Bitcoin, Crypto-Assets, And The Energy Sector – Fin Tech
Crypto-assets such as Bitcoin are often criticized for consuming more energy than
entire countries as a result of energy-intensive “mining”
activities. However, other crypto-assets such as Ethereum consume
significantly less energy and many crypto-asset
mining operations use renewable energy or energy that would
otherwise be wasted, such as flare gas from oil drilling.
As crypto-assets become more widely adopted, government
officials seek guidance to help inform policy decisions
and ensure the responsible development of crypto-assets and their
underlying blockchain technologies. This article provides a brief
overview of the factors that drive crypto-asset energy consumption
and examines a report from the White House Office of Science
and Technology Policy evaluating the climate and energy
implications of crypto-assets.
What Drives the Energy Consumption of Crypto-Assets?
The energy consumption of crypto-assets is primarily a result of
the underlying blockchain technology and the process by which new
blocks are added to the blockchain. A blockchain is a digital distributed ledger that
enables parties who may not otherwise trust one another to agree on
the current ownership and distribution of assets. One party or
“node” in the distributed network proposes a block – a
set of crypto-asset transactions and/or other data – to add to the
blockchain and the other nodes verify the validity of the block.
After the nodes reach consensus, the new block is added to the
blockchain.
Some crypto-assets, such as Bitcoin, use a proof-of-work (PoW) consensus mechanism to
determine which node is authorized to add the next block to the
blockchain. This process is referred to as “mining” and includes presenting the nodes
with a difficult computational problem. The first node to solve the
problem proposes the solution to the other nodes, which then verify
that the solution is valid. Once verified, the new block is added
to the blockchain and the first node to find the solution is
rewarded, typically with units of the corresponding crypto-asset.
Crypto-assets that use a PoW algorithm require substantial energy
to both (1) operate the computing devices attempting to solve the
computational problem and (2) provide cooling to compensate for
heat generated by the computing devices during operation.
Other crypto-assets use less energy-intensive consensus
mechanisms, such as proof-of-stake (PoS), to determine which node
is authorized to add the next block to the blockchain. In a PoS
system, instead of requiring the nodes to solve a difficult
computational problems, a node is selected randomly based on the
amount of the crypto-asset “staked” with the node. The
largest crypto-asset by market capitalization to use a PoS
consensus mechanism is the Ethereum blockchain. Ethereum
transitioned from PoW to PoS in a network upgrade known as “the
Merge” in September 2022, which reduced the energy
consumption of Ethereum by an estimated 99.95%.
White House Office of Science and Technology Policy Report
In September 2022, the White House Office of Science and
Technology Policy published a report examining the climate and energy
implications of crypto-assets. The report is responsive to
President Biden’s Executive Order 14067 issued in March 2022 on
ensuring responsible development of digital assets and answers the
four main questions asked in the Executive Order:
- How do digital assets affect energy usage, including grid
management and reliability, energy efficiency incentives and
standards, and sources of energy supply? - What is the scale of climate, energy, and environmental impacts
of digital assets relative to other energy uses, and what
innovations and policies are needed in the underlying data to
enable robust comparisons? - What are the potential uses of blockchain technology that could
support climate monitoring or mitigating technologies? - What key policy decisions, critical innovations, research and
development, and assessment tools are needed to minimize or
mitigate the climate, energy, and environmental implications of
digital assets?
Key Findings from the Report
Crypto-Assets Use a Significant Amount of Energy, but Also
Benefit the Electric Grid
The report estimates that global annual electricity usage for
crypto-assets is between 120 and 240 billion kilowatt-hours as of
August 2022, which is at least double the estimate from 2018. This
is equivalent to 0.4% to 0.9% of annual global electricity usage,
and more than the annual electricity usage of many individual
countries such as Argentina or Australia. The United States is
estimated to host about a third of global crypto-asset operations,
which currently consume about 0.9% to 1.7% of total U.S.
electricity usage.
The report expresses a concern that electricity usage from
crypto-asset mining can adversely impact the electric grid.
However, the report also highlights the benefits that crypto-asset
mining operations provide to the electric grid, such as the ability
to use mining operations as a grid resource.
Crypto-asset mining facilities can rapidly modulate their
operations to participate in demand response programs and instantly
curtail their electric consumption during high demand periods to
help stabilize the grid. For example, in July 2022,
high temperatures and high projected electricity demand caused the
Electricity Reliability Council of Texas (ERCOT) to declare a grid
emergency event, and Bitcoin miners using 1 GW of power reportedly responded to ERCOT’s demand
response request by reducing mining power usage.
The report acknowledges that nearly all crypto-asset electricity
usage is driven by consensus mechanisms, citing PoW as the most
energy-consuming. As of August 2022, Bitcoin was estimated to
account for 60% to 77% of total global crypto-asset electricity
usage, and Ethereum was estimated to account for 20% to 39% when
both crypto-assets used the PoW consensus mechanism. However, these
numbers do not reflect the September 2022 Merge event for the Ethereum blockchain, which
dropped Ethereum’s energy consumption by an estimated
99.95%.
Some Crypto-Assets Have Other Environmental Impacts Related to
Energy Use
According to the report, global electricity generation for the
crypto-assets with the largest market capitalizations resulted in a
combined 140 ± 30 million metric tons of carbon dioxide per
year (Mt CO2/y), or about 0.3% of global annual
greenhouse gas (GHG) emissions. Crypto-asset activity in the United
States is estimated to result in approximately 25 to 50 Mt
CO2/y, which is 0.4% to 0.8% of total U.S. GHG
emissions. The report finds that GHG emissions from electricity
usage vary by region because some regions rely more on
carbon-intensive fossil fuels, whereas other regions use more
nuclear and renewable energy sources.
Apart from electricity consumption and GHG emissions, the report
notes that crypto-asset mining operations also cause local noise
and water impacts, electronic waste, air and other pollution from
any direct usage of fossil-fired electricity, and additional air,
water, and waste impacts associated with all grid electricity
usage. The report recommends action by the federal government to
encourage and ensure responsible development and adoption of
crypto-assets.
Blockchain as Enabling Technology for Environmental Markets and
Distributed Energy Resources
Blockchain and distributed ledger technology (DLT) may have a
role to play in enhancing market infrastructure for a range of
markets, including environmental markets. However, the rationale
for replacing existing market infrastructure technologies with DLT
will depend on the context in specific markets, including switching
costs. The report cautions that, in environmental markets
specifically, those who propose to adopt DLT should ensure that the
environmental benefits are clear, relative to the environmental
footprint of existing market infrastructure technologies. The
report also recommends that DLT adopters ensure the environmental
footprint of the DLT does not negate the benefit of the associated
environmental market products.
Emerging use cases of DLT include energy management for
distributed energy resources (DERs) such as electric vehicles, fuel
cells, residential and commercial battery systems, and solar power
systems. DLT could potentially serve as the digital ledger for the
registration, authentication, and participation of these DERs in a
smart grid, enabling flexible grid operations as more variable
renewables are adopted. Additionally, DLT could enable verification
by allowing grid-operators and aggregators to audit, in real-time,
the services provided by every DER within the pool through analysis
of the tamper-resistant distributed ledger.
Recommendations from the Report
To ensure the responsible development of digital assets, the
report recommends that policy-makers consider the following factors
when developing legislation and policy decisions for
crypto-assets:
1. Minimize GHG Emissions, Environmental Justice Impacts, and
Other Local Impacts from Crypto-Assets
The report suggests that the Environmental Protection Agency
(EPA), Department of Energy (DOE), and other federal agencies
collaborate to develop “effective evidence-based environmental
performance standards for the responsible design, development, and
use of environmentally responsible crypto-asset technologies.”
The report proposes setting standards for energy intensities, water
usage, noise generation, clean energy usage by operators, and
standards that strengthen over time for additional carbon-free
generation to match or exceed the additional electricity load of
these facilities. Should these measures prove ineffective, the
report recommends exploring executive actions and legislation to
limit or eliminate the use of high energy intensity consensus
mechanisms for crypto-asset mining.
2. Ensure Energy Reliability
The report recommends that the DOE coordinate with the Federal
Energy Regulatory Commission, and the North American Electric
Reliability Corporation and its regional entities to conduct
reliability assessments of current and projected crypto-asset
mining operations on electricity system reliability and adequacy.
If these reliability assessments find current or anticipated risks
to the power system as a result crypto-asset mining, the report
suggests developing, updating, and enforcing reliability standards
and emergency operations procedures to ensure system reliability
and adequacy under the growth of crypto-asset mining.
3. Obtain Data to Understand, Monitor, and Mitigate
Impacts
The report recommends that the Energy Information Administration
and other federal agencies collect and analyze information from
crypto-asset miners and electric utilities in a privacy-preserving
manner to enable evidence-based decisions on the energy and climate
implications of crypto-assets. The collected data could include
mining energy usage, power purchase agreements, environmental
justice implications, and demand response participation. The report
also suggests establishing a National Science and Technology
Council subcommittee to coordinate with other relevant agencies to
assess the energy use of major crypto-assets.
4. Advance Energy Efficiency Standards
The report recommends that the current administration work with
Congress to enable the DOE and encourage other federal regulators
to promulgate and update energy conservation standards for
crypto-asset mining and related operations.
5. Encourage Transparency and Improvements in Environmental
Performance
The report recommends that the National Science Foundation, DOE,
EPA and other relevant agencies promote and support research and
development priorities that improve the environmental
sustainability of digital assets. Such research could include
crypto-asset impact modeling, assessment of environmental justice
impacts, and understanding beneficial uses for grid management and
environmental mitigation.
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