Lawmakers address energy consumption of crypto mining

It all started with China in May 2021, later in Sweden in November, and recently in the United States (US) in December as lawmakers and regulators voiced concerns about the electricity and energy consumption of the crypto mining industry and called for attention to mitigate impact on the climate.

Since the United Nation´s climate change conference in Paris in 2015 and with Agenda 2030 in mind, numerous governments have pushed for greater focus on addressing climate risk. Part of the measures has included the move away from fossil fuel and promotion of renewable energy sources. Potentially, such measures may reduce the perils of ongoing global warming and the risks related to catastrophic climate events.

In principle, the maintenance of any financial system comes with a price tag typically measured against economic outcomes, such as the gross domestic product (GDP). Moreover, it is a fundamental principle in finance to reduce costs with financial transactions and employ various means such as technology and regulation to increase the informational efficiency of transactions.

Crypto/digital assets are promoted as a cost-effective, accessible, efficient and secure future alternative to current investment assets, medium of exchange as well as payment that can supersede established platforms in financial markets and systems. The market capitalisation of crypto assets reached $2 trillion in early January 2022, about three times more than in January 2021, creating many business opportunities.

At the current rate of production, the crypto asset industry is expected to require more computing power and consume more energy. For example, Greenridge Generation produced 1,866 bitcoins in 2021 and expects to increase its order book for 2022, and by September will have 49,000 miners (14,700 miners in 2021) in service with a hash-rate (measure of energy consumption) of 4.7 exahash per second (EH/s). The total hash-rate at the end of 2021 was 182 EH/s from around 143 EH/s at the start of the year. This suggests an almost 27% higher energy consumption for 2021.

In a benchmark study, Cambridge Centre for Alternative Finance indexed the energy consumption of bitcoin mining and found that it consumed about 0.54% and 0.24% of global total electricity and energy consumption. Bitcoin´s consumption of 123 terawatt-hour (TWh) is comparable to the amounts used for the production of gold of around 131 TWh. A total of 16,000 cryptocurrencies have been issued so far and bitcoin has a 40% share.

Part of the electricity and energy consumption is related to the computing power required for consensuses algorithm and transaction validation features embedded in the blockchain technology. For some crypto transactions, the degree of decentralisation requires an abnormally high amount of energy.

Lawmakers in China have gone so far as to introduce punitive legislation to ban and curb crypto mining and transactions. The ban was estimated to result in a 53% reduction in hash-rate globally.

However, hash-rate has since recovered as the mining industry relocated from China. In this process, the US has taken a significant share of these miners. The development has now reached the ears of Congress which has called for answers from the industry.

In the European Union, the supervisory authority of financial markets in Sweden has escalated the issue and asked for new standards for mining and to ban the proof of work mining method, which has a comparatively high energy consumption, within the region.

Lawmakers and regulators relate the electricity and energy consumption of crypto assets to climate risk and demand changes to crypto mining methods through new legislations. However, it is still uncertain if the regulatory approach towards the consumption targets is what is really needed. The preferences for the proof of stake mining method over the proof of work mining method may only address a legacy method that is no longer used widely. Moreover, as the market for tradable cryptos is growing exponentially, the lawmakers outside China have decided to take a more measured approach, to learn and balance the potential risks and benefits of the innovations from the new asset class. Each policy choice no doubt has its own set of consequences.