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Bitcoin, Crypto-Assets, and the Energy Sector

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:

  1. How do digital assets affect energy usage, including grid management and reliability, energy efficiency incentives and standards, and sources of energy supply?
  2. 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?
  3. What are the potential uses of blockchain technology that could support climate monitoring or mitigating technologies?
  4. 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…

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