Cryptocurrency and climate change
Estimates by the Ethereum Foundation suggest that moving the Ethereum blockchain from PoW to PoS would dramatically reduce energy consumption by Political and social choices on energy sources and energy consumption levels are needed for the green transition to net zero. These choices could lead policymakers to privilege certain productive activities and their use of energy to meet climate strategy targets and avoid crowding out the limited renewable energy sources for crypto mining.
Increasing financial sector exposure to crypto-assets with a significant carbon footprint is contributing to increased financial sector transition risk. These authorities see the increased energy use by crypto miners as threatening their ability to meet the Paris Agreement. They have therefore called on the EU to consider a ban on the energy-intensive PoW mining method.
In September , China issued a ban on all crypto transactions and mining amid financial stability, consumer protection, financial crime and environmental concerns. Public authorities should not stifle innovation, as it is a driver of economic growth. Although the benefit for society of bitcoin itself is doubtful[ 22 ], blockchain technology in principle may provide yet unknown benefits and technological applications. Hence, authorities could choose not to intervene with a view to supporting digital innovation.
This holds especially given that an alternative, less energy-intensive blockchain technology exists. To continue with the car analogy, public authorities have the choice of incentivising the crypto version of the electric vehicle PoS and its various blockchain consensus mechanisms or to restrict or ban the crypto version of the fossil fuel car PoW blockchain consensus mechanisms. So, while a hands-off approach by public authorities is possible, it is highly unlikely, and policy action by authorities e.
Investors will have to evaluate whether investing in certain crypto-assets is in line with their environmental, social and governance ESG objectives. It is highly unlikely that investments in PoW-based assets can be part of an ESG investment strategy. Even so-called green crypto mining would crowd out other, likely more productive uses of renewable energy. Financial institutions will have to incorporate the climate-related financial risks of crypto-assets into their climate strategy, which should be an integral part of their overall risk strategy.
For banks, for example, the principles for the effective management and supervision of climate-related risks proposed by the Basel Committee on Banking Supervision BCBS [ 25 ] apply to any exposure or activity of banks and hence also to exposures to crypto-assets. In this regard, banks should identify and quantify climate-related financial risks and incorporate those assessed as material over relevant time horizons into their internal capital and liquidity adequacy assessment processes.
Prudential standard-setters may also decide to capitalise the increased transition risk of crypto-assets as part of their holistic approach to capture climate-related risks. Two reasons speak for such an approach. First, as discussed above, the significant carbon footprint of certain crypto-assets means that their transition risk may be more acute and pressing than that of other assets.
Second, the cost-benefit analysis for crypto-assets is different from other assets vulnerable to climate risk. Hence, conservatively capitalising the increased transition risk of crypto-assets will have no immediate impact on bank capital and thus indirectly on bank lending. Nevertheless, such a policy tool will disincentivise investing in such assets from the outset and prevent the build-up of transition risk through crypto-assets in the banking system.
As crypto-assets are global by nature and climate risk is a global issue, such an approach would ideally be set at the international level, thus also ensuring a level global playing field. However, the banking sector is not the only sector where prudential standard-setters need to consider their approach to crypto climate transition risk.
Similar capitalisation considerations would apply for the insurance sector. Capital requirements for crypto climate transition risk could range from risk weights to more punitive capital treatment. Such capital requirements could be risk-sensitive in the form of risk weight add-ons or — more punitively — could stipulate that banks deduct capital for all new exposures to crypto-assets with a significant carbon footprint[ 27 ].
Crypto-assets with a significant carbon footprint could be regarded as at least the crypto-assets that are based on the PoW consensus mechanism. Such a definition would currently include bitcoin and ether, but also stablecoins, tokenised assets and unbacked tokens based on these blockchains. More sophisticated definitions could also be applied, for example in the form of an acceptable carbon footprint in million tCO2 or energy consumption in kilowatts for each crypto-asset.
Increasing financial sector exposures to crypto-assets with a significant carbon footprint are contributing to increased climate transition risk for the financial sector. Whilst the first and foremost policy role is for governments, financial institutions and prudential standard-setters also have a role to play. Public authorities will have to evaluate whether the outsized carbon footprint of certain crypto-assets undermines the achievement of their green transition commitments.
Investors will have to evaluate whether engaging or investing in certain crypto-assets is in line with their ESG objectives. Fred Thiel, the CEO of the crypto mining company Marathon Digital Holdings, has announced his intention to make the company fully carbon-neutral by the end of this year, and says that companies like his could have a huge impact on the future of the renewable energy industry. Ethereum, the second largest blockchain behind Bitcoin, is in the process of switching from proof of work to proof of stake this year.
But renewable energy developers need customers in order to grow, and proof-of-work miners provide exactly that, Thiel argues. As an example, Thiel suggested that there are wind farms in Vermont that have no ability to sell their energy because of their remote locations and the lack of transmission lines. Putting a crypto mining plant on top of the farms would theoretically give them immediate revenue. But Thiel declined to give the name of the Vermont wind farms, and a follow-up email to a Marathon representative asking for the name of that operation or any similar ones received no response.
Most experts TIME spoke with dispute the idea that there has been any sort of boom in renewables due to crypto. He also argues that even if crypto did spur a renewables boom, it might not even help the right places. While wind and solar energy is plentiful in West Texas, for example, it requires extensive infrastructure and transmission lines to run that power back east to the cities that desperately need it, like Houston and Dallas.
Many communities or organizations have opposed them on various grounds ranging from aesthetic to conservational. In Kentucky, abandoned coal mines are being repurposed into crypto mining centers. Flexible energy loads are, in fact, good for the grid, Rhodes wrote in a study last year. We never got the sense there was any willingness to scale back even for a nanosecond of what they were doing.
Plenty of electricity gets wasted in the U. The process of oil extraction, for example, produces a natural gas byproduct that many companies simply choose to flare burn off and waste rather than building the infrastructure to capture it. But in North Dakota, crypto miners signed a deal with Exxon to set up shop directly on site and use gas that would have been flared for new mining operations instead.
Some experts say this process could still be severely damaging. Further, Ingraffea argues, by giving Exxon extra business at their oil drilling sites, crypto mining theoretically incentivizes the fossil fuel industry to keep investing in oil extraction. Claim: Some crypto mining operations are already carbon neutral. Last year, Greenidge Generation, the crypto mining facility in New York, tried to quell criticisms about its environmental impact by announcing its intention to become carbon neutral.
In a press release, the company said it would purchase carbon offsets and invest in renewable energy projects to account for its gas-based emissions. Replacing fossil-fuel-based energy with renewable energy is certain to be an environmental good. But carbon offsets are not as clear-cut. Offsets essentially allow companies to pay to continue polluting. He argues that they should only be used in the case of emissions that are impossible to reduce.
Many crypto miners feel unfairly targeted about their environmental impact, believing that data centers, which receive far less scrutiny, are just as responsible for increasing carbon emissions. Multiple experts disagree.
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