The Foundations of Climate Leadership in the Crypto Economy

By Faryar Shirzad, Chief Policy Officer at Coinbase

The climate crisis is a defining challenge of our time that will require action across the global financial system. And despite our industry’s youth, we’re not exempt. Climate risks threaten to reduce enthusiasm for crypto amongst otherwise loyal advocates and suppress capital investment by ESG-conscious stakeholders. This discourages innovation and, over time, poses risks for every crypto market participant committed to a DeFi future, from the smallest validator team to the largest cryptoasset service provider.

One of my first actions at Coinbase was to ask my colleagues to prioritize how to minimize crypto’s environmental footprint. We aren’t just looking at Coinbase (we directly use very little energy), but ecosystem-wide. There’s much more work ahead, but unlike many legacy industries, crypto is actually well- positioned to lead on climate.

Here are some of our early thoughts on what we think climate leadership may look like for the crypto economy.

Foster candid discussion and gap-filling research to produce high-quality, universally accepted data and consistent, transparent disclosure on crypto’s climate impacts
First, crypto companies must understand their climate impacts, which requires gathering, maintaining, and transparently disclosing high-quality data about their electricity consumption and energy mix. Crypto companies will then need to calculate their Scope 1-3 greenhouse gas (GHG) emissions. This will enable them to design mitigation portfolios and consider targets, such as net zero. They may also want to consider sustainable office operations, transportation modes, water intensity, work-from-home policies, and more.

Numerous ESG reporting and ratings frameworks exist to track and disclose climate (and other environmental) impacts, but none are particularly well-tailored for crypto. It may be time for our industry to partner with established leaders in carbon accounting and reporting to develop a bespoke, standardized framework for assessing and disclosing the climate impacts of crypto mining, trading, and holdings. A commitment to voluntary ESG reporting would align crypto firms with a large majority of the top 50 companies by revenue in the Fortune 100, which made climate, renewable energy, and/or environmental sustainability disclosures.

No matter the framework, crypto’s climate disclosures must include the good with the bad. Bitcoin offers a case-in-point. Mining previously undertaken in China’s Xinjiang province that relied on government-subsidized coal-fired generating facilities harmed the environment and public health. Mining powered by existing surplus hydroelectric capacity in Sichuan, by contrast, arguably had no direct warming impact. In other words, mining can be carbon intensive, but need not be. If customers, agency officials, or the press see our sustainability efforts as “greenwashing,” the reputational damage and follow-on oversight consequences could be severe. Radical transparency is a part of crypto at its core. Our reporting mechanisms should be similarly transparent.

Forge industry coalitions and develop constructive relationships with policy makers to create aggressive but achievable environmental targets
The crypto community will need to use a robust and coordinated approach to having our voices heard in shaping future climate-related legislation and regulatory actions. To date, there have been at least five carbon pricing bills, six climate bank proposals, as well as numerous signals that mandatory U.S. Securities and Exchange Commission (SEC) climate disclosure rules are imminent. It’s in our interest – and the interest of sound public policy – to participate in these processes so as to ensure that legislation is rooted in evidence–based data and reflects an understanding of crypto’s underlying technology.

Crypto is developing quickly and gaining public acceptance as a valuable part of the economy; however, crypto will not enjoy the same long–off ramp to decrease climate impacts that traditional financial institutions and other legacy industries have enjoyed. We need to combat climate misinformation with demonstrable climate progress. As a result, where economically feasible, participants in the crypto economy should strive to lead our counterparts in tech and traditional finance. That means: investing in rigorous carbon footprinting, using that information to develop ambitious mitigation targets, achieving those targets with high-quality nature-based carbon- • removal projects (not merely offsets), and reporting our progress, at a minimum, to the Carbon Disclosure Project (CDP).

Leadership also means owning up to the net effects of crypto mining. Bitcoin, at least, is self-solving. Soon enough, the last Bitcoin ever to exist will be mined, reducing the network’s overall energy consumption. But even where networks transition to less energetically demanding protocols, mining activities will continue • to depend on an energy mix that may include fossil fuels for the foreseeable future. An industry-wide effort to pool resources and invest in expanded renewable energy projects, coupled with investments intended to facilitate the decommissioning of coal-fired generating plants, could significantly mitigate that residual carbon footprint.

Take bold action now
Progress towards decarbonizing crypto is not only possible, but feasible in the near term. The industry’s first steps have already begun to take shape:

  • First, major industry players should consider actions to green their own houses. These may include matching electricity needs with 100% renewable energy and decarbonizing their operations using high-quality carbon removal projects, amongst others.

  • Second, we should partner with established leaders in carbon accounting and reporting to develop a realistic Scope 3 (value chain) carbon accounting methodology purpose-built for crypto, as well as a standardized ESG disclosure framework for crypto mining, trading, and holdings, so as to maximize our compliance with government regulatory mandates to come and the public’s understanding of our true environmental impacts.

  • Third, the industry should organize and pool data to facilitate the publication of an annual sustainability report for the crypto ecosystem, a first-of-its-kind, industry-wide status report validated by third-party academic and other auditors that cuts through the noise and misinformation to serve as a defining “single source of truth.”

  • Fourth, we should coordinate ecosystem-wide renewable energy purchases at scale – to offset mining operations, facilitate the decommissioning of coal-fired generating capacity, bring new solar and wind supply online, and develop creative private-governance mechanisms to incentivize all participants in the crypto economy to offset or abandon residual fossil fuel use.

With these and other steps, there will be no doubt that this ecosystem can rally together to take charge of our climate future.

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