Harvard Business Review: Bitcoin mining is not a stumbling block to carbon neutrality

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Tesla CEO Elon Musk said on social media that the company has stopped accepting Bitcoin for the purchase of its vehicles due to concerns about Bitcoin mining's increased use of fossil fuels. On the same day, the price of Bitcoin fell below $50,000, and today it fell below the $40,000 mark. Of course, there are multiple factors that affect the price of Bitcoin. So in response to the energy consumption issue mentioned by Musk, how much energy should an emerging industry consume to be considered reasonable?

According to the Cambridge Center for Alternative Finance (CCAF), Bitcoin currently consumes about 110 terawatt hours per year, which is 0.55% of global electricity generation, or roughly equivalent to the annual energy consumption of small countries such as Malaysia or Sweden. This number sounds huge, but how much energy should a monetary system consume?

How you answer this question depends on your view of Bitcoin. If you think Bitcoin is just a Ponzi scheme or a money laundering tool that provides no utility, then the conclusion is that no matter how much energy is consumed, it is a waste; if you use Bitcoin as a tool to escape monetary inflation or capital control, you are likely to think that these energy consumptions are particularly reasonable. Whether you think Bitcoin is effective for social resources ultimately comes down to how much value you think Bitcoin has created for society.

However, if we are to have this debate, we should clarify the way Bitcoin consumes energy, which can help us understand how big an environmental impact Bitcoin advocates are really talking about. Specifically, there are several key misconceptions worth focusing on:

1. Energy consumption is not the same as carbon emissions

First, there is a critical difference between a system’s energy consumption and its carbon emissions. While determining energy consumption is relatively straightforward, you cannot infer the associated carbon emissions without knowing the exact energy mix, i.e. the composition of energy used by the computers mining Bitcoin. For example, hydroelectric power has a much smaller environmental impact than the same unit of coal power.

Bitcoin's energy consumption is relatively easy to estimate. The hash rate is a good indicator of how much energy miners are using their hardware, and how much they are using it. But carbon emissions are harder to pin down. Mining is a competitive industry, and miners are often not forthcoming about the details of their operations.

According to CCAF, in some cases, the energy composition used by miners in different countries is also different. In addition, many analytical reports only summarize the energy structure at the national level, resulting in inaccurate descriptions, especially for countries with diversified energy sources.

Therefore, the proportion of renewable energy used in Bitcoin mining can also vary greatly. In December 2019, Coinshare reported that 73% of Bitcoin's energy consumption is carbon neutral, mainly due to the abundance of hydropower in major mining centers such as southwest China and Scandinavia. On the other hand, CCAF estimated in September 2020 that Bitcoin's energy consumption is close to 39% carbon neutral. Even if the number is correct, this is still almost twice the US power grid, indicating that looking at energy consumption alone is hardly a reliable way to determine Bitcoin's carbon emissions.

2. Unique advantages of Bitcoin mining

Another key factor that makes Bitcoin energy consumption different from other industries is that Bitcoin can be mined anywhere. Almost all energy in the world must be produced relatively close to its end user, but Bitcoin has no such restrictions, and miners are able to utilize electrical resources that are unavailable to most other applications.

Hydropower is the most famous example of this. Huge amounts of renewable water are wasted every year in China’s Sichuan and Yunnan provinces during the rainy season, where production capacity far exceeds local demand, and storage technology is far from advanced enough to efficiently store and transport energy from rural areas to the cities that need it. It is no coincidence, then, that these provinces are the heartland of China’s mining industry, responsible for nearly 10% and 50% of global Bitcoin mining in the dry and rainy seasons, respectively.

Another avenue for carbon-neutral mining is natural gas. The process of extracting oil releases large amounts of natural gas, which pollutes the environment without being transmitted. Because natural gas is confined to remote oil mine locations, most traditional applications cannot effectively use this energy. However, Bitcoin miners from North Dakota to Siberia have seized the opportunity to monetize this wasted resource, and some companies are even exploring how to generate electricity by controlling natural gas more efficiently. Of course, this is still a small player in the Bitcoin mining landscape today, and it has been calculated that the amount of natural gas in the United States and Canada alone is enough to run the entire Bitcoin network.

To be honest, Bitcoin monetizing surplus natural gas still generates emissions, and some see the practice as even a subsidy to the fossil fuel industry, incentivizing energy companies to invest more in oil extraction than they otherwise might. However, revenue from Bitcoin mining is a drop in the bucket compared to demand from other industries that rely on fossil fuels, and this external demand is unlikely to disappear anytime soon.

Interestingly, there are striking similarities in the aluminum smelting industry. The process of converting natural bauxite into usable aluminum is a highly energy-intensive industry, and the cost of transporting aluminum is often not high, so many countries with energy surpluses have built smelters to take advantage of their excess resources. Regions such as Iceland, Sichuan, and Yunnan, where energy production capacity exceeds local consumption capacity, now have the same conditions that incentivize them to invest in smelting, and mining Bitcoin has become the main choice. Even some old aluminum smelters, such as the hydro Alcoa plant in Massena, New York, have become Bitcoin mines.

3. Mining Bitcoin consumes more energy than using Bitcoin

How energy is generated is part of the equation. But another area of ​​widespread misunderstanding is how Bitcoin consumes energy and how that might change over time.

Many journalists and academics talk about Bitcoin’s high “energy cost per transaction,” but this metric is misleading. The vast majority of Bitcoin’s energy consumption occurs during the mining process. Once a Bitcoin is minted, only a small fraction of the energy required to verify a transaction is consumed. Therefore, dividing Bitcoin’s total energy consumption to date by the number of transactions is meaningless, as most of this energy is used to mine Bitcoin, not to transact. Therefore, there is a misconception here: the energy costs associated with mining Bitcoin will continue to grow exponentially.

4. Bitcoin mining crime growth is impossible

Because Bitcoin’s energy footprint is growing so rapidly, people sometimes think it will eventually take over the entire energy grid. The New York Times recently cited a 2018 study that suggested Bitcoin could warm the planet by two degrees Celsius, but there are good reasons to believe that won’t happen.

First, as is common in many industries, Bitcoin’s energy mix is ​​becoming less carbon-dependent year on year. In the US, publicly traded, increasingly ESG-focused miners have gained market share, and coal-based mining was recently banned in Inner Mongolia, one of the worst-hit areas for coal. Meanwhile, inspired by the Paris Climate Agreement, many organizations within the crypto mining industry have launched initiatives similar to the Crypto Climate Accord, advocating and committing to reducing Bitcoin’s carbon footprint. Of course, as renewable energy sources such as solar become more efficient and mining becomes more viable, Bitcoin could eventually become a significant incentive for miners to set up.

Furthermore, it is unlikely that miners, who receive a small fee for the transactions they verify while mining (about 10% of miners’ revenue), can continue to expand their mining operations at the current rate indefinitely. Miners receive a small fee for the transactions they verify while mining (about 10% of miners’ revenue), as well as a profit when they sell their bitcoins.

However, Bitcoin mining output halves roughly every four years, and unless Bitcoin prices permanently double every four years (economics suggests this is impossible for any currency), the miners' share of revenue will eventually decay to zero. As for transaction fees, Bitcoin's natural limit on the number of transactions (less than one million per day), coupled with users' limited tolerance for payment fees, limits the growth potential of this revenue source. In fact, there are also disadvantages to relying on network transaction fees to maintain operations. If profit margins decline, the economic incentive to invest in mining will naturally decrease.

Of course, there are countless factors that influence Bitcoin's impact on the environment, but behind all of them is a question that is harder to answer with numbers. Is Bitcoin worth it? It's important to understand that many environmental concerns are exaggerated or based on false assumptions or misunderstandings of how the Bitcoin protocol works.

When asking “Does Bitcoin have an impact on the environment,” the actual negative impact we’re talking about is probably much smaller than you think. But it’s undeniable that Bitcoin (like nearly everything else that adds value in society) does consume resources. Just like any other industry that consumes energy, the cryptocurrency community should acknowledge and address these environmental issues, work in good faith to reduce Bitcoin’s carbon footprint, and ultimately prove that the social value Bitcoin provides is worth the resources required to sustain it.

Source:

Nic Carter: How Much Energy Does Bitcoin Actually Consume?