The Environmental Impact and Future of Cryptocurrencies
By Ka Yin Au
Alongside the increasing prominence of the cryptocurrency and blockchain industries, growing concerns about energy consumption and environmental impact have been raised by the public. This article will discuss the environmental impacts of cryptocurrency mining, the challenges in obtaining accurate data, as well as upcoming developments in the private sector and regulatory environment that could make the cryptocurrency industry more sustainable.
Why cryptocurrencies require energy
The key feature of cryptocurrency is that it is decentralized. This means that cryptocurrencies are powered by blockchain technology such that transactional records and data are distributed across a collection of specialised computers. (1) In particular, Proof of Work (PoW) blockchains such as Bitcoin operate in a way that incentivizes a distributed network of miners to engage in competitive computational exercises, which involve using powerful computers and machinery to solve complex mathematical problems, thereby verifying transactions and producing new coins. (2) As such, this decentralized system requires and uses an astronomical amount of processing power, leading to significant environmental implications.
The environmental impacts of cryptocurrency mining
According to the University of Cambridge Bitcoin Electricity Consumption Index, the Bitcoin
network uses approximately 121.36 terawatt-hours (TWh) of electricity each year, exceeding the energy consumption of the entire country of Argentina. (3) The Ethereum Energy Consumption Index created by Digiconomist has also estimated that the Ethereum Network uses 63.17 TWh of electrical energy per year, which is comparable to the power consumption of Switzerland. (4) Evidently, PoW cryptocurrencies consume a considerable amount of energy for mining operations. Given that fossil-fuelled power plants still constitute a majority of the global energy mix, the cryptocurrency mining process can be linked to the production of greenhouse gases that cause climate change. According to the Bitcoin Electricity Consumption Index created by the Cambridge Center for Alternative Finance (CCAF), as of April 2021, approximately 46% of Bitcoin mining facilities are located in China, (5) which primarily relies on polluting coal-based facilities to generate electricity. (6) A CNBC article has also previously reported that the carbon footprint of Bitcoin can be compared to that of New Zealand, producing 36.95 megatons of CO2 annually. (7) Nevertheless, one could contrast these statistics with the estimated environmental impacts of the gold industry and banking industry. A study approximated that in 2020, the gold mining industry used 265 TWh of energy and produced 145 Mt of CO2, while the banking industry used 700 TWh of energy and produced 400 Mt of CO2. In light of this, cryptocurrency mining’s environmental impact seems trivial, especially considering that miners are increasingly using renewable sources. This suggests that cryptocurrencies could potentially represent a more sustainable future for
traditional banking and gold mining.
Aside from energy consumption, cryptocurrency mining also generates significant quantities of electronic waste. This is because the mining process uses specialized single-purpose hardware which becomes obsolete approximately every 1.5 years. (8) The efficiency of mining hardware is determined by the amount of electricity required to complete a certain amount of computations, so the more efficient the hardware, the more profitable it will be. Due to the competitive nature of cryptocurrency mining, the race to generate increasingly energy-efficient iterations of hardware will render older machinery to become obsolete regularly. Consequently, the already significant amount of electronic waste generated by PoW cryptocurrencies will continue to grow so long as mining competition remains. Current statistics by the Digiconomist suggests that Bitcoin itself generates 7.35 kilotonnes of electronic waste per year. (9)
Doubts on data accuracy
However, the accuracy of all these reports and data may be called into question. For instance, a Harvard Business Review article notes that energy consumption and carbon emissions are not equivalents. (10) While energy consumption for cryptocurrencies can be estimated based on the hash rate, carbon emissions are more difficult to ascertain and depend on the precise energy mix, that is, the makeup of the different energy sources used by computers for mining. For example, mining computers using hydro energy would produce significantly less carbon than those using coal-powered energy. Resultantly, some reports may generalize energy mix at the country level, so it is arguably inaccurate to assume that the cryptocurrency mining firms in China all rely on coal-based energy despite the diverse energy landscape. Thus, inconsistent data is abundant in this area; A report by a pro-Cryptocurrency research firm estimated that about 74% of the electricity powering the Bitcoin network came from renewable sources, (11) while the CCAF reported that the figure is closer to 39%. (12)
Moreover, given China has recently increased regulatory scrutiny and banned cryptocurrency
mining or imposed hyper-restrictive regulations on operators in certain key mining provinces, (13) previous data on the number of mining operations in China that rely on coal-based energy have also become inaccurate. While one could argue that, looking forward, this would lead to an influx of Chinese miners migrating to countries with abundant renewable energy sources and therefore be better for the environment, (14) another could also argue that miners from other regions driven by price competition may seek to relocate to countries with the cheapest sources of energy, which heavily rely on non-renewable energy sources and have a largely unregulated energy sector. (15) As such, the exact environmental impact of the crypto-mining industry remains uncertain.
A More Sustainable Future for Cryptocurrencies
Nonetheless, a more environmentally friendly operation of cryptocurrencies may be anticipated in the future, especially given the increased emphasis that investors place in environmental, social and governance (ESG) factors. (16) For example, the “Crypto Climate Accord” (CCA) initiative, led by the Rocky Mountain Institute and inspired by the Paris Climate Agreement, was announced in April this year and aims to decarbonize the cryptocurrency and blockchain industry. It hopes to transition all blockchains to renewable energy by 2030 and have the crypto industry reach net-zero emissions by 2040. (17) Over 150 companies and individuals from various sectors, including the UN, have joined the CCA as Supporters.18 Furthermore, UN experts have recognised that cryptocurrencies and blockchain can play an important role in sustainable development. For instance, blockchain can be developed for the World Wide Fund for Nature (WWF) and a platform (CarbonX) that converts reductions in greenhouse gas emissions into cryptocurrency that can be bought or sold, such that manufactures and consumers have a financial incentive to make more sustainable choices. (19)
Additionally, there are other low-energy solutions that the private sector hopes to use to address the huge energy consumption of cryptocurrencies. One of the most notable developments is Ethereum’s attempt to transition towards a Proof of Stake (PoS) consensus model. Unlike the PoW mechanism, PoS blockchains rely on the collaboration of individuals in cross-checking transactions and have a much lower energy consumption as miners do not need to solve extremely complex mathematical puzzles to prove their work, thereby reducing the processing power needed. (20) It is estimated that switching to PoS will enable Ethereum to cut their energy use by 99.9% and their network speed can be increased. (21) Although the PoS model has clear environmental benefits and is used by many other cryptocurrencies such as Dash and NXT, it may be difficult for established networks such as Bitcoin to transition to a new consensus mechanism. (22)
Finally, many regions are also working on regulating digital assets and their providers. For
instance, the European Commission proposed the “Markets in Crypto-assets” (MiCA) Regulation while some countries including China, Britain and Russia are considering launching their own central bank digital currencies (CBDCs). (23) In light of this evolving environmental framework, one could expect more stringent requirements to be imposed on cryptocurrency providers to ensure environmental compliance.
Although PoW blockchains and cryptocurrencies indisputably use tremendously large amounts of energy and generate lots of electronic waste, it is uncertain how much of their energy comes from renewable sources and what is their precise contribution to carbon emissions. Regardless, it is certainly true that cryptocurrency mining is a major contributor to carbon emissions and negatively impacts the environment. As such, the private sector and international governments are working on different solutions to reduce the environmental impacts of cryptocurrencies and hopefully, will be able to ultimately reach net-zero while simultaneously developing the industry. Nevertheless, cryptocurrencies may the way forward over traditional banking giving it potentially uses less energy and can rely on renewable sources.
(16) https://www.euronews.com/next/2021/04/29/can-cryptocurrencies-adapt-to- environmental-concerns-and-rule-changes
(17) https://www.businessinsider.in/cryptocurrency/news/what-is-the-crypto-climate- accord/articleshow/83946286.cms
(22) https://www.investopedia.com/tech/whats-environmental-impact- cryptocurrency/#:~:text=Bitcoin%20and%20other%20proof%2Dof,the%20computations%20needed%20for%20mining.&text=The%20bitcoin%20network%20also%20generates,not%20use%20mining%20at%20all.