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..

 

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[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.

 

[2] https://www.statista.com/statistics/247280/number-of-bitcoins-in-circulation/

[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.

 

CARBON EMISSIONS AND TRADE WITH CHINA

Should we be doing more to limit our trade with China, if we are serious about having a global effect on emissions rather than concentrating on purely domestic issues?

[Third in a series originating in a set of questions put by sixth form students. 
I should also thank Environmental Change Institute colleagues. 
Their ideas have inspired a number of my comments.]

Trade and climate connections are many, so a full answer has several dimensions. They relate to the amount of CO2 emissions embedded in the manufactured goods we process, to comparison of manufacturing methods and energy policies in different countries, to fuel use in shipping, to the international norms that govern trade, and potentially to the enforcement, if any, of international agreements.  

In the current international system of accounting for greenhouse gas emissions, they are generally attributed to the country where they enter the atmosphere, regardless of where any final products go.  This limits our understanding of the full impacts of our own national consumption.  One illustration is the apparently very substantial reduction in UK emissions since 1990. Closer examination reveals this was due, not just to the coal to gas transition or the growth in renewable energy, but in large measure to the de-industrialisation of the UK in the 1980s and 1990s under the Thatcher government. In other words since 1990 the UK has exported much of its manufacturing industry and the CO₂ emissions that went with it. The reduction in our carbon footprint is less than we occasionally pretend.

So it is sensible to look beyond the patterns of energy use within the UK, as well as beyond our own personal choices within the home and in personal travel. There will be an embedded carbon footprint in all the goods and services we purchase. If we all reduced our consumption of manufactured goods, but especially those that have a high carbon content, then that would certainly be an important impact. It is not always easy to tell which are the worst industries in causing emissions, but one recent report by the World Bank has claimed that the fashion industry is responsible for 10% of global emissions, more than aviation and shipping combined.

[1]

 Policies on trade

 It’s almost impossible for individual consumers to make meaningful calculations of the carbon footprint of different products, but we can collectively make sensible choices through trade policy. It will be important to trade with countries that have strong environmental policies and are willing to take action on reducing emissions, and setting meaningful targets, like the European Union. Goods produced in those countries will, over time, tend to have a significantly lower carbon footprint than others, especially as their emissions reduction policies start to bear fruit.

Those policies are now starting to impact on, and create tensions for, trade policy. As the EU seeks to avoid simply exporting its own manufacturing to countries with less commitment to reducing emissions, it is proposing measures that will ultimately amount to a carbon adjustment tax at the border, for countries that are not part of the EU’s own ambitious emissions reduction programme. We should expect to see this, and its reconciliation with WTO rules on trade, as a major source of controversy over the next few years.

And imports from China?

However most of the UK’s international imports (and their embodied carbon) are not from China.^[2]  China accounts for only about 7% of UK imports, about the same as France but with a higher proportion of manufactures, and significantly less than the USA and Germany at about 11% each. A further complication is that the carbon footprint of your purchase will depend on how what you are buying is manufactured in China, and whether the process there results in more or less carbon emissions than it would if you were buying a similar product from somewhere else. 

But we should be careful not to overstate the negative impact of China on our carbon footprint. China currently has a very high share of the world's manufacturing and the emissions that go alongside; and they also have what is almost certainly an excessive amount of coal-fired capacity, much of which is under-utilised and may eventually be retired early. On the other hand they have also been very active in developing and promoting low carbon technologies, including wind, solar and nuclear. And they are themselves very vulnerable to climate change so they have some strong incentives to improve. 

Shanghai, 2011. Coal barges on the Yangtse.

China has other emissions problems, particularly with city air pollution.  The Chinese city of Shenzhen, with a population similar to London, has 17,000 electric buses (in part to improve air quality), whereas London has 200.  In terms of emissions generated per head of population, China ranks well below Saudi Arabia, Australia, the United States and many other countries, although surprisingly it is above France.

Does distance matter?

Surprisingly, and although shipping is a significant contributor to global emissions, the carbon footprint of the freight involved in trade will be a small part of the total and will usually be less important than the footprint involved in manufacture. Other things being equal it makes sense to trade with your neighbours, but other than for obvious bulk items or sometimes for lower value perishable items where air freight is involved, the distance to market will not usually be a critical factor.

Benito Mueller gives an interesting example.^[3]  “According to DfID, … the emissions produced by growing flowers in Kenya and flying them to the UK can be less than a fifth of those grown in heated and lighted greenhouses in Holland.”

But emissions from freight and food miles are topics for another day.

And the lessons from this analysis?

The carbon footprint of the manufactured goods we buy does matter.

“Fast fashion” accounts for a surprisingly high proportion of global emissions.

We cannot avoid the connections between climate-related issues and trade policy.

China accounts for quite a small proportion of our total imports.

Distance will usually be less important than the carbon content of the means of production in different countries. Food miles will not always be a good indicator of environmental credentials..

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[1] I have not so far found an authoritative estimate of the contribution of motor manufacturing, but its contribution appears to be less than 10%, although it is clearly one of the larger contributors.

[2] Parliamentary research briefing. Number 7379, 5 November 2019. Statistics on UK trade with China.  https://researchbriefings.files.parliament.uk/documents/CBP-7379/CBP-7379.pdf

[3] Food Miles or Poverty Eradication: The moral duty to eat African strawberries at Christmas. Benito Mueller. Oxford Energy and Environment Comment. October 2007.  https://www.oxfordenergy.org/publications/food-miles-or-poverty-eradication-the-moral-duty-to-eat-african-strawberries-at-christmas/?v=79cba1185463