What do Greece and Bitcoin have in common? They consume comparable amounts of energy, and both are powered in large part by coal-firing power plants. These facts do not work great as a joke, most likely because the estimated 40 million tons of CO2 that the Bitcoin network is responsible for are no laughing matter. How does a digital token (or currency, according to some) have an estimated carbon footprint comparable to that of Switzerland? How does environmental risk factor affect this disruptive technology’s viability? Answering these questions requires a basic understanding of blockchain technology.
Chances are someone has already tried to explain the blockchain to you, but we refuse to miss out on giving you our simple take. As the name would suggest, there is a chain of connected blocks. Each of these blocks is produced by running transaction data through a hashing algorithm, which returns some characters and numbers known as a hash. The block includes data from the previous block, essentially connecting it to the one before in a chain. Computers dedicate processing power to finding hashes that are smaller than a specific target value. If the rest of the network agrees that the computer was successful, then the new block is added to the chain and the computer is rewarded with some crypto.
These computers are called miners, and they carry out the role of verifying new transactions. They are equipped with graphics cards rather than pickaxes, but they still go through a lot of coal. According to a Bank of America note to clients, 75% of this processing power was initially based in China, where more than half of the electricity came from coal-firing plants. As this processing power is required to maintain security in the system, each Bitcoin transaction is associated with the emission of 359 kg of CO2! Using standard conversion factors, we found that a car would have to burn more than 150 L of gasoline to match that figure.
Some miners face premiums from their utility providers, but many are not presently including environmental cost in their calculus. Disruption of traditional currencies is driven by the machines that make the alternative system work, and these are growing ever more power-hungry. Innovative technologies such as blockchain-based cryptocurrencies may enable a transition away from the established centralized system. However, the environmental risk associated with any different system must be accounted for, especially when such risk is closely tied to security and verification.
Tesla, a company famous for disrupting the automobile market by developing stellar electric vehicles, recently converted a large part of its reserves to Bitcoin. Due to its amazing price boom over the past 10 years, Bitcoin seems like an appealing addition to many portfolios. However, companies should remember that like any other asset, the emissions associated with owning Bitcoin count towards their scope 3 emissions. Besides losses in climate-sensitive assets, companies like Tesla could face problems if climate disclosures are mandated in the US, as Federal Reserve governor Lael Brainard recently endorsed. In the EU, owning carbon-intensive assets could quickly prove costly at a time when the ECB expects banks to assess and account for their clients’ exposure to environmental risk.
Even if Bitcoin does not aim to fully replace traditional currencies and transaction systems, the partial adoption of a disruptive technology that leads to further environmental damage seems questionable. Proponents of the digital token are burdened with somehow justifying transactions that produce almost 800,000 times more (yes, you read that estimate right) CO2 than ordinary VISA transactions do. Some, like Artist Simon Denny, are looking for ways to offset crypto’s environmental impact. However, a safer bet would be to back technologies that actively reduce our carbon footprint, instead of supporting methods that exacerbate the climate crisis.