Federal Report Warns of Crypto’s Environmental Impacts

Investing News

In a Sept. 8, 2022 report titled, “Climate and Energy Implications of Crypto-Assets in the United States,” the White House Office of Science and Technology Policy (OSTP) called for more research on the energy impact of crypto mining, the process that generates cryptocurrency. The report is a 46-page response to President Biden’s March 9, 2022, Executive Order 14067 urging responsible development of digital assets, including cryptocurrency.

The OSTP report notes the high energy use by cryptocurrency production and its impact on the environment, including both the scale of the impact and how different mining methods use electricity differently. Recommendations include reducing greenhouse gas emissions, operations that increase the cost of electricity, operations that reduce the reliability of electric grids, and the negative impact of crypto mining on equity, communities, and the environment.

Key Takeaways

  • A Sept. 8, 2022 report by the Office of Science and Technology Policy (OSTP) tackles the subject of energy use by the cryptocurrency sector.
  • The report is a response to President Biden’s Executive order urging the responsible development of digital assets.
  • The report calls for legislation limiting or eliminating Proof of Work (PoW) consensus if desired results are not achieved.
  • Recommendations include reducing emissions, keeping electric costs low, maintaining the reliability of the electric grid, and avoiding negative impacts on communities and the environment.

The Energy Costs of Crypto

According to the OSTP report, estimates of the total global electricity usage for the crypto-assets range between 120 and 240 billion kilowatt-hours per year which is more than the total annual electric consumption of many countries. Almost all of this usage comes from what is known as consensus mechanism, which is the infrastructure of the blockchain network that allows cryptocurrencies to work.

The estimated amount of electricity used by the crypto industry per year is 120 to 240 billion kilowatt-hours.

The popular consensus mechanism is Proof of Work (PoW) which is used by the Bitcoin. PoW requires enormous amounts of computing power to validate transactions. Bitcoin, for example, is estimated to account for 60% to 77% of total global crypto-asset electricity usage (up to 185 billion kWh), and Ethereum is estimated to account for 20% to 39%.

Another consensus mechanism, Proof of Stake (PoS) uses a fraction of the amount of electricity used by PoW. Experts estimate switching to PoS would reduce electricity usage by cryptocurrencies to less than 1% of today’s levels.

The Impact of Crypto on the Environment

The massive amounts of electricity used to generate crypto-assets result in the generation of roughly 0.3% (140 million metric tons) of greenhouse gas emissions per year, the OSTP report states. The United States generates approximately 25 to 50 million metric tons of that total. The OSTP says this is similar to the amount of emissions from diesel fuel used in railroads in the United States.

Other factors that affect the environment include noise and air pollution, impact on water sources, and waste creation as a direct result of the use of fossil-fired electricity. All this could impact the ability of the U.S. to achieve goals under the Paris Agreement, not to mention avoiding some of the most severe impacts of climate change.

How Crypto Mining Can Help Meet Climate Goals

Ways exist through which the distributed ledger technology (DLT) could not only reduce the impact of crypto-mining on the environment but actually help the U.S. meet climate goals, the report says. Substituting PoS for PoW is one direct way to reduce pressure on the grid, but to get there requires addressing the downsides of both technologies.

As stated, PoW requires massive amounts of electricity. PoS uses a fraction of the electricity but requires a massive initial investment in order to be a validator. This, in itself, creates a potential issue since the population of validators is skewed toward wealth. Use of clean energy which produces fewer carbon emissions is one of several possible solutions presented by the OSTP.

The Bottom Line

The report seeks to answer four questions presented in Executive Order 14067. How does crypto affect energy usage; how much does it affect energy usage; how could it help address climate change; and what does the government need to do to ensure this happens?

The answers to these questions are not straightforward and will require continuing communication between the crypto industry and the government. The development of policies that reduces emissions, keep electricity costs down while ensuring the reliability of the grid, and avoid negative impact on communities and the local environment is critical.

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