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White House warns against crypto’s climate consequences

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A new report from the White House Office of Science and Technology Policy warns that cryptocurrency mining could prevent the US from meeting its climate goals. 

  • The report estimates that global crypto mining operations will emit up to 170 million metric tonnes of CO2 within 2022 alone. 
  • Despite their high carbon footprint, blockchain technologies are increasingly being developed as potential climate solutions. 
  • To avoid contradiction, these solutions will be complemented by ongoing efforts to improve the sustainability of blockchain technologies. 

The White House’s report, Climate and Energy Implications of Crypto-Assets in the United States, details some alarming findings. 

It estimates that crypto operations in the US now consume as much energy as all home computers or all residential lighting, representing between 0.2% and 0.3% of global greenhouse gas emissions and up to 0.8% of domestic emissions. 

In 2022 alone, it is expected that crypto mining will emit up to 170 million metric tonnes of CO2, with the US responsible for between 25 and 50 million metric tonnes. This volume of emissions is larger than that generated by several individual countries. 

The report, which was ordered by President Joe Biden in March 2022, warns that crypto operations could prevent the US from meeting its goal of achieving net zero emissions by 2050. 

It warns that, “depending on the energy intensity of the technology used, crypto-assets could hinder broader efforts to achieve net-zero carbon pollution consistent with U.S. climate commitments and goals”. 

The carbon footprint of blockchain technologies 

Blockchain technology, the distributed ledger system through which crypto assets are managed, is used to enable secure transactions on a transparent, decentralised basis.

Transactions are recorded on the ledger as ‘blocks’ of data that must be independently verified by a peer-to-peer computer network. 

To guarantee the validity of transactions, blockchains rely on algorithmic systems known as consensus mechanisms. These sets of rules are what provide the chain’s security, protecting it from malicious behaviour such as fraud or hacking. 

The most commonly used consensus mechanism, proof of work (PoW), requires computers within the network – referred to as ‘nodes’ – to compete against one another to solve extremely complex computational puzzles. 

Users of the computer that solves the equation first earn the right to create and confirm a new block of transactions, and are rewarded with cryptocurrency as a reward.  

This mechanism brings a high degree of trust, as it shows dedication to the blockchain through the amount of work, and the high costs of computational resources, that have been put in.

Furthermore, transactions cannot be maliciously altered without repeating the intensive process for the entire chain. 

The downside of this mechanism, however, is its carbon footprint. As it requires such high levels of computational power, it uses substantial amounts of energy.  

Unless a renewable energy source is used, this means that fossil fuels are being burnt to produce electricity, resulting in the carbon emissions identified by the White House report. 

This problem is not easily addressed, as to make the computational process less energy intensive would simultaneously make the stakes of participation lower, meaning that anyone could gain the privilege of verifying transactions and could engage in malicious activity. 

In addition, the decentralised nature of the blockchain makes it impossible to mandate the use of renewable energy sources, as to do so would mean compromising users’ anonymity. 

Should we just abandon blockchain technologies? 

It could be argued that this alone is reason enough to abandon blockchain technologies altogether. To do so, however, would be to reject the innovative use cases that are emerging as a means to address the climate crisis. 

The ability of blockchain technologies to provide greater transparency, prevent repeat transactions, and enable assets to be traced from their point of origin has gained traction within voluntary carbon markets (VCMs). 

Blockchain could help VCMs gain market trust by addressing ongoing challenges relating to credibility and transparency.

Where carbon credits have previously relied on opaque verification processes, blockchain ledgers can be used to link all of a credit’s relevant information with a traceable, unchangeable key. 

Furthermore, transactions via blockchain can be processed instantaneously, removing the need for lengthy negotiations that rely on the honesty of numerous intermediaries. 

With these incentives, blockchain-based VCMs could also generate higher demand, enabling carbon prices to rise to a point where they truly reflect their environmental cost. 

Such systems have already gained traction on a national scale, with countries such as Thailand planning to develop blockchain-based VCMs. 

In addition to carbon trading, blockchain technologies have been proposed as a means of democratising sustainable finance.  

A report by the HSBC and the Sustainable Digital Finance Alliance (SDFA) details how the granularity of data made traceable by blockchain can enable green asset ownership to be fragmented or how multiple assets can be aggregated into green bonds. 

Fragmentation would allow anyone to become an investor in sustainable assets or projects, while asset aggregation would enable smaller asset owners to transparently seek investment to fund their sustainable activities. 

Other creative use cases for blockchain technology include the decentralised gathering, verification and distribution of climate data, as is being introduced by WeatherXM, and the development of waste management systems that engage participants in tracking their waste and gaining crypto rewards in return for its responsible disposal. 

The caveats of blockchain-based climate solutions 

Despite their apparent benefits, there are caveats to these innovations that cannot be ignored. 

The creation of blockchain-based VCMs, for example, requires carbon credits to be transferred from recognised verification bodies onto the chain via a process known as ‘bridging’.  

The expectation is that this means only registry-backed credits will be available to trade, but in reality it has allowed for dormant offsetting projects that have not traded credits in years to gain new life as the blockchain-based market prompts new demand. 

Carbon Plan’s analysis of Verra-verified carbon credits traded via the Toucan protocol, for example, found that approximately 6 million tons of CO2 equivalent had been traded based on such ‘zombie’ projects.  

The issue with these ‘zombie’ projects is that they have been unable to find buyers before the increase in demand generated by blockchain availability. This suggests that their quality had been in question, meaning they should not be traded at all. 

Furthermore, Carbon Plan’s research revealed that Verra credits that had been registered over a decade ago had been bridged to the blockchain market.

At least 18.3 million of these credits would now be forbidden from trade under the cut-off rules introduced under Article 6 of the Paris Agreement, demonstrating their lack of credibility.

Can blockchain’s problems be solved?

Despite these revelations, blockchain technologies are unlikely to see their end just yet. 

Efforts are underway to address the energy consumption of blockchain, primarily through the development of alternative consensus mechanisms. 

Dominating these efforts is Proof of Stake (PoS) which ensures participants’ commitment to the chain by requiring them to set a share of their crypto assets aside, creating a staked pool that would be lost if the chain became compromised. 

Rather than award the responsibility of transaction verification to users with the greatest computational capacity, individuals are selected randomly on a lottery-like process that favours those with the greatest volume of assets set aside. 

This process demands far less energy, and has been used to replace the conventional PoW approach. Ethereum, the second largest cryptocurrency platform after Bitcoin, has already transitioned its network to the PoS method in what Zumo’s Decarbonising Crypto report describes as a, “watershed moment”. 

Alternative consensus mechanisms, such as the proprietary proof of stake and time method developed by the Chia Network, have also been able to demonstrate substantial improvements in resource intensity.  

Indeed, the Chia Network has been selected to prototype the World Bank’s Climate Warehouse platform, supporting a global investment platform raising private capital to source, tokenise and trade in high-quality carbon offsets. 

More organised crypto operations can also improve their energy efficiency by recapturing the heat emitted by the computational process for local distribution.

Canadian cryptocurrency miner MintGreen, for example, has partnered with the Lonsdale Energy Corporation to supply a local heat network in North Vancouver. 

Beyond these efforts to reduce the carbon footprint of blockchain technologies, there have also been movements to address their failing within VCMs. 

Verra has suspended its practice of creating blockchain tokens based on retired carbon credits, and has launched a consultation aiming to address issues concerning fraudulent activity and environmental integrity. 

Although blockchain technologies undoubtedly have their problems, such initiatives demonstrate an ongoing commitment to developing new approaches that could allow their potential to be fulfilled.  

There will always be challenges when developing powerful technologies that are yet to fully evolve, but this does not necessarily mean they should be abandoned.

As concluded by the HSBC and SDFA’s report, “none of these risks present critical barriers to further development”, though they, “must be acknowledged.” 

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