Bitcoin. Ethereum. Dogecoin. NFTs. These cryptocurrencies and tokens are often talked about and are barely understood. Even less understood is the environmental impact of the cryptocurrency world. Read on to learn about Bitcoin’s environmental impact and the impact of other cryptocurrencies.
What Are Cryptocurrencies?
Cryptocurrencies are digital currencies. A unit of currency is often called a coin or a token. Coins and tokens are purchased using traditional currency or other digital currencies. Cryptocurrencies use blockchain technology, a decentralized online ledger.
There are more than 10,000 cryptocurrencies valued at more than $1.6 trillion. Bitcoin is the most dominant cryptocurrency, with 45% of the market capitalization. Ethereum comes in second, with approximately 18% of the market cap.
Non-fungible tokens (NFTs) have seen a lot of hype in 2021. Cryptocurrencies like Bitcoin are “fungible” or mutually exchangeable. In contrast, a NFT is one-of-a-kind, unique token. The NFT with the greatest trading volume is CryptoPunks. CryptoPunks and most other NFTs are registered on the Ethereum blockchain.
What is the Environmental Impact of Cryptocurrencies?
Cryptocurrency networks consume a vast amount of energy. This is due to an authentication process called mining (see Figure 1). Digital coin mining is the process of both the creation of new digital coins and the verification of transactions. Electricity is consumed in the operations and cooling of the mining machines.
The mining of Bitcoin consumes the greatest amount of energy, making Bitcoin’s environmental impact the greatest. It currently accounts for an estimated 0.46% of the world’s electricity consumption. If Bitcoin were a country, its July 2021 electricity consumption would rank between that of Austria and Colombia (see Figure 2).
To put Bitcoin’s consumption in perspective, a single transaction currently consumes as much electricity as an average size American household consumes in a week. Between January and June 2021, the daily volume of transactions has ranged from ~167,000 to 402,000.
Do Cryptocurrencies Differ in Their Consumption?
The energy consumption of different cryptocurrencies differs significantly. The difference occurs due to the “consensus” mechanisms used by the cryptocurrency. Both Bitcoin and Ethereum blockchains use what is known as “Proof of Work” (PoW). The PoW protocol requires miners to go through an intense race of trial and error to solve complex puzzles. This race requires huge amounts of computing power and electricity.
Proof of Stake (PoS) is an alternative consensus mechanism. PoS is already used by cryptocurrencies such as EOS, Tezos, and TRON. Ethereum is in the process of switching to PoS. PoS does not depend on the energy-intensive race to solve puzzles. It instead depends on direct economic incentives, whether through a carrot (block rewards) and/or via a stick (“slashing”, in which the stakeholders post bonds which can be seized if they misbehave).
The PoS process consumes a dramatically lower amount of energy than the PoW process. The difference in energy consumption between Bitcoin (PoW) and Tezos (PoS) is a factor of 25 million. The difference between Ethereum (PoW) and Tezos (PoS) is a factor of 1.5 million. The table below shows the kilowatt-hour (kWh) per transaction of different cryptocurrencies.
|Currency||Kilowatt-hour (KWh) consumed per transaction*|
Harmful impacts of mining
Elon Musk increased awareness about the use of fossil fuels to power cryptocurrency mining. He tweeted in May 2021 that he stopped accepting Bitcoin payments because of the increasing use of fossil fuels for Bitcoin mining.
For every fossil fuel-powered kilowatt-hour consumed by miners, greenhouse gas emissions and air pollutants are created. A 2019 study considered the societal impact of cryptocurrency mining. The study concluded that each $1 of Bitcoin value created [for a miner] was responsible for $0.49 in health and climate damages in the US. One of the study’s authors, Benjamin Jones, an assistant professor of economics at the University of New Mexico, further explained: “[The study is] saying for every dollar value created—and this is created to the miner, it’s like my personal value from mining this to society—[mining is] generating 49 cents in damages, and those damages are premature mortality and climate change effects associated with carbon dioxide emissions from fossil fuel power plants.”
Can Cryptocurrencies Be Powered by Renewable Energy?
One way to “clean up the act” of cryptocurrencies is to have cryptocurrency mining be powered by 100% renewable energy. However, achieving that goal is complex. A significant amount of mining is powered by renewable energy. Some estimate that 39% of mining is powered by renewables. Other estimates put the percentage as high as 74%. The wide range comes from the uncertainty about exactly where mining is happening and the variability of when renewable energy is available to power mining.
Location of Miners
Miners go to where electricity is cheapest. China has by far the most cryptocurrency mining (~65%) due to its cheap electricity. A significant amount of mining occurs in Sichuan Province, which has mainly hydropower. However, hydropower is variable, based on the season. Therefore, the power may be generated by hydropower or, in the dry season, fossil fuels. Additionally, other miners are located in regions with mainly coal power. One study estimates that 40% of Chinese cryptocurrency miners are located in coal regions.
The percentage of renewable power used is further complicated by a June 2021 cryptocurrency mining crackdown in China. Due to increasing electricity demand, the government closed down more than 90% of mining. The locations of where the miners relocated, and the energy mix of their new locations, are unknown.
Initiatives to “Green” Mining
Bitcoin Mining Council
Musk has said that Tesla would accept Bitcoin payments again once “mining” uses 50% renewable energy. In response to Musk’s and many others’ demands to “green” mining, two initiatives were created. The Bitcoin Mining Council was founded with the goals to “promote transparency, share best practices, and educate the public on the benefits of Bitcoin and Bitcoin mining.” Founding members agreed to “standardize energy reporting”. This standardization will, in theory, bring clarity to the type of energy that powers mining.
Crypto Climate Accord
The Crypto Climate Accord is a private sector-led initiative focused on decarbonizing the cryptocurrency industry. Crypto Climate Accord Signatories are crypto market participants that make a public commitment to achieve net-zero emissions from electricity consumption associated with all of their respective crypto-related operations by 2030 and to report progress toward this net-zero emissions target using best industry practices.
The impact of these initiatives remains to be seen. Ethereum’s gradual switch to PoS is an important step in reducing consumption. However, Bitcoin has announced no plans to switch away from the energy intensive PoW.
In terms of the type of energy consumed, cryptocurrency miners care about the lowest-cost electricity. With a decentralized system, there are few ways to regulate or incentivize miners to use renewable energy. Therefore, the success of low-carbon crypto initiatives relies heavily on the decreasing price of renewable energy.
Proof of work cryptocurrencies like Bitcoin and Ethereum (for the time being) have a major energy consumption problem. A significant portion of the energy consumed is produced by fossil fuels. These fossil fuels cause climate and health impacts. Efforts are underway to clean up the act of mining. However, lack of transparency and lack of “teeth” to push renewable/climate initiatives will plague the industry for decades to come.
I, as a sustainable investor, will not be investing in Bitcoin because of Bitcoin’s environmental impact. Ethereum, although on the higher end of the consumption scale, still consumes a fraction of Bitcoin’s energy. Ethereum is also taking bold action to transition to proof of stake. Therefore, in terms of sustainability, Ethereum or any of the cryptocurrencies which use proof of stake “win” over Bitcoin.