electric vehicles are a sustainable alternative to the internal combustion engine. Why would we be happy with “carbon neutral” bitcoins?
If we create the right economic incentives for Bitcoin miners to use renewable energy, they will switch to renewable energy. This industry can change quickly when it wants – watch mining equipment moved out of China since the summer.
Bitcoin already has enough boosters and opponents; history will be the judge of its success. The carbon footprint is a fact, not “fear, uncertainty and doubt,” and every Bitcoin holder has an ongoing responsibility to clean it up.