Are Cryptocurrencies polluting the earth?
Environmentalists long ago discovered one simple truth: It’s hard to convince people to leave oil in the ground. The problem is easy to understand when we consider the incentives: Drilling for oil creates immediate, concentrated profit for the drillers themselves, while the environmental costs come later and are spread out across the entire world. In such ways, the ‘rational’ choice for each individual becomes the most harmful choice for the world as a whole.
The move away from fossil fuels is therefore happening slowly – but it is happening. As renewable energy sources become more prevalent, however, another recent development threatens to undo much of the world’s current progress toward environmental sustainability.
Bitcoin and other cryptocurrencies are obtained through virtual mining instead of real-world drilling, but in economic and environmental terms, the outcome is the same. Absent international regulation, cryptocurrency miners could cause great environmental harm – all while making economic decisions which are perfectly rational from their perspective.
As we will see, fixing this situation will require learning a key lesson from the oil debate, and then applying it to the world of cryptocurrencies. Before doing so, however, we must first understand the connection between cryptocurrency technology and the environment.
How coins are mined
Governments and national banks can print more of their currencies whenever they choose, but most cryptocurrencies follow different rules. By far the most popular of these digital currencies is Bitcoin, which uses an algorithm to release a set amount of coins each year. Ordinary users compete for the right to claim these new coins, and this competition is called mining.
The problem is that mining takes an enormous amount of computing power, which in turn requires electricity, which of course needs to come from somewhere. Because Bitcoin’s market price is so high, the value of mined Bitcoins is typically much higher than the cost of each miner’s electricity bill.
And so we encounter dangerous incentives once again: The more each user mines, the more they profit – even at the cost of straining the electricity grid they rely on. And because renewable energy capacity is not yet high enough to power the world, this extra energy use often requires the burning of fossil fuels to supply the miners. Once again, we find it nearly impossible to leave oil (and other fossil fuels like coal) in the ground.
The scale of the problem
The electricity consumed by Bitcoin alone – mostly from mining, but partly from digital transactions as well – is already greater than the amount used by medium-sized countries like Argentina and Sweden. Indeed, if Bitcoin itself were a country, it would be the 40th highest energy-consuming country in the world.
Moreover, a recent analysis by Cambridge University found that around 65% of all Bitcoin mining came from China, which gets more than half of its energy from coal. A 2018 study concluded that carbon emissions from Bitcoin alone could raise global temperatures by as much as 2 degrees, as early as 2033.
Even worse, Bitcoin is just one of countless cryptocurrencies in use today. Although it is the most widespread, other digital coins such as Ethereum and Dogecoin only add to the problem. The situation has gotten to a point where an actual power plant in New York has decided that it can make more money mining for Bitcoins than selling its energy to the surrounding community.
A case can certainly be made for the value of mined cryptocurrencies as a viable alternative to centralized forms of money. But in a world whose carbon emissions are already far above safe levels, it seems legitimate to question the wisdom of setting up armies of continuously running computers that compete endlessly for virtual coins.
Some have already begun to question these priorities – including notable crypto supporter Elon Musk, whose company Tesla has paused its decision to accept Bitcoin transactions due to environmental concerns. The details of this decision, and others like it, suggest a solution that could make all parties happy in the long run.
Private markets and the public good
Less than 2 weeks after the Tesla announcement, leading Bitcoin miners announced a Bitcoin Mining Council tasked with increasing industry transparency and ensuring that over 50% of all mining takes place using sustainable energy sources.
Around the same time, the Chinese government began cracking down on Bitcoin mining – leaving entire mining centers shut down. Malaysia took an even more dramatic approach, physically crushing over 1,000 Bitcoin mining rigs with a steamroller.
These examples should serve as a reminder that markets do not operate in isolation. Cultural influence, business leadership, and government regulation all have a big role to play in ensuring that the right market incentives prevail.
Just as importantly, however, we must understand that the cryptocurrency emissions problem is a mere symptom of the same larger sustainable energy issue that the world has known about for decades. When the global community completes its switch to renewable energy, which it must eventually do anyway, cryptocurrency emissions will vanish.
Consider the following infographic from the nonprofit group Land Art Generator:
If the black boxes alone were filled with networked solar arrays, the world would have no need for any other energy source. Sustainability becomes even easier to imagine if we consider the other forms of clean energy we could also employ, with the help of wind, hydroelectric, tidal, nuclear, and geothermal power plants. Simply put: We can only leave oil in the ground after we replace it with something better.
Blaming cryptocurrencies for their emissions makes a certain amount of sense, but only if we keep the larger issue in view: It is the responsibility of everyone, not just cryptocurrency miners, to accelerate the world’s transition to clean energy sources. In the meantime, miners must certainly reduce their emissions – but we make a mistake if we point the finger at them alone. Miners can only operate in the world we create for them, and it is up to all of us to make that world as healthy, and sustainable, as we possibly can.