Proponents of crypto must demonstrate that its value to society exceeds its significant environmental costs.
The vision behind cryptocurrency has been to free money from the centralized control of banks and other financial intermediaries—and ultimately to replace the current sovereign-based financial system. But to achieve its aspirations, cryptocurrency uses technology that demands massive amounts of energy. Its climate impacts simply cannot be ignored.
To understand what cryptocurrency is and how it works, consider how financial transactions ordinarily occur today. Every time consumers complete a transaction without cash, the transaction must be validated through an intermediary in the form of a bank. The banks operate with additional intermediaries in the form of the U.S. Board of Governors of the Federal Reserve System or the European Central Bank. All this intermediation involves some small transaction costs, but also gives rise to concern about the value of the currency because the Federal Reserve can essentially print money. Orthodox economic theory teaches the more money created by central banks, the greater the risk of inflation. That does not mean that intermediation is not good though. It has, after all, succeeded in financing considerable economic growth for decades.
The cryptocurrency revolution intends to reduce the cost of intermediary transactions by using a distributed ledger system: Blocks that form part of a blockchain are used to validate the so-called reality of each cryptocurrency. The most well-known and biggest cryptocurrency is Bitcoin, but there are other big ones too, such as Ethereum. They are validated by a process called “mining,” which means that mathematical problems have to be solved by “miners,” who are rewarded with a particular cryptocurrency. This process analogizes well to gold mining in that if you perform the work and successfully identify what is genuine gold and not fool’s gold, you will get the reward of building a big stash of money.
The difference in the modern world is that cryptocurrency is very complicated in terms of the solutions to the mathematical puzzles used in validation, which get increasingly difficult as more crypto coins are discovered. This result has required the use of extremely large computing power to be able to compete—so large that the scale is staggering. Big banks have huge computer systems, and yet even their data centers are dwarfed by big cryptocurrency-mining centers. That intensive energy consumption has given rise to serious concerns about the environmental impacts of cryptocurrency.
More efficient ways to develop and mine cryptocurrency may exist. But as more people use cryptocurrency, these supposed efficiency gains can be overwhelmed. This potential for crypto’s scale to overwhelm even greater efficiency matters because the aspiration of cryptocurrency’s proponents is ultimately to replace sovereign financial systems. That would bring about a massive increase in the growth of the use of crypto technology—and its energy demands.
At this stage, a single Bitcoin transaction uses the equivalent electrical energy of an average U.S. household over about 70 days—really big energy demand. The precise carbon footprint depends on how the electricity supplied to the servers is produced. But assuming it is based on coal, its climate impacts can be described in terms that any teenager can understand: one Bitcoin transaction equates to almost 200,000 hours of watching YouTube.
The Bitcoin network uses an electricity consumption on an annual basis that is greater than the energy consumption of the country of Norway, and not that far behind that of New York state. Every now and again, commentators even talk about Bitcoin soon using more energy than the city of London.
Ethereum is somewhat more efficient, but not much different. It has a lower volume but a single Ethereum transaction still uses the same electricity as an average U.S. household for about nine days, and it has a carbon footprint of almost 24,000 hours of watching YouTube.
This huge energy consumption translates into major health and environmental justice impacts. People living in neighborhoods near energy-generation plants, such as coal-fired utilities, have to endure the health effects associated with pollution. And any burning of fossil fuels will have effects on the climate.
Displaced workers at defunct mines understandably welcome the employment crypto energy production offers, but there are surely more environmentally constructive ways to assist such workers.
Waste is a concern too, which can result from discarded computer chips and other computer equipment when it must be replaced. For Bitcoin, the electronic waste equates to that of the IT and telecommunication waste generated by the Netherlands. In an era of microchip shortages, this concern becomes increasingly important.
Defenders of cryptocurrency will say, “Sure, it uses a lot of energy, but how much energy do you think the banking system uses?” Well, the carbon footprint of one Bitcoin transaction equates to nearly 2 million Visa transactions. In terms of efficiency, there is simply no comparison.
Defenders have also protested that cloud data centers, for example, use enormous amounts of energy. The relative comparison, even if conceivably true, is by no means clear. In any event, such examples refer to the platforms for current commerce, not add-ons such as cryptocurrency. So the comparison is misleading.
The crypto industry is now under a lot of pressure from two directions. On one side are the climate groups that are well organized and very upset about the industry’s energy use. On the other side is the Crypto Climate Accord, a consortium of cryptocurrency organizations that tries to make crypto greener—meaning reliant on less energy consumption. Many players are involved in the Crypto Climate Accord, and it is possible that could be where crypto goes in the future.
The possibility of green crypto certainly offers some hope. A number of supposedly green cryptocurrencies are emerging, but my reading is that none of them have yet received anything like the kind of market share that could compete with those of big players like Bitcoin and Ethereum. And there are various meanings of “green.” Ultimately, it depends on where the energy is coming from. If the source is renewable, such as wind farms or solar generation, it may not be bad. The trends, however, are not encouraging.
The debate over crypto will not end by just declaring it could be more efficient than it is today. After all, the traditional banking industry is also constantly striving to make its computer systems more energy efficient too. To resolve the debate over crypto, industry players must not only address its huge environmental impacts, but they must also show why it should exist at all. How does it benefit society? A lot of people believe in crypto and presumably they benefit from it. But that does not mean that it confers an aggregate benefit to society as a whole. There has to be something better about crypto than the existing system. And for that question, the jury is still out.
This essay draws on remarks delivered earlier this year at an event cosponsored by the Wharton Risk Center and the Penn Program on Regulation (PPR). A full video recording of the session is available at PPR’s YouTube channel.