Monday, October 4, 2021

ELECTRICITY TARIFF REFORM. SHIFTING THE BURDEN FROM ELECTRICITY TO GAS IS A START

 

Plans to shift green surcharges from household electricity bills to gas bills are an overdue and welcome reform. With the necessity to shift consumption away from gas to low carbon power, taxing electricity but not gas has been perverse. In particular it conflicts with policies to shift residential heating to electricity-based systems, especially heat pumps. It was one of several key recommendation of the 2019 report, on network tariffs for a low carbon future, that I prepared for Energy Systems Catapult. So it’s satisfying to see the proposed change.

However this shift is probably not enough on its own to provide a clear incentive for consumers to switch from gas to electric systems, including heat pumps, even if the present surge in gas prices is sustained. A more fundamental recasting of the structure of electricity tariffs will be essential, notably a significant change towards recovering far less of the fixed costs of network infrastructure through the kWh charge. This is a profound change, and may require additional measures to prevent the regressive effects of a larger burden on lower income households. But it can be done in ways that are consistent with equality or levelling up agendas.

The flaw in current tariffs

The incremental costs of supplying energy are the right basis for any price and tariff comparisons that consumers make when choosing a heating system. Costs should ideally include all environmental costs and these may be expressed for example as a carbon price. Energy costs are however only a part of the story for the tariffs faced by consumers. For residential consumers, up to 50% of total costs reside in the fixed costs of the networks, concentrated in the local distribution networks. The marginal cost of accommodating extra throughput is, at least in uncongested networks, very low. But the fixed cost still needs to be recovered. How best to do it poses some difficult questions in terms of reconciling considerations of equity and income distribution, on the one hand, and the efficient allocation of economic resources on the other.

Current UK practice for smaller retail consumers is simply to average most fixed costs over all units of energy sold. This seems fair, and prima facie results in those who consume most (and might broadly also be those with higher incomes) paying the most towards the fixed costs. However it distorts the economic message, that the actual marginal or incremental cost is much lower. This leads to at least two major problems.

1.       It exaggerates the incentive for individual consumers to instal their own forms of power generation, even if these incur high resource or environmental costs, simply in order to avoid network charges. There is no saving in overall fixed cost and, while individual consumers with own generation may benefit, a larger share of fixed public network costs is then picked up by others. Total societal costs increase. Incidentally, this also tends to benefit the wealthier households who are more likely to instal their own generation.

 2.       Policies for a low carbon economy rest on persuading consumers to use large amounts of extra electricity for heating (eg with heat pumps). The high unit kWh rates that result from the current practice of spreading the fixed costs over all kWh then become a very serious obstacle, particularly when the consumer choice is between electricity and gas. This is reinforced by the matter of high per household capital costs for retrofitting heat pumps.

 

For household consumer, a higher fixed charge in the tariff, and a lower unit energy charge, transforms the choice between using the low carbon solution (electric heat pumps) and traditional fossil fuels (gas or oil).  I examined this in my 2019 report, but it is worth recalculating in the light of recent price trends. Assuming a coefficient of performance (COP) of 3 for heat pumps and 90% efficiency for modern condensing boilers (both slightly optimistic), the message is clear.

 

Economics of Heat Pump vs Gas [Energy Cost Only]

 

elec tariff p/kwh

Elec useful heat p/kWh

Gas tariff

p/kWh

Gas useful heat p/kWh

Heat pump

saving £ pa

Current tariffs[1]

 

14.50

4.83

3.86

4.29

-54

Current tariffs

and + 1p/kwh CO2 tax on gas[2]

14.50

4.83

4.86

5.40

57

Reform tariffs + CO2 tax.[3]

 

7.50

2.50

4.86

5.40

290

Reform tariffs + CO2 tax + permanent high gas price[4]

7.50

2.50

8.00

8.89

638

 

With current tariffs, heat pumps struggle to be competitive with gas even on running costs. A 1p per kWh carbon tax on gas, or its equivalent, helps to shift the balance (to a small advantage for heat pumps). Tariff reform has a much larger impact (2.5 times), and this is of course hugely reinforced if we assume permanently higher gas prices. This takes us at least part of the way to compensating households for the higher capital costs of heat pumps.

Disadvantages to poorer consumers

We noted above that some wealthier consumers benefit from current tariffs through the arguably excessive implicit subsidies to own generation. Other beneficiaries include second home owners with very low annual consumptions. However the regressive impact of a necessary tariff reform cannot be ignored. But there are many different options available.

One is to change the basis for applying standing charges to consumers. One proposal put forward has been to collect contribution to fixed costs through tariffs based on property values, akin to traditional approaches in water based on rateable value, or property tax band.

Another is to limit the application of the lower tariff rate to consumption for heating, but not for other purposes. Modern technology makes separate metering, as well as the detection of any metering fraud, a very plausible option.

………..

The conclusion must be that tariff reform will be an essential component of any national strategy for the decarbonisation of the heat sector.



[1] Average kWh rate for UK, and recent variable rate British Gas tariff for gas.

[2] Set at 1.0 p/kWh as first approximation to likely impact of transferring environmental cost burden to gas. I used a higher number in the original report

[3] Assumed future average wholesale power cost of 7.5p/kWh

[4] Assumed winter gas price of 170 to 210 p/therm, deduced from recent reports

Tuesday, September 21, 2021

ENERGY CRISIS? MARKET FAILURE, INCOMPETENT GOVERNMENT, COVID, OR JUST ANOTHER MANIFESTATION OF BREXIT.

 

Nothing better illustrates the complex interdependencies in modern economies better than the cluster of interrelated threats now hitting the UK with high gas prices, gas company failures, HGV driver shortages and supply chain problems, and shortages of CO2 – all interacting and impacting on food supplies, supermarket and fuel deliveries, and retail price inflation. So looking for the OBE – One Big Explanation – is a mistake.  But the explanations, excuses and blame shifting currently in evidence are interesting and various. As usual they will include personal prejudices and ideologies as well as informed analysis. Here are a few from the last few days, and an attempt to give a considered, but still personal, verdict on each. The perspective is examination of UK response to both global trends and UK circumstances.

In energy at least it’s just the global gas market and supply shortage. There are multiple causes, and all we can do is try to mitigate the impacts. This contains an essential truth, with a well-established willingness to pay much higher prices (for LNG) in Far East markets, together with more immediate and temporary factors such as weather or low renewables output triggering dramatic spikes in gas prices. But in spite of meeting up to 50% of demand from domestic production, UK prices remain highly exposed to international markets and possibly have surged more than elsewhere in Europe. Decisions to leave the EU's single market for energy, and to make Britain more “independent”, plus reduced reliance on storage, are additional factors that may be exacerbating the UK crisis. Verdict. Global and more regional, European, factors and trends are real and substantial; but the obvious criterion for judging UK government and institutions is UK performance in comparison with other EU countries, most of which are significantly more import dependent.

Covid? It is hard to see why the fading impacts of the covid pandemic should be very different in the UK from the impacts in other countries which have suffered very similar levels of infection. Verdict. Covid will have affected everything in the last 18 months, but as an all-purpose excuse, this is starting to sound rather tired.

It’s all down to our obsession with climate change, and trying to go green, at the expense of energy security. So, if we had doubled down on our dependence on gas, we would be better placed to manage a global tightening of gas supplies? Prima facie, earlier moves to low carbon sources, renewables or nuclear, would have reduced gas import dependency and mitigated the current crisis. One might also more justifiably argue, in relation to the related CO2 shortage, that Osborne’s highly controversial 2015 cancellation of carbon capture projects (essential components of global low carbon climate strategies) deprived us of an obvious alternative source of CO2. This would at least have reduced the risk to food production that was an indirect consequence of the gas price spike, and avoided the need for a government subsidy to CO2 production. These potential supplies might well have been in the wrong place or lacked delivery infrastructure, but this is at least a logical response to a silly argument. Verdict: blaming Green policies to reduce fossil dependency is both counter-intuitive and, in this instance, simply wrong.

Turning to the transport sector, other long term trends, including demographics and an ageing HGV workforce, are to blame. Other countries face the same HGV problems. These are exactly the trends markets are supposed to anticipate, manage and remedy, eg via higher wages and industry training initiatives? The UK has been particularly badly hit, largely due to the post-Brexit exodus of EU drivers. Verdict. These are trends that should have been anticipated, so this is a partial explanation or excuse at best. Comparison with other European countries, which do not have empty shelves or petrol queues, is instructive.

Failures in the design and regulation of UK energy markets. UK electricity trading arrangements do not deal adequately with reliability. Consequently, in the power sector, government has already assumed de facto responsibility for capacity planning. But the current crisis is primarily in gas and responsibilities for security are less clear than in other parts of the energy sector. Traditionally, public utilities supplying essential services like gas were regulated monopolies for a reason. Competition, the Tory and Thatcher mantra for decades, should have been fine provided there was a means of enforcing an obligation to supply on all market participants. Absent that, together with a weak regulatory framework and no clear responsibility for delivering reliability, and problems begin. There is every incentive for aggressively competitive suppliers to undercut more prudent suppliers who have covered their commitments to consumers by contracting for firm future supplies, sometimes at a higher but guaranteed price. This can lead to gambling on permanent excess capacity and the assumption that spot prices will always be low. Failure to anticipate price spike risk puts some companies in trouble and leads to systemic risk for the sector and government bailouts. Verdict. This is a regulatory and policy failure by the UK government, over decades, but it is also a major factor in the current crisis.

It’s Brexit, stupid! Brexit adversely affects both transport and the energy sector.  Undoubtedly the loss of EU drivers is a major factor, probably the biggest, in reducing HGV capacity. But Brexit has also made haulage less efficient. It limits the cabotage rights which made UK (and EU) haulage more efficient. A truck from Spain dropping fruit in Glasgow could pick up dairy in Glasgow for delivery in Hull, then fish in Hull for delivery in Madrid. Ending cabotage is equivalent to reducing effective HGV capacity.  

Trade with Europe in both gas and power remains important for our security. Brexit inevitably puts more friction into that trade, though this may have so far had at most only a limited impact on exchanges of power or on energy security. But it could become a significant factor in a more serious energy crisis, just as in other supply chains. Verdict. Brexit consequences, positive or negative, inevitably impact on almost every aspect of the economy and this includes energy, transport and trade.  

It is the downside that is currently in evidence, summed up in the following quote. “Energy price hikes, empty shelves, chronic labour shortages, tax rises, rampant inflation and that’s before we start talking about farming, fish or the motor industry. Where is the Brexit Wonderland we were promised?”

 

Friday, August 6, 2021

COSTING AN ELECTRIC VEHICLE FUTURE. IGNORE THE ALARMISTS.

 

Contrary to recent claims from a group of our MPs, EV demands on our power system infrastructure do not lead to national bankruptcy.

The All Party Parliamentary Group opposing government policy on electric vehicles claim in a new report that the required investment in electricity generation will “bankrupt UK plc”. Unfortunately for this claim, it is based on some major errors of fact and understanding. These exaggerate investment costs by a factor of 25 or more, even on the basis of a rather pessimistic cost assumption that is the authors’ starting point.

Thirteen MPs and Lord Lilley have endorsed a new report[1] from the All Party Parliamentary Group[2] for Fair Fuel for UK motorists and UK hauliers. The press release describes it as ground-breaking. However the report consists largely of a stitching together of questionable “facts”, opinions and arguments from multiple sources and special interest groups, and contains major and consequential errors, of both fact and understanding, for electricity in particular.

Inevitably a central focus of the analysis, and for press headlines, is the additional investment cost required to service the additional electric vehicles implied by government targets. It is this estimate of required investment cost that has provoked the “bankruptcy” claim and headline, so it is worth examining its credibility. The  calculations are set out quite unambiguously in the report.

“FairFuel UK and the ABD have also analysed the economic consequences of dumping ICEs and concur with ... [the] prodigious cost conclusions shown here, to all our lives. The Government’s unilateral decision to commit UK to 75% reduction in carbon by 2030-2035 will increase our national debt by £2.17 trillion.[3]

2020 Consumption of petrol, diesel, bio diesel, bioethanol was 30 million metric tonnes per year. … A 75% reduction target by 2030 -2035 or whatever target date is chosen, means finding enough energy to replace 22.5 million tonnes of fuel per year.

The average energy density of the fuels: petrol, diesel, bio diesel, bioethanol is 12.5 kWh per kilo. That [equates to] 281.25 TWh pa.

Considering one nuclear power station generates about 4 TWh/year, [this] means 70 nuclear power stations are required to offset the 75% reduction in petrol and diesel.

A nuclear power station costs £22 billion, so 70 nuclear power stations =  £1.54 trillion.”

Order of Magnitude Error 1. The calculation ignores efficiency in use.

What matters to the consumer, and hence for aggregate energy consumption, is the efficiency with which different fuels can provide useful energy to deliver the service required.  Internal combustion engines (ICE) have very low efficiencies in the delivery of useful energy compared to electric vehicles (EVs), but the report assumes they are the same.

A typical claim made for EVs by charging networks is that EVs are 85-90% efficient while internal combustion engine cars 17-21%. If accurate, this implies we should divide the APPG estimate of 281.25 TWh by a factor of 4 or 5.

Calculating an equivalent electricity requirement is not just a matter of comparing technical parameters. The reality will depend on many factors including speed, driver behaviour and driving conditions, so there is no single universal answer. Hence it is worth comparing alternative sources and informed assessments. The following quote is from the Australian Energy Council[4]

“EVs convert over 77 per cent of the electrical energy from the grid to power at the wheels. Conventional gasoline vehicles only convert about 12 per cent – 30 per cent of the energy stored in gasoline to power at the wheels,” according to the US Department of Energy. …. Particularly in city driving, IC engines waste fuel while idling or operating at very low outputs compared to their design capacity, and engines at low output achieve very low efficiencies. … And, unlike EVs, most conventional vehicles do not recover the energy wasted to heat by braking for traffic lights.

The well-researched Committee on Climate Change (in its Sixth Carbon Budget[5]) uses an efficiency multiple of about 3, less than the above, but recognises that the nature of EV load also implies a less than proportionate requirement for additional capacity, a view shared by the National Grid.

Carbon Commentary also provide a first approximation estimate[6] of total requirements, for cars, based on an intuitively reasonable calculation from official transport statistics.

A 2017 electric car will typically get 4 miles from a kilowatt hour of energy.[NB 40 mpg for a typical petrol driven car would be equivalent to about one mile per kWh] The average car in the UK travels about 8,000 miles a year. That means that a typical electric car will use about 2,000 kWh a year.  In 2016 there were 36.7 million cars on the road in the UK. The total amount of energy required to power these cars if they were all electric would be about 75 TWh a year.  The total consumption of electricity in the UK last year was about 300 TWh. So if all car and taxi transport was by electric vehicles, the total amount of electricity needed would rise by approximately 20%.

This of course is an estimate that covers only cars and taxis, but assumes 100% rather than 75% replacement. The National Grid[7] likewise does not seem to be unduly concerned with the issue and suggests that “even if the impossible happened and we all switched to EVs overnight”, peak demand[8] (measured in GW not TWh) would only increase by around 10 per cent, or about 6 GW. One reason for this rather low number for peak capacity requirement is that vehicle charging load can be managed so that incremental TWh can potentially be met by much less incremental capacity than would be required for other consumer loads.

Order of Magnitude Error 2.

The report is also at odds with reality in its depiction of the scale of output expected from a 3.2 GW nuclear plant. It takes as its cost benchmark the reported numbers projected for the construction cost of EdF’s 3.2 GW Hinkly Point C nuclear plant (over £ 20 billion), but assumes an electrical output of 4 TWh for that plant. Hence it deduces the need for 70 Hinkly Point C equivalents, or 224 GW of additional capacity. However EdF have quoted an annual output (assuming 90% load factor) of 25 TWh, a scale confirmed by the government in its evidence to the Public Accounts Committee.[9] A more accurate statement of the expected output from this benchmark 3.2 GW plant therefore reduces the scale of investment by a factor of 6.

The error factors are multiplicative, and the result is that the implied 224 GW of capacity calculated in the report, for a 75% switch to EVs, exceeds the more realistic 6 GW suggested by National Grid, for a 100% changeover, by a factor of 37.

Is the Hinkly Point nuclear plant a reliable cost benchmark anyway?

There are several reasons to suppose it is not. The Public Accounts Committee was critical of government procurement performance, and clearly feels the cost of this contract was excessive. It is also generally assumed that subsequent nuclear power plant of similar design would be cheaper. Not least, not everyone will agree with the assumption that all-nuclear is the least cost route to expanding power generation, the implicit assumption that underpins the report’s cost estimates.

Dieter Helm[10] and others have also argued that about 50% of the estimated very high cost of Hinkly C is entirely attributable to the very high return to be earned by EdF over the life of the project. If this were indeed to be financed through addition to the national debt, one might surely expect to apply a much lower rate of return, closer to government borrowing rates. Helm argues for rates as low as 2 or 3%, halving the cost of a station such as Hinkly C. By implication Helm’s arguments alone would imply a further cost reduction by a factor of 2.

………………….

The misunderstandings in the report, at least on relative efficiency and likely cost, and an overall error factor of perhaps between 25 and 50, even on the basis of its own assumptions and methodology, are all the more surprising given that the House of Commons Library has just published (June 2021) an analysis, Electric Vehicles and Infrastructure[11], on the same subject. This is a brief but well-researched source of basic information on the subject under discussion. One might assume it was available to MPs.

In reality, if we do proceed successfully with low carbon generation, electric vehicles have a major positive role to play in helping to balance power systems associated with less flexible generation from nuclear or renewable plant. This makes them an economically net positive option in any low carbon future. But that is a bigger subject to which we can return, and which I have addressed elsewhere[12].

………………

Updated on 3 September 2021 to include additional sources and references

[2] Readers should note that these informal groups of MPs do not have the official standing of parliamentary Select Committees.

[3] This number seems to be the national debt in April 2021, as referenced later. It is intended, one assumes, to be the £1.54 trillion calculated by the APPG researcher.

[8] In large power systems, it is important to distinguish between the additional energy requirement, kWh or TWh, and the amount of additional generation capacity required. The relationship between the two, for different types of consumption, is a crucial element of system economics.

[9] Hinkley Point C - Committee of Public Accounts - House of Commons (parliament.uk). The Department (BEIS) is recorded as stating that Hinkly Point C is expected to supply about 7% of UK requirements, ie about 20-25 TWh.

[10] Energy Policy: What happens next? - Dieter Helm

[11] CBP-7480.pdf (parliament.uk). Electric vehicles and infrastructure June 2021

 [12] Enabling Efficient Networks For Low Carbon Futures | The ETI

......................

ADDENDUM. 19 October 2021

This APPG report has been modified since the above was posted, but the fundamental errors remain.

The relevant paragraphs have been revised to suggest that the output of a nuclear plant of the same scale as Hinkly C could be between 8 (not 4) and 25 TWh, and therefore that the EV requirement is for “between 12 and 35 new nuclear power stations” (not the more realistic 3 that use of more conventional arithmetic would imply).

CHANGES

previous

current

Estimated energy requirement (c 4x factor error)

281 TWh

281 TWh

Output of “a Hinkly C” – a 3.2 GW station

4TWh

8 -25 TWh

Number of such stations required

70

12-35

Cost of a station (presumably a 3.2 GW station)

£ 22 bn

£ 10-50 bn

  

So what has happened.

·       The author has continued to ignore the ICE/EV efficiency issue, which creates an error factor of about 4,

·       and has also taken the point that EdF are claiming an expected 25 TWh for Hinkly C, but simply made this one end of a wide range. As far as I can judge from correspondence, the 8 TWh figure seems to have been constructed in rather an odd way, by looking at the maximum output of any current UK nuclear power station, ie about 1.0 GW, and multiplying by 8000 as the approximate number of hours in a year. But of course Hinkly C is a planned 3.2 GW, and Sizewell B, which is the most recent of existing nuclear plant has a nameplate of 1.2 GW, ie about a third of the size. This has all the hallmarks of someone who does’nt understand the basic units of measurement, or indeed what they are doing at all.

·       The author has also invented a new figure of £ 50 billion as the upper end of the cost range for “a nuclear plant” – implicitly another Hinkly C. This implicitly acknowledges my comment that a £ 22 bn cost of Hinkly might be over the top anyway (and not just because of cost of capital issues), but only by putting in a lower end of £10 bn. The £ 50 bn is sufficiently large, when combined with top end of the range on stations required, to give a high final number that even exceeds the previous estimate of total cost. But both bits are absurd numbers which remain unexplained.

John Rhys. 

Sunday, May 23, 2021

CRYPTOS THREATEN SUSTAINABILITY. BITCOIN AS AN EASY TARGET FOR COP26?

 

Crypto-currencies are not just the latest speculative bubble.  Bitcoin (and others) may be virtual commodities but they have big real-world impacts, and are a threat to our attempts to contain climate change. Stopping their contribution to CO2 intensive emissions must surely be the simplest of credibility tests for international agreement in the forthcoming international climate negotiations, COP 26. 

Alarm over the carbon footprint of bitcoin is the latest illustration of the convergence of climate change issues with a widening range of social and economic issues. We are witnessing a collision between two of the most disruptive themes in today’s global economy - sustainability and the cryptocurrency explosion.

Cryptocurrencies were already a controversial subject, promoted by libertarians as an alternative to national currencies, a currency that would be outside the control of governments or “inflation promoting” central banks, and a means to improve on existing payments systems. They are however also seen as potentially damaging innovations, whose main application may prove to be, at best, facilitation of criminal activity, tax evasion and money laundering, and whose main product has no real function or value other than as a vehicle for speculative investment. At worst they may simply be an elaborate Ponzi scheme.

What is bitcoin, and could it replace other currencies?

The Cambridge University Judge Business School (JBS) provides useful summary descriptions[1]. Bitcoin is a virtual currency whose proponents believe it could represent the future for payments systems of all kinds – the future of money. The three main functions of money are to act as a unit of account, a medium of exchange and a store of value. Bitcoin’s price volatility militates against its future either as a unit of account – the unit in which most transactions are priced and value is measured, or a medium of exchange. As a store of value it has been compared to gold, in having a limited supply, with the potential to become more and more valuable as bitcoin use increases. This third function is, at least theoretically, a more credible possibility. After all gold has a price that is disconnected from its use in jewellery and its value in industrial applications.

However these ambitions for bitcoin seem to hinge, inter alia, on its ability to see off the competition from thousands of other crypto currencies, many of which can also promote themselves as payment systems. These include dogecoin (dog e-coin, or doggy coin?), originally a joke currency that now has holdings worth up to a nominal $ 80 billion.

Mainstream economic commentators and financial authorities have been almost universally sceptical or even scathing. The European Central Bank has compared the rise in crypto prices in recent months to “tulip mania” and the South Sea Bubble of the 1600s and 1700s.

The joke-coin makes a mockery of the idea that crypto investing should be considered a serious pursuit. Its very existence undermines the notion that bitcoin derives value from its scarcity. While bitcoin’s total supply will eventually be capped at 21m, as written into its original source code, there is no limit to the number of copycat cryptocurrencies that compete with it — there are now almost 10,000, and dogecoin itself has no hard supply cap. [Jemima Kelly, FT, 11 May 2021]

None of this will deter the bitcoin evangelists, and it is certainly true that many people will have made a great deal of money out of the gyrations in the bitcoin price. However early entrants often make money out of Ponzi schemes of all kinds, and one worry for financial stability is the destabilising effect of an eventual crash, possibly bankrupting thousands of smaller, later investors and speculators. The collapse of financial pyramid schemes in Albania in 1997 brought the country to the brink of civil war.

Bitcoin’s Extraordinary Energy Consumption

Mining bitcoin is intrinsically a highly decentralised and indeed largely anonymous activity, so direct measurement of its energy consumption is not possible. The Judge Business School have attempted to research the carbon footprint of bitcoin, highlighted by the recent pronouncements from Tesla’s Elon Musk. This reflects the huge amount of computing power absorbed in searching or “mining” new bitcoins, and its impact on fossil use in electricity generation. The numbers, and even more importantly the growth, are extraordinary.

In April 2018 some 17 million bitcoin had been mined[2], and the JBS estimate that the annualised rate of electricity consumption at that time was 36.4 TWh. In May 2021 the number of bitcoin had grown to 18.6 million, but JBS estimate the annualised rate of electricity consumption had grown to 148 TWh, an amount larger than that of a medium sized country such as Sweden or Argentina This 2021 level of power consumption, resulting in more generation from the most polluting coal-fired power stations, could be close to 150 million tonnes of CO2. The JBS consumption estimates from which this number is derived are central estimates and JBS suggest much much higher upper estimate bounds.

Other sources offer equally alarming estimates. One estimate by Chinese academics[3] published in the scientific journal Nature Communications in April found that, without policy intervention, bitcoin in China alone would generate 130m metric tonnes of CO2 emissions by 2024.

The implication of the JBS trend growth, or of this alarming estimate for China, is that we could easily see bitcoin mining exceed 1% of global CO2 emissions in a few years. This may sound small but global GHG is an aggregation of individually small issues. Aviation, for example, to which far more attention is paid, accounts for only about 2.5 % of CO2.

This accelerating rate of energy use is intrinsic to the bitcoin process as mining becomes increasingly difficult. Inefficiency is a necessary consequence of its security requirement. Higher energy use is also encouraged by a rising bitcoin price, and by the fact that much of bitcoin mining takes place in jurisdictions with high coal based power and where electricity is subsidised or seriously under-priced. The increasing “inefficiency” of bitcoin mining implied by these numbers is not remediable; it is intrinsic to the bitcoin design, and indeed to that of other cryptocurrencies.

The Carbon Footprint and Implications for the Global Climate Challenge

The carbon footprint of bitcoin, and other similar cryptocurrencies depends on how the electricity is generated. Crypto promoters attempt to argue that this is or can be from renewable resources and therefore that the carbon footprint should not be an issue. This is a nonsense argument. Low or zero running cost renewables will always be used in power systems before fossil plant is brought into play, so any additional power demand will normally result in extra production from the generating plant at the margin. In almost all geographies this will be fossil plant for the next few decades, and all the extra CO2 emissions attributable to bitcoin will reduce the available carbon budget.

Two particular concentrations of bitcoin mining have been in highly fossil dependent Iran, where illegal use of subsidised power for crypto mining is believed to resulted in major city blackouts, and China, which relies very largely on coal generation.  The current growth of mining in China is of increasing concern to the Chinese authorities on environmental grounds, and the FT reported[4] that the government of Inner Mongolia, which is particularly reliant on coal generation, has come under particular pressure to crack down on bitcoin mining.

Implications for COP 26 and Global Agreement

The clearest possible priority in the global effort to reduce GHG emissions is to seize, with urgency, the “low hanging fruit”; these are the easy measures which have little or no real economic or social cost and deliver immediate savings. Since CO2 in the atmosphere is cumulative we know that immediate emissions prevented are more valuable than the same saving in 20 years time.

Stopping or severely discouraging emissions attributable to crypto currencies falls in this category. There is little or no real cost in economic terms, and perhaps economic and social positives if the world has one fewer set of Ponzi schemes and speculative bubbles. Reduced subsidies to fossil fuel is one of the instruments to discourage mining, and will also help reduce emissions and fund low carbon alternatives. No major physical investments or disruptive lifestyle changes are required to dispense with cryptos, and the carbon saving is immediate and substantial.

It does however need concerted international agreement. What better simple “win” with which to start COP 26 negotiations than a general agreement to apply measures which will discourage any use  of cryptocurrencies dependent on high energy input[5].

The Chinese approach of criminalising bitcoin mining may not be universally acceptable, although most countries have plenty of laws and regulations prohibiting the release of other dangerous substances.  Bitcoin was designed to “escape” any such central control from authoritarian regimes or central banks, and mining is highly decentralised. However there are plenty of other effective measures that governments can take to minimise the attractions of crypto currencies. These include wide restrictions on the use of cryptos as a means of payment (Turkey, Morocco, and India), and controls over the holding of bitcoin by pension funds or other regulated investment vehicles.

For COP 26 a declaration of intent to eliminate the crypto emissions threat might be a small step, but a useful one that sends a powerful message..

 



[1] https://cbeci.org/  “Bitcoin is a software protocol and peer-to-peer (P2P) network that enables the digital transfer of value across borders without relying on trusted intermediaries. … an open and permissionless system: anyone can participate in the network, as well as send, store, and receive payments. Bitcoin has its own cryptocurrency called bitcoin (BTC), as the universal unit of value within the network. New bitcoins are issued … through a process called mining.“ It is a virtual currency, and the Bitcoin protocol specifies that a maximum of 21 million bitcoins will ever be created. Of this 21 million, it is estimated 17 million have been create to date, of which some 4 million have simply been “lost”. It is intrinsic to this virtual currency that, once lost, they can never be found.

 

[3] Policy assessments for the carbon emission flows and sustainability of Bitcoin blockchain operation in China.  Jiang, S., Li, Y., Lu, Q. et al. Nature Communications, April 2021.

[4] Chinese province sets up hotline to report suspected crypto miners. [FT. 20 May 2021]

 

[5] Not all such currencies do. Restrictions on bitcoin, and likely subsequent collapse of the bitcoin bubble, would however send a significant warning to future cryptos, even those with much lower energy implications.