Can crypto mining taxes in the US help save the planet, or is there an easier way?

Carbon emissions are overheating the planet, and Americans are feeling it this summer, with unprecedented wildfires, heat waves, floods and droughts. The most important source of carbon emissions from the planet is burning fossil fuels for energy.

Politicians seeking to curb emissions are turning their attention to cryptocurrency mining (validating cryptocurrency transactions on a blockchain network that stores an unfathomable amount of data), which requires enormous energy. Bitcoin, for example, requires between 67 and 121 terawatt hours a year. In comparison, the whole of Germany needs more than 500 terawatt-hours a year. Much of the energy used by crypto miners is carbon-based, around 60 percent globally and 34 percent in North America. Bitcoin generates an estimated 22 million tons of carbon emissions each year, equal to the country of Jordan’s total emissions.

Consider the scale of crypto mining in the United States, where 35 percent of Bitcoin is mined, more than any other nation. New York, Kentucky, Georgia and Texas are home to an estimated 70 percent of the nation’s crypto mining. Last month, a congressional investigation found that seven of the largest Bitcoin mining companies in the United States use almost as much electricity as all the homes in Houston, Texas.

Meanwhile, researchers at the University of California at Berkeley found that US crypto mining could cost residents and businesses $1 billion in energy bills annually due to electricity prices rising with demand.

Bans, excise duties or incentives?

Should crypto miners in the US face heavier regulation of their energy use, pay a tax on their electricity use, or receive tax incentives for using renewable energy?

Worldwide, 15 countries have restricted or banned crypto mining. China used to host the largest mining activity in the world, but it banned the use of cryptocurrencies in financial transactions in 2021, in part because of Bitcoin’s carbon footprint. However, the ban did little to lead to a reduction in crypto mining. It instead pushed mining to other countries, including those that use even less renewable energy.

China’s ban led to a crypto-mining boom in Kazakhstan, where renewable energy accounts for less than 1 percent of power installations. Crypto miners then overloaded Kazakhstan’s electrical grid. In response, starting in 2023, Kazakhstan will increase taxes on crypto miners based on their electricity usage. If a crypto miner uses electricity generated from non-renewable sources, their tax per kilowatt hour will be ten times higher than the tax paid by miners using renewable sources.

Neighboring Uzbekistan has a similar approach. Cryptomining that uses fossil fuels during the busiest hours of the day will be subject to excise taxes on electricity consumption. The country is also offering tax breaks to crypto miners who buy solar panels for their electricity needs and will charge them lower electricity prices than miners using non-renewable energy.

Back in the US, states are now grappling with similar problems. Lawmakers in New York have opted to use regulation, with the state assembly passing a two-year moratorium on some crypto mining. If Gov. Kathy Hochul signs the legislation, the state would ban new coal-based mining. Mining that uses renewable energy will be unaffected. The bill has been on the governor’s desk for weeks, and it’s unclear whether she will sign it, given the political pressures of an election year.

But as seen in China, if the New York bill passes, miners could simply go to other states like Kentucky or Texas. These states are instead offering tax incentives for crypto mining, hoping to generate economic growth that offsets higher electricity bills if not climate impacts. Kentucky offers tax incentives to crypto miners who set up operations in the state, and it is unlikely that much of their energy use is renewable since most bitcoin mining operations in Kentucky use the state’s carbon-intensive electrical grid.

Texas offers comparable incentives to crypto miners who can at least access a mix of renewable, less carbon-intensive and carbon-based energy. But the cheapest energy remains carbon-based.

There is another option.

Given the competition to attract crypto miners in these states and others, it is hard to imagine that many states will be like Kazakhstan and tax the industry. Not to mention the conflicting signals the industry is getting from national lawmakers, who are considering tax subsidies for certain cryptocurrency activities.

US policy makers need to address crypto mining and its energy needs soon. University of New Mexico economics professor Ben Jones and his colleagues found that $1 in bitcoin value created in 2018 led to 49 cents in climate and health damage in the United States.

It is strong. But it’s not the crypto mining that’s hurting us. It’s the carbon emissions. If only there was a tax policy that could help limit the damage of climate change, reduce the budget deficit and even fund rebates for Americans. Any ideas?

The treasure dog, published once a month, helps to understand tax policy for those outside the tax world by connecting tax issues to everyday concerns. Do you have a question or an idea? Send Renu an email.