A Warning For Cryptocurrencies That Ignore Climate Change
Musk’s Statement
A couple of days ago, Tesla CEO Elon Musk suggested that his company might sell its bitcoin holdings, causing the cryptocurrency to plummet.
This follows Musk’s announcement earlier this month that his company will no longer accept Bitcoin as payment for its electric vehicles due to the fossil fuels needed to create a digital currency.
The Problem with BTC
Bitcoin is created using powerful computers that solve complex mathematical equations. These computers consume a lot of electricity, which is often generated from fossil fuels.
Tesla’s position is a big win for both the climate and the company’s green reputation. This development has also shed light on the carbon footprint of cryptocurrency an issue that won’t go away anytime soon.
Announcing Tesla’s Bitcoin withdrawal, Musk said:
“Cryptocurrency is a good idea in many ways, and we believe it has a promising future, but it shouldn’t come at a cost to the environment.”
Wel…Props to Musk for standing his ground, especially since this decision led to a drop in the price of bitcoins, reducing its value on Tesla’s balance sheet.
So why exactly are Bitcoin and many other cryptocurrencies bad for the environment?
It all comes down to the energy used to create it. Before a Bitcoin transaction can take place, the person spending the coin must be verified as the actual owner. And once the transaction is complete, it must be digitally recorded in a database known as the “blockchain” ledger.
Unlike a traditional bank, where transactions are centrally verified and recorded, the bitcoin ledger includes a distributed user database. They validate transactions by solving complex math problems on powerful computers. The first user to solve computation and add it to the blockchain is rewarded with bitcoins.
This process is called “mining“.
Previously, geeks could mine in their bedrooms using their home computers. Nowadays this is mostly done in huge rooms with very expensive specialized equipment that only companies can afford.
This process requires a lot of energy. The University of Cambridge recently calculated that Bitcoin consumes more electricity each year than the entire economy of Argentina or Sweden.
Some of this electricity comes from renewable sources. But research shows that most of the bitcoin mining takes place in China, with coal being the main source of energy. A recent study concluded that Bitcoin operations in China should generate 130 million tonnes of greenhouse gas emissions in 2024 more than the entire economy of the Czech Republic.
“Cleaning” cryptocurrency
So where do you look for energy-intensive and “clean” digital currencies like Bitcoin now?
Some environmental problems could potentially be solved by switching to cleaner sources of electricity for computer processing. According to one proposal, this could include creating a traceability registry so that climate-aware investors can buy bitcoins made from, say, Icelandic hydroelectricity rather than coal.
But such a measure should probably be voluntary. Regulating Bitcoin will be difficult due to its decentralized nature; there is no company that can be “fined” for breaking the rules.
Any attempt to clear Bitcoin by changing its encoding will be problematic. Previous attempts to change the code to improve efficiency simply led to forks the emergence of new cryptocurrencies such as Bitcoin Gold and Bitcoin Cash.
As with climate policy in general, the best way for governments to cut greenhouse gas emissions is to set a carbon price for cryptocurrency mining companies. This will be financially detrimental to those who do not switch to renewable energy sources.
