Behind the Scenes: A Critical Assessment of the Bitcoin Sustainability Debate

By: Michel Rauchs, Digital Assets Lead and Alexander Neumueller, Digital Assets Research at Cambride Centre for Digital Finance

In the spotlight
Bitcoin has seen a phenomenal rise in popularity in recent years, not least driven by a rapid surge in price, market capitalization, and total users (or rather, holders). At the same time, Bitcoin has also come under increased scrutiny for its seemingly insatiable demand for energy. Now on par with the level of entire countries, concerns about Bitcoin’s electricity consumption – and in particular the resulting environmental implications – are mounting amongst environmentalists, financial institutions, and policy makers. In times of intensified decarbonization efforts to combat climate change, this has sparked a heated debate between supporters and critics about the need for intervention.

Opponents argue that Bitcoin is a climate disaster responsible for destroying decades of progress made on environmental issues. Proponents counter that Bitcoin mining is one of the most sustainable and greenest industries on the planet. Neither claim holds up when subjected to the test of evidence. And yet they are emblematic for the deplorable state of the public discussion. Sensationalist headlines, unsubstantiated claims, and technical inaccuracies are commonplace, as are deliberate misrepresentations, personal attacks, and mutual accusations.

Given the considerable environmental, financial, and social interests at stake, it is hardly surprising that the debate is fraught with emotional bluster and technical blunder. There is undeniably a political element to it: vested interests on both sides of the spectrum fight tooth and nail to influence decision-makers, creating an environment where key policy and investment decisions risk being swayed by one-sided rhetoric and cherry- picked data points. It is therefore more important than ever to recognize that the question of Bitcoin’s environmental footprint is more nuanced and complex than a cursory glance might suggest.

What does the data say?
Having a reliable estimate of the total power consumption is just the first step, though. The environmental impact of this consumption depends on the carbon intensity of the energy sources used to generate the electricity. This, in turn, requires a detailed understanding of the geographical location of mining facilities and local power mixes. Several studies have suggested that renewable sources constitute a growing share of Bitcoin mining, but estimates vary considerably (ranging from approximately 30% to more than 70%).

A possible explanation for these discrepancies, aside from methodological differences, can be found in the dynamic nature of Bitcoin mining which causes the global power mix to fluctuate throughout the year. Estimates that lack a time dimension are unable to capture subtleties like regional miner mobility or seasonal changes in local grid composition.

Confronted with a general shortage of robust empirical data points on this issue, in 2020 we embarked on a new project that, with the continued support of four partnering mining pools, has since resulted in a unique longitudinal dataset on regional miner distribution spanning the period from September 2019 to April 2021 (with further updates scheduled regularly). Despite the inherent limitations – finding an appropriate methodology that is both scalable and consistent is challenging – the findings were revealing.

For one, the data confirmed for the first time the seasonal migration patterns within China that had previously only been anecdotally observed. These migrations, between hydro-rich Sichuan during the monsoon season and coal-rich Xinjiang during the dry season, materially affected the energy profile of Bitcoin mining in China. Since the data also revealed that China was responsible for two thirds of total Bitcoin hash rate up until Q3 2020 (see figure above), the migration had a substantial impact on global Bitcoin emissions throughout the year. However, with the recent exodus following the government crackdown on the mining industry, miners are spreading further across the globe – making it likely more difficult to track them in the future.

By linking our datasets on electricity consumption and regional hashrate distribution to the carbon intensity of local power mixes, we hope to provide a continuous estimate of Bitcoin’s carbon dioxide emissions in the future. Yet, there is more to sustainability than ‘just’ carbon emissions. For instance, there is also the generated e-waste from the disposal of special-purpose mining equipment. There are other greenhouse gases that are emitted throughout the hardware supply chain from production to delivery, from the set-up of facilities to the transportation of units. And then, of course, there are the offices, vehicle fleets, business travels, and all other sorts of potential Scope 1-3 emissions relevant assets and activities of mining companies that could be further considered. Where do you draw the line, really?

One of a kind
These examples illustrate just some of the real-world complexities that a robust environmental assessment needs to consider. But another issue preventing a more balanced public discussion, often less obvious and clear, is the prevalence of conceptual and technical misconceptions regarding Bitcoin itself. For instance, there is a widespread belief that electricity consumption automatically must rise over time, although Bitcoin does not require a pre-defined threshold of electricity to function.

The Bitcoin network is also commonly compared to traditional payment systems in terms of the carbon footprint per transaction. However, electricity consumption is linked to block production rather than transaction processing. Therefore, this comparison tends to be mainly theoretical and of little practical relevance without additional context let alone the fact that many transactions are cleared ‘off-chain’ through private intermediaries like custodial exchange and wallet services, instead of being settled on the blockchain itself.

This last example highlights a deeper issue with comparisons in general. While important for putting things into perspective, they can only provide partial insights at best – because there simply is nothing else quite like Bitcoin in the world today. Even within the world of cryptoassets, Bitcoin occupies an exclusive place as a global, politically-neutral settlement system that enables permissionless transfers of a synthetic commodity asset free from discretionary management. Proof of work, the key driver of Bitcoin’s electricity appetite, plays a fundamental coordination role that enables the network to self-organize in the absence of human subjectivity and intervention. Calls for replacing this mechanism with less energy-intensive alternatives neglect the potential risks to Bitcoin’s main value proposition as trade-offs and transition hazards remain understudied.

Bitcoin also appears to be held to a different standard when it comes to ‘permissible’ energy usage. Naturally in the eye of the beholder, judgments about the moral legitimacy of the use of energy seem to be arbitrarily applied to Bitcoin but less so to other controversial industries and activities. Much of this is the product of personal preferences and values that create a false dichotomy which lies at the heart of the debate: can the Bitcoin network’s activities be considered ‘good’ and ‘socially useful’? Those who disagree with the premise regard every use of resources by the network as wasteful by definition. But what some regard as waste, others see as the key pillar for ensuring the system’s value proposition.

Light on the horizon?
Given all these factors, the debate seems to have reached a polarizing impasse with no clear solution in sight. But not all hope is lost, as the industry appears to undergo a change in mindset. A growing number of mining firms have recognized the need for greater transparency and started to voluntarily disclose information and participate in research projects such as the CBECI. Private initiatives, extending well beyond just the mining sector, have formed to promote sustainable practices amongst members and collect pledges for active decarbonization. Some asset managers and exchanges have begun offsetting their activities through carbon credits, while others are contemplating the idea of so-called ‘green Bitcoins’ that are carbon- neutral.

This is not just due to a sudden awakening to environmental concerns, of course (e.g. sustainability issues were already discussed as early as 2009). Rather, the growing pressure from public opinion, caused by the subject’s omnipresence in the media, and the resulting concerns about consequential policy intervention, seem more probable drivers. The largest push for decarbonization may, however, ultimately come from the investor side. Since investment decisions are increasingly bound by stringent ESG rules, future flows of funds into (or out of) the ecosystem will largely depend on whether Bitcoin can meet set sustainability criteria.

Some suggest that these considerations pose a potentially existential threat to miners, creating a natural financial incentive for the industry to actively decarbonize. Others doubt the effectiveness of a purely market-driven approach and call for additional policy responses. What means will prove most impactful remains to be seen. As the world is moving towards decarbonization, so will Bitcoin – but only if the environmental externalities are adequately priced in. Because ultimately, mining operations will continue to be dictated by economic rather than ideological, ethical, or environmental principles.

What are the main takeaways, then?
At present, no satisfactory conclusion about the actual scale and extent of Bitcoin’s environmental footprint can be drawn. A radical thought experiment suggests that, in a hypothetical worst case, Bitcoin could produce as much as 158 million metric tons of carbon dioxide this year, or roughly 0.48% of the world’s total emissions in 2019 (assuming an annualized consumption of 100 TWh). While this is by no means a small feat, it is still far away from the climate disaster that opponents often paint. Actual emissions will be significantly lower given the non-trivial share of renewables that already power the network – although the exact proportion is likely less than what ardent supporters commonly claim. To the chagrin of decision-makers, there are no easy answers – just many shades of grey, as further exemplified by the ambiguous effect of Bitcoin mining on broader incentives for power generation. On the one hand, Bitcoin mining may encourage the build-out of sustainable power generation capacity by changing the long-term economics of renewable infrastructure projects. On the flipside, additional mining demand for low-cost and stable power can also lead to the re-commissioning of old, polluting power plants – or at least extending their economic lifetime. It is undoubtedly a double-edged sword.

We need more data, insights, and education to raise the level of public discourse. We need to discount the emotive rhetoric and start looking at facts, irrespective of personal opinions and preferences. We need to properly identify the consequences of potential (in)action, whether they are of financial, economic, regulatory, legal, social, environmental, or ethical nature. And above all, we need to promote a general willingness amongst stakeholders to engage more intensively with the arguments and concerns of the other side. Only then can the underlying issue be seriously addressed.

Read more from the report, Digital Assets: Laying ESG Foundations