Anyone who is interested in crypto is attracted by the stunning growth of it and Bitcoin.
The increase in popularity resulted in an increased Bitcoin mining activities.
This is because the incentive to mine Bitcoin grows higher as the price of the coin rises and more and more people start to take part in it.
Good as it may be for the miners and the coin, it creates trouble for the climate.
It is actually this specific aspect that has put the environmentalists on edge.
A secure economic future is promised and managed by a decentralized database shared among the nodes of the blockchain network instead of a single-point control like the central bank.
For the crypto advocates, it is compelling and alluring to mine more of this coin.
However, with more Bitcoin mining, the carbon footprint cannot be overlooked.
It is due to the excessive amount of energy used by the Proof of Work or PoW Bitcoin mining.
In fact, according to data from the Bitcoin Energy Consumption Index from Digiconomist, the carbon footprint of Bitcoin is equal to that of New Zealand.
Ideally, the world’s largest crypto coin, Bitcoin emits about 37 megatons of carbon dioxide into the air every year, according to a CNBC article.
This is a significant issue for the world and its environment.
If you want to have a better understanding of this issue and how big and serious it is for the world, you are in the right place.
Through this article you will come to know what it takes to create one single Bitcoin on a blockchain and the cost the world has to pay for it.
How Big and Serious is the Carbon Footprint of Bitcoin Mining?
Crypto or Bitcoin mining is a process of solving complex computational puzzles to verify transactions on the blockchain network between the users.
It is only then the transaction is recorded and added to the blockchain when others agree to it based on the Proof of Work consensus protocol.
The validators are rewarded with a new coin for their efforts. This entire process is extremely energy intensive.
With Bitcoin becoming almost mainstream with a lot of major companies now accepting Bitcoin payments, people want to mine more of them which emit carbon dioxide into the atmosphere which is almost equal to the amount emitted by countries like Brazil or Mexico on the whole.
According to Digiconomist, the carbon footprint of a one single Ethereum transaction is 102.38 kilograms of CO2, as of December 2021.
This is equal to the carbon footprint of watching YouTube for 17,063 hours or as many as 226,910 VISA transactions.
On the other hand, the footprint due to energy used to complete one single transaction is equal to the amount of power used by any standard home in the United States for 8.09 days, the report further states.
For Bitcoin it is even higher.
This issue is so concerning that several major industries such as Tesla stopped accepting crypto payments and eminent artists stopped selling their digital artworks backed by Non Fungible Tokens or NFTs.
Organizations like Greenpeace are also worried about this huge data crunching need of the digital currency and have said that it is not suitable for the world that is basically powering technology of the 21st century with the energy sources of the 19th century.
In fact, only one-fifth of the entire energy used by the data centers of the world comes from renewable sources.
According to the Cambridge Bitcoin Electricity Consumption Index of December 2021, Bitcoin uses 0.52% of the entire global electricity.
This may sound pretty trivial but when the annual power consumption of bitcoin is calculated, it comes to about 204.50 terawatt-hours.
This is equal to the power consumed by the entire Thailand.
Another significant aspect to worry about is the limited supply of crypto coins, especially Bitcoin which has a cap of 21 million only.
This means that the mining difficulty or the complexity of the math problems to be solved will be higher as the number of miners grows.
This will demand more energy for computing which will thereby result in higher carbon emissions.
That is not all. There is another problem – the source of this huge amount of energy.
It cannot be ascertained for sure with definitive statistics the proportion of renewable energy sources and fossil fuel-powered electricity that is used for Bitcoin mining.
According to an April 2020 report of Quartz, about 65% of the total energy consumed during Bitcoin mining was the cheap electricity from China, a major reason for the country to ban Bitcoin mining.
However, other reports were also close to it. For example, Rystad Energy figures suggested in 2020 that 63% of Bitcoin mining energy in China came from coal-fired plants.
With a ban on Bitcoin mining, China is supposed to have reduced carbon emission by about 57 million metric tons.
This is equal to the amount of carbon emitted by Portugal in a year.
This will give a fair bit of idea as to where the energy used for Bitcoin mining comes from.
However, the entire world is worried about the amount of energy usage by Bitcoin mining as well as its source.
Several countries, including China, have pledged to reduce their carbon emissions by 2030 and achieve carbon neutrality by 2060.
This means that these countries are supposed to move towards renewable energy sources such as solar and wind power and even additional natural gas.
However, banning crypto mining will not solve the problem in hand, as it is seen with China.
When China banned all sorts of crypto transactions in September 2021, it resulted in an exodus as the miners started to move out from there and set up their mining facilities in countries that are more favorable and liberal such as Norway, Iceland, and Canada.
Now you may ask why Bitcoin mining is only to be blamed for carbon emission since there are other sectors that use a relatively high amount of energy. True you are.
Looking at the broader perspective of energy usage, though the amount of energy used during Bitcoin mining is absurd, it is still only half as much the amount consumed as the inactive home appliances in the United States.
Then, a lot of different tasks performed everyday that also consumes a fairly high amount of energy such as:
- Sending emails
- Using the internet
- Services provided by the banks and financial houses
- Jobs carried out in the investment management firms
- Gold industries and more.
However, the blame is on Bitcoin mining only because it is basically a novel technology and it is not considered to be an appropriate substitute for any legacy system.
This means that Bitcoin is not like traditional currency or gold. It is not solely a store of value, a settlement layer, or a medium of exchange.
Still, due to the inefficacies in the energy market, the Bitcoin miners are motivated to use non-rival energy that is either underutilized or wasted and is also the cheapest.
For example, the government of El Salvador led by the President Nayib Bukele has allowed using geothermal energy for Bitcoin mining.
Promises and encouragements like this will surely make the future of crypto more secure and brighter but the effect it would have on the climate is to be seen along with the actions, or inactions, taken by the governments and the industries.
How Dirty is It?
A lot of analysts and environmentalists consider cryptocurrency as dirty virtual currency, but how dirty it really is.
Well, it is power hungry.
It does not have any physical form like the mainstream conventional currencies that are made up of paper, plastic, or metal.
Bitcoin is simply created by using high-powered computers by the process called mining, which uses a lot of energy.
Bitcoin mining or creation also has a coal connection.
The high amount of energy required for its creation is mainly obtained from fossil-fuel or coal which is considered to be the dirtiest and most polluting for the environment.
Bitcoin production emits anywhere between 22 and 22.9 million metric tons of carbon dioxide every year, according to a study report of Joule, which is equal to that emitted by countries like Sri Lanka and Jordan.
Though there is a growing attempt to mine green Bitcoin by using renewable energy, the prospects are too low.
There are also attempts made to mine Bitcoin using alternative sources of energy to coal such as hydro but the heat generated in the process makes the water bodies extremely hot which affects agriculture and fishing.
Moreover, during summer months, the amount of energy generated is also low.
Therefore, the major part of the energy used for mining Bitcoin comes from coal which makes it pretty ‘dirty.’
What Do the Congress and Regulators Think?
The Congress and the regulators are extremely worried about the growing popularity of Bitcoin mining as well as its massive carbon footprint.
They are wondering what to do to resolve this ever-growing problem that is making this world an unsafe place to live in.
Ideally, the huge energy requirement of crypto or Bitcoin for mining is not a bug but it is its characteristic feature.
As a result, the lawmakers in the United States have started to investigate exactly how crypto mining operations are hindering the global efforts to fight against climate change.
The House Energy and Commerce Subcommittee is also worried about the carbon emissions due to Bitcoin and other crypto mining.
They found that it is required to reduce overall carbon emissions immediately in order to extend the life of fossil fuels.
The members of the subcommittee have also questioned the crypto booster regarding their promises that crypto mining will actually stabilize the power grids.
The subcommittee emphasized on understanding the degree to which the potential benefits of crypto mining is actually achieved.
The lawmakers and regulators are discussing the climate implications of Bitcoin mining.
Even the crypto company executives have sworn before the House Financial Services Committee that the mining operations are able to incentivize the creation of clean and renewable energy resources.
Such an approach is already being followed in several regions, such as in Texas, where the power grid of the state is flooded in exchange for renewable energy backing.
As a part of the contract, the crypto miners have agreed to power down their mining systems voluntarily during peak energy demands.
However, the government, the regulators, and even the energy producers are not sure whether this approach will be realistic and sustainable in the future.
The main reason such an effort to modulate energy usage may not be sustainable is the insignificant modulation offered.
In spite of these issues, Bitcoin miners are still found to be motivated to use cheap and dirty energy to power their mining rigs instead of sustainable power.
This is a serious point of concern for the Congress, the committee members, and the regulators.
They are worried because it will expedite the ecological decline as warned by the researchers studying the effects of crypto on the environment.
Even the scientists have warned that at the given growth rate of Bitcoin and crypto mining the global temperature may rise by as much as 2oC by the next two decades.
However, the Congress is not sure about how exactly they can stop all these and achieve their climate goals.
This is because they simply cannot bring back the retired fossil fuel plants online simply to support crypto mining.
As for the regulators, the main concern is the Proof of Work algorithm used for Bitcoin mining since this needs a huge amount of energy in order to validate transactions by solving mathematical puzzles and get newly minted coins in return.
This system is outdated and intrinsically inefficient.
The PoW algorithm must be intensely regulated, feels the regulators, or the Proof of Stake algorithm should be used alternatively.
This will use much less energy and reduce the carbon footprint significantly. In this alternative system there is no competition.
The amount of crypto coins put up as collateral will determine who will get a chance to validate a transaction.
Different governments and regulators follow different approaches to control the carbon emission due to crypto or Bitcoin mining.
- The US government contemplates on ways to lower the level of energy consumption
- China has banned crypto mining and transactions in their country since September 2021
- Swedish regulators are on their way to PoW mining not only in their country but all through the European Union and more.
Though most countries are against a complete ban on crypto or Bitcoin mining realizing the profit potentials and benefits it offers, all seem to agree that there is a need for some legislation and restrictions on the crypto companies.
This approach, they think, will compel the crypto companies to use renewable energy in some form or the other.
They also think that this will not be an impossible feat to achieve because the crypto industry has matured now and the actors in this space are more responsible.
They will surely realize the need and readily participate and collaborate.
When they invest in cleaner and greener renewable energy there will be no need to ban crypto altogether but make the best use of blockchain technology and at the same time achieve their energy interests or climate goals.
The policymakers however should not ignore a few specific aspects while considering the usefulness of PoS over PoW consensus algorithm.
Social cost of carbon – The electricity prices of the globe usually do not represent the future damage caused by the emissions of today.
However, this is in contradiction to the economic theory which needs the governments to intervene when it needs to correct a market failure. This will augment social welfare.
Though the social cost of carbon is not restricted to cryptocurrency alone, such regulation on the carbon emissions due to the gambling-driven Bitcoin mining can prove to be a simple yet useful means to decarbonize the economy.
Risk of concentration – There is always the risk of concentration in the case of Bitcoin which should not be overlooked.
The mining pools provide most of the hash rate today, in spite of the decentralized nature of the Bitcoin blockchain network.
Typically, as for Bitcoin four of the largest Chinese pools provide more than half of its total hash rate.
Out of these four pools, Bitmain runs three of them. If any one of these four pools controls the bulk of the computational power it may result in reversal of new transactions, double spending of coins, and may even ruin the trust on cryptocurrency systematically.
Central control – The main idea of Satoshi Nakamoto in creating Bitcoin was to increase privacy, offer a more transparent payment system, and eliminate the need of third parties while making a transaction.
However, defending individuals and others from themselves and their actions may need a justification of the demerits of central control.
This is because the underlying benefit offered by anonymous transactions potential benefit may drive illegal behaviors and activities such as buying weapons, drugs or child pornography.
Therefore, central governance is necessary based on use cases.
The policymakers should also understand that a socio-economic and decentralized blockchain will only be able to replace the intermediate parties if it can offer the same kind of functionality and useful services.
The wild ride of Bitcoin as well as its massive carbon footprints renewed worries for the regulators and governments.
Ideally, just as the prices of Bitcoin can rise or fall by significant amounts, the amount of electricity it uses for mining is also quite high, and worrying.
This is not a recent issue. In fact, the high level of energy usage of Bitcoin mining, which creates new coins, has alarmed the environmentalists and experts for years.
The reason for such an insane amount of energy requirement by Bitcoin for mining needs a bit of detailed explanation.
As you may know, transactions on the Bitcoin blockchain network are not controlled by any single central authority as it is done by the central bank for the traditional fiat currencies.
Here, the onus is on a large network of computers called the ‘miners.’
These miners use specially built computers for the mining process which needs a lot of energy to operate.
The higher the number of participants on the network and more complex is the math puzzle to solve, the higher the amount of energy required solving the puzzle and making the transaction go through and get added to the blockchain after proper validation.
This blockchain is a digital distributed ledger. It contains all the transactions but the users cannot double spend funds or use the same token twice.
This is because each of the new transactions, or blocks, added to the chain is linked with the other blocks on it with the help of a hard cryptographic reference.
This makes Bitcoin very secure with the records being immutable in nature.
The Bitcoin miners however do not do this for gratis. They get rewarded with a small amount of Bitcoin or transaction fees for their effort to solve the difficult hashing algorithm.
The whole thing operates on Proof of Work consensus protocol which however cannot get better by design.
This is the main issue and creates a chain link such as:
- The Bitcoin gets more successful
- The price of it rises
- The competition for mining Bitcoin rises
- The difficulty level of mining increases and
- The use of energy increases.
The eventual increase in the use of energy results in the increase in the amount of carbon emission.
Therefore, now you know that the main reason behind Bitcoin mining using such a huge amount of electricity is its PoW mechanism.
Until this is changed, the use of energy will not reduce no matter how advanced machines are used for Bitcoin mining.
Alternatively, the Proof of Stake consensus mechanism uses much less energy and therefore the carbon emission is significantly less.
In this case, the people who buy tokens are allowed to take part in mining by staking their coins.
The amount of collateral determines who validates a transaction.
However, the advocates of Bitcoin have a counter argument regarding the environmental issue of mining the coins.
They say that Bitcoin is much more transparent in its use in energy while the other industries are not.
It is for this reason people blame Bitcoin only and not the others.
They also say that the Bitcoin miners are now incentivized to use renewable sources of energy as well.
It will be much cheaper and also less harmful for the environment with low carbon emissions.
However, there are issues which the energy producers should look into so that more and more Bitcoin miners can use renewable energy for their mining operations.
Some of these issues are:
- The intermittent generation of solar and wind power due to the prevailing weather conditions
- Transporting energy from the source over a long distance to the destination without any leakage and
- The huge initial cost of setting up an infrastructure and the power system.
Until these issues are taken care of, there will not be widespread use of renewable energy for mining Bitcoin.
However, the hunger for energy by Bitcoin will continue to rise over the years. This will result in much bigger issues.
The requirement of energy for Bitcoin mining will never go down which means it is high time that better infrastructure is built to generate more clean and green energy.
It is only then the issues with carbon emission due to Bitcoin mining will be handled effectively.
As of now, according to some reports, only a small portion of the energy used by the data centers spread all over the world for their operation comes from renewable energy.
And, this is certainly not good enough to accommodate the energy requirements for Bitcoin mining.
Calculating Carbon Footprint
Carbon footprint of Bitcoin can be calculated on the geographic footprint and the total power consumption.
For this you will need to simply multiply the power usage by the marginal and average emission factors of power generation.
Here, the average emission factors means the carbon intensity of the resource mix in the power generation and the marginal emission factors represent the carbon intensity of incremental change in load on the grid.
Skimming of renewable energy may result in shortage in the areas surrounding the grid if there is no additional zero-carbon power capability.
Such shortages are typically balanced by fossil fuel resources.
However, there is an uncertainty regarding which particular resource technology is balancing the extra energy required by Bitcoin.
In such situations, coal is used as the maximal and gas is used as the minimal marginal emission factors.
While making the calculation, it is required to assume that the Bitcoin mining hardware works continuously all through the year.
However, potential revenue from additional sources due to volatility in the prices in the market or any provision for load-balancing services is not considered.
Perspectives of Investors and Approaches
The ways in which the carbon emissions can be compensated depend on the perspective of the investors.
Though Bitcoin has not been in the scene for much long, it has had an eventful journey but the most concerning factors is its carbon emission due and excessive use of energy due to the PoW consensus protocol used for mining new coins.
Carbon emission has been a serious issue and worry and it is its PoW mechanism that is primarily criticized for it.
The analysts and the environmentalists think that Bitcoin can only be made more sustainable and usable when its strengths and weaknesses are analyzed and reconciled.
Moreover, for a more precise estimate of the carbon footprint of an investor, the conditions are required to be measured individually depending on the company and the business approach.
According to a lot of studies an investor should focus on a few specific aspects to determine carbon footprint.
Focus should be on the electricity consumption of the Bitcoin network and made from a neutral perspective focusing more on the source of the energy consumed.
This will help in distinguishing between fossil fuels and renewable sources of electricity.
In order to convert electricity consumption of Bitcoin into its carbon footprint the total electricity energy mix of the country should be taken into account.
To calculate the carbon footprint from the perspective of an investor, it is better to follow a flexible and two-pronged carbon compensation model that will allow you to meet the requirements of the Greenhouse Gas Protocol Scope 3 emissions.
This model is suitable not only for the investors but also for the crypto exchanges, asset managers, and custodians.
Using this model, it will be easy to adjust any carbon offset approach over time depending on different aspects such as:
- The specific type of business model
- The number of coins held and
- The proportional usage of the network.
The results will be in accordance with the growth of the Bitcoin blockchain during a certain period of time.
Most people believe that Bitcoin itself can be mined hypothetically with entirely renewable and carbon-neutral energy.
However, things have changed today and the miners do not follow this approach.
This is because their primary concern is to maximize their profits by keeping their cost of operation as low as possible.
Therefore, while evaluating the carbon footprint of an investor for Bitcoin transactions you will need to do it very cautiously and preferably follow one of these two approaches.
It is required to determine the comparative accountability for carbon emission of Bitcoin depending on the utility enjoyed by the stakeholders.
Since a new transaction is added to the blockchain in Bitcoin mining you will need to follow a more quantifiable method to determine the carbon footprint of each of these transactions.
The most accurate estimate can be obtained by figuring out the share of blockchain space that is used with respect to the total growth of the Bitcoin blockchain network.
This is a specific approach to follow by the investors to calculate carbon footprint is which access to transaction-related data can be excluded.
As it is, the major part of the utility of Bitcoin is usually derived from its macroeconomic model in the long term or the store of value.
In such situations, you will need to use a calculation model that will focus mainly on the amount of coins held with respect to the circulation of Bitcoin for a specific period of time.
Both these approaches will offer the investors, crypto exchanges, asset managers, and custodians an opportunity to come forward and take the onus for their carbon footprint due to their transactions on the Bitcoin blockchain network.
However, the focus should not be restricted to representing CSR or Corporate Social Responsibility but also in creating additional value to make Bitcoin a much more sustainable and useful investment with respect to the carbon footprint.
Social cost and benefit should also be taken into account in order to approximate the carbon footprint of Bitcoin as well as deal with the environmental externalities due to it.
All crypto companies can use any of the approaches mentioned above to calculate their carbon footprint that they should offset.
It is also very important to follow these processes with a look at the future when such computations will be required to be made and its results may be authenticated and audited by expert service providers.
Carbon footprint due to Bitcoin mining is a serious and a big issue which all companies should be wary of.
As it is mentioned in the article, different approaches can be followed to calculate the carbon footprint and offset it to make the world a better place to live in.