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.

 

A CLIMATE FOCUSED ELECTION IN THE UK? IT’S NOT HAPPENING.

Because that would mean confronting other difficult issues too.

Positive policies also bring with them more inconvenient truths. With climate, policies threaten entrenched ideologies[1]. Politicians are reluctant to talk honestly about costs at election time. But the biggest silence is around the fundamental implications for trade of any realistic global climate regime, and trade remains at the centre of the Brexit dilemma. 

It was widely supposed, only a few months ago, that climate change would be a major feature in the next UK election. This year has seen growing public concern over the threat of climate change as the most important challenge our society has to face. An eight country poll[2] revealed widespread alarm that the crisis is on the brink of spinning out of control, with 64% in the UK agreeing that “time is running out to save the planet”.  At least three-quarters of the public think there is a “climate emergency”, and of climate breakdown risk as “extremely dangerous”.

Climate breakdown was viewed as the most important issue facing the world, ahead of migration, terrorism and the global economy, in seven out of the eight countries surveyed. Only in the US did it come third, behind terrorism and (understandably given the US dismal ranking in international health comparisons) affordable healthcare. An overwhelming majority in each country – 74% in Britain – said they were already seeing the influence of the climate crisis in extreme weather events, such as heatwaves and floods, and around two-thirds described it as a direct threat to ordinary people in their country.

Moreover, the last few months have brought more extreme weather events across the globe, just as anticipated by the science, and a rising level of alarm over increasing carbon emissions and global governmental failure to take effective action. And we have also seen direct action protests from the Extinction Rebellion movement. Prima facie the public is “way ahead” of politicians in recognising the scale of the climate crisis.

But in the election campaign so far climate has been the dog that does’nt bark. All the major parties are committed to the zero carbon by 2050 target or earlier, but since they will never be held to account for failure on that timescale, what matters more is the credibility of their specific policies. The smaller parties have made the best efforts, but the current Prime Minister appears reluctant to debate the subject in front of the electorate, perhaps understandably given the climate sceptic history of many in his party. Labour has a better story to tell, not least with Blair’s ground-breaking 2008 Climate Act, but has preferred to concentrate on other issues.

So why is this critical subject getting so little attention.

The real reason for reticence on climate is that it would put a spotlight on trade, and raise difficult questions about Britain’s future post Brexit.

Both major parties are anxious to avoid any discussion whatsoever of the future for British trading relationships with the rest of the world. The Conservative government is promoting a “Get Brexit done!” message in the hope that it can avoid impossible to answer questions of exactly what benefits will flow from that, and in the certain knowledge that the actual outcome will be strongly negative if not disastrous. The Labour Party is also trying to avoid the subject altogether in its campaigning, in the vain hope of satisfying fundamentally opposed sections of the electorate, and moving on to what are (for Labour) “safer” subjects.

To see why the Conservatives are anxious to avoid scrutiny, we need look no further than the complications posed by their ambitions for a US trade deal. Since 2015, US Trade Representatives are bound by Congress not to include mention of greenhouse gas emission reductions in trade agreements and there are no prospects this ban will be lifted in the near future.[3]

Under any viable global regime climate, trade policy can be an important mechanism to incentivise and facilitate participation in global agreements to limit emissions. There are at least four potential approaches[4] that can impact on climate policies:

-       leakage and competitiveness issues, in which low carbon economies lose competitiveness in particular industries and “export” carbon emissions to potentially “dirtier” competitors who emit more carbon;

-       sanctions against non-participation in and non-compliance with international agreements ;

-       placing more of the cost of abatement on the responsible parties, whether in production or consumption; and

-       maintaining a free-trade regime that allows and encourages technology transfers.

Conversely dysfunctional trade agreements can have the opposite effect. It has been claimed[5] that the NAFTA agreement locks North America into continued exploitation of the dirtiest fossil fuels.

It is immediately clear why a US President, who considers climate science a hoax and wants an “America first” trade policy, and whose political base includes huge coal interests, would not want the subject mentioned in trade talks. The US still has substantial coal exports to Europe, and will not want to see any measures, such as international agreement on carbon pricing, or even a limited bilateral accommodation, that would reduce the competitiveness of its own industry. In addition the US has a longstanding interest, most evident in pharmaceuticals, in allowing greater opportunities to exploit intellectual property rights. In the climate policy context, this limits the rate of transfer of low carbon technologies to developing countries, generally those with the highest rates of growth in energy use and CO₂ emissions.

Against this background the EU, strongly influenced by the UK and France, and despite some of the weaknesses and limitations in its climate policies, has been one of a very small number of major economies taking the climate issue seriously.

So, on the one hand we have a Conservative government reluctant to admit that its break with the EU, and promised strategy of a US trade deal, will almost certainly reduce its international influence on climate, and seriously damage future prospects for successful global policies. On the other is a Labour party, alarmed by the prospect that too much focus on climate will spill over into the Brexit issues it is trying to avoid.

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[1] The biggest connection is that between neo-liberal orthodoxy, with its emphasis on a small state and deregulation, and its support for unsubstantiated denial of climate science.

[2] https://www.theguardian.com/environment/2019/sep/18/climate-crisis-seen-as-most-important-issue-by-public-poll-shows . The countries were UK, US, Canada, Brazil, Poland, Germany, Italy and France.

[3] This is referenced in the recent leaked documents on US/UK trade negotiations, and appears to be a well established US position.

[4]  Trade and Climate Change: The Challenges Ahead. 2010.. Jaime de Melo (jaime.demelo@unige.ch) and Nicole Mathys

[5] https://canadians.org/sites/default/files/publications/report-nafta-people-or-polluters.pdf
I have not tried to verify this claim.

TRUMP, COAL, AND CLIMATE. AN OPENING FOR CARBON CAPTURE?

Modified policies on climate issues might have some surprising benefits for a declining US coal industry, and for the future of carbon capture.

President-elect Trump is having second thoughts about climate change, previously dismissed as a Chinese-inspired hoax. There are many reasons that might make this a perfectly rational response to the impending responsibilities of office.

First he is almost certainly now getting briefings from scientific and other experts both on the reality of climate science, and on the potential impacts of climate change.

Second the USA is now suffering major drought conditions in the South West. There are indications of a possible link with climate change and strong indications of possibly much worse “megadroughts” in the future. Most people in the US now accept the reality of climate risks, and for some people the potential costs are becoming apparent.

Third, and of more immediate political significance, it seems unlikely that a US withdrawal from the Paris agreement would be followed by any significant US allies or trading partners. Even more significantly, and as I have observed in earlier blog comments, climate policy will become increasingly tied in with trade. China’s Vice Foreign Minister Liu Zhenmin, for example, has made it clear that China will take other countries’ positions on climate change and the low-carbon economy into account when negotiating trade deals.

This is hardly surprising. No-one is going to put up with trading partners who free-ride on cheap but destructive energy sources with unabated emissions, undercutting competitors who adopt environmentally responsible policies. [The UK incidentally will have to recognise the same realities as it navigates a path to those sunlit uplands of new trade agreements. This will be a bitter medicine for ardent climate sceptics and Leave campaigners such as Lawson, Redwood and Rees-Mogg.]

But acceptance of the compelling arguments for action on greenhouse gas emissions could, in principle at least, also provide a lifeline for US coal communities, in the “rustbelt” that provided an important contribution to Trump’s election victory. The connection is carbon capture and storage (CCS) applied to coal. This is not currently a frontrunner as a least cost solution for US energy policy, and a substantial unknown is the extent to which Trump will be willing or able to fulfil his campaign promises to these neglected communities.

Coal has almost certainly suffered more from fracking and the resulting cheap gas than it has from federal environmental policies, so the connection may seem an improbable one. Proposed policies to spend on infrastructure, similar to those advanced by Obama but blocked by a Republican Congress, may provide a “Keynesian” stimulus to the economy. But directing them to benefit deprived areas may be much more difficult, particularly as the allocation of infrastructure spend is far from being in the gift of the President. 

There are in consequence some potential merits in CCS that at least make this an avenue worth exploring. A programme to develop carbon capture and storage has several potential advantages, and these include benefits to economically depressed regions with high dependency on coal.  It requires a very substantial infrastructure spend which is likely to be close to those regions. It may provide a more promising future for coal. And in terms of wider benefits, CCS is still seen by many policy analysts as an important or even essential ingredient of real progress to a low carbon economy, and could reduce the large number of coal fired stations that otherwise threaten to become stranded assets.

These are complex questions, and continued coal fired generation with CCS could still face many barriers, not least on cost. But the idea does provide at least a small element of hope for a fading industry.