United States Issues Report on Climate and Energy Implications of Crypto-Assets – Fin Tech
On September 8, 2022, the White House Office of Science and Technology Policy (the “OSTP“) published a report (the “Report“) on the climate and energy implications of cryptoassets in the United States.
This report was published in response to Executive Order 14067, which was signed by President Joe Biden on March 9, 2022. Executive Order 14067 outlines the first “whole-of-government” strategy for regulating digital assets in the United States. Our summary of the announcement can be found here.
The report examines the potential for distributed ledger technology (“DLT”) to impact efforts to address climate change and transition to cleaner energy sources. The report’s publication is timely as the Ethereum blockchain underwent a significant software upgrade, known as “the Merge,” on September 15, 2022. “The Merge” transitioned the Ethereum blockchain from a “proof of work” (“PoW“) consensus mechanism to a “proof of stake” (“Bucket“) system that is expected to reduce energy consumption by approximately 99.95%, according to the Ethereum Foundation.1
OSTP’s recommendations
To ensure that responsible development of digital assets is consistent with broader U.S. efforts to achieve certain climate commitments, the report recommends that U.S. cryptoasset policy and decision-making focus on the following five key areas:
1. Minimizing Greenhouse Gas (GHG) Emissions, Environmental Justice Impacts and Other Local Impacts of Crypto Assets: The report calls on the Environmental Protection Agency (“EPA”), the Department of Energy (“DOE”) and other US federal agencies to collaborate and develop an “evidence-based environmental performance standard for cryptoasset technologies”. The report recommends setting standards for energy intensities, water consumption, noise generation and clean energy use by operators. The report also suggests exploring executive actions and legislation to limit or eliminate the use of high-energy-intensive consensus mechanisms for mining cryptoassets.
2. Ensure energy reliability: The report directs the DOE, the Federal Energy Regulatory Commission, and the North American Electric Reliability Corporation to conduct reliability assessments of current and projected crypto-asset mining on electricity system reliability and adequacy. It also mandates these organizations to develop procedures that reinforce power systems in anticipation of an increase in crypto-asset mining.
3. Obtain data to understand, monitor and mitigate the impacts of crypto asset mining: The report recommends that the Energy Information Administration and other federal agencies consider obtaining data from miners and electric utilities, regarding energy use and fuel mix, power purchase agreements, environmental justice implications and response participation requirements.
4. Advanced standards for energy efficiency: The report calls for greater promulgation of energy conservation standards for mining equipment for cryptoassets, blockchains and other operations.
5. Encourage transparency and improvements in environmental performance: The report calls on crypto-asset industry associations, including mining firms and equipment manufacturers, to publicly disclose mining locations, electricity usage, greenhouse gas emissions under existing protocols, and e-waste recycling performance.
Main points from the report
Crypto-Asset Mining is energy intensive
The report observed that global electricity consumption by cryptoassets in 2022 is estimated to be between 120 and 240 billion kWh, which exceeds the total annual electricity consumption of many countries, including Argentina and Australia.2 Also, the US hosts about a third of the world’s crypto-active operations, and accounts for between 0.9% to 1.7% of the country’s total electricity consumption, equivalent to the amount consumed by all US home computers or residential lighting.3
As of August 2022, Bitcoin accounts for between approximately 60-77% of all global crypto asset electricity use4while Ethereum accounts for about 20%-39%.5 US electricity consumption to mine Bitcoin increased enormously from early 2021 (about 8 to 11 billion kWh) to mid-2022 (between 33 to 55 billion kWh).6
Certain consensus mechanisms, such as Bitcoin’s PoW, are largely responsible for this enormous energy use. OSTP believes that responsible development of digital assets requires a shift towards an alternative, less energy-intensive consensus mechanism.
Distributed Ledger technologies can help innovate environmental markets and energy management
While blockchain and DLT have seen potential applications in environmental markets, for example in the voluntary carbon markets, the report warned that innovations should follow established market rules and must offer an improvement over existing technologies in cost, speed and security without negative environmental impact. impact.
Other emerging use cases of DLT include energy management, particularly through smart grid technology and coordinating distributed energy resources (DERs), such as fuel cells, solar energy systems, and residential and commercial battery systems. The report estimates that an increasing number of electricity consumers may become suppliers in the future, with DLT offering the potential for automation, decentralization and digitization of the operation of an electricity grid. This technology is cited as having the ability to facilitate a clean power community marketplace for DER assets.
At the same time, grid operators can also increase reliability by auditing, in real time, all DER services using DLT. With innovations in blockchain technology, DLT can potentially provide these services while protecting the identity and privacy of DER owners.
Crypto assets pose challenges to power infrastructure
Mining with cryptoassets can put a significant strain on the power grid. This is primarily due to a cryptoactive mining operation’s high load factor (consistent use of electricity), and their propensity to operate through periods of high demand. Consequently, this damages the life of the equipment, causes power outages and creates a fire hazard.
Predictions of energy use are essential for estimating demand for services, energy supply options and prices in changing macroeconomic environments. However, many energy system models do not accurately predict the energy use of complex digital systems. For example, it is difficult to predict the future hashrates of cryptoasset networks. Mining rig efficiencies are closely tied to the market value of the cryptocurrency being mined, and estimates have often produced unrealistic demand expectations for blockchain energy consumption. Based on this uncertainty, and the possibility that electricity use of cryptoassets could grow exponentially in the future, the report argues for improved data collection and monitoring.
Significant consequences for the environment and local communities
Fossil fuels are often burned to generate electricity and mined for use in the production of computers and related infrastructure, resulting in greenhouse gas emissions that exacerbate climate change. The report estimates that the current carbon dioxide emissions from mining of cryptoassets in 2022 are 110 to 170 million tons globally, and 25-50 million tons in the United States alone.7 Based on these estimates, emissions from crypto-asset mining represent 0.2% to 0.3% of total global emissions.8 Crypto asset mining can also harm the planet indirectly, such as contributing to noise and water pollution due to the cooling solutions used to keep the mining infrastructure running optimally.
OSTP also observed that more natural gas and coal power plants were dispatched (or restarted) to meet electricity loads, increasing costs and pollution problems.
In addition to the environmental damage of mining crypto-assets, the additional demand for electricity inevitably results in higher costs for local residents. According to the report, crypto asset mining in New York state increased annual household electric bills by $82 and annual small business electric bills by $164, in just two years.9
The Canadian context
As a popular destination for crypto asset mining, due to our colder climate, relatively low electricity prices and the current approach to crypto asset regulation, Canadian climate and energy policy makers can benefit from this report and use it as a source of substantive dialogue.10 For example, according to Hydro-Quebec, the province of Quebec received electricity requests from crypto-asset miners that accounted for 24% of Hydro-Quebec’s total generation capacity in 2018.11 A similar landscape can be found in other provinces such as Manitoba, as Manitoba Hydro previously revealed that six major crypto asset mining companies in the province consume a total of as much electricity as 18,000 households.12
Given the popularity of crypto asset mining in Canada, energy regulators across different provinces have engaged with miners in different ways. In an effort to understand the crypto-asset mining landscape and to ensure it complies with safety requirements, the Alberta Energy Regulator issued Bulletin 2022-12 April this year, requesting information from regulated entities regarding the size of their crypto-asset mining operations, energy source and use. Recently, Hydro-Quebec also announced its plan to launch a process for the allocation of energy capacity dedicated to cryptographic use applied to blockchain.1. 3 While it remains to be seen whether Canada will develop a national approach to mining cryptoassets, current or potential operators in Canada must consider regulatory regimes and other policies that may govern the source and amount of energy consumed during their mining operations.
Footnotes
1 Ethereum Foundation. The merger.
2 US Energy Information Administration. (nd). Electricity data reader. US Department of Energy.
3 US Energy Information Administration. (2022). Annual Energy Outlook 2021 (Reference Case Tables).
4 71 Digiconomist. (2022). Bitcoin Energy Consumption Index. Opened 16 August 2022, from
5 72 Digiconomist. (2022). Ethereum Energy Consumption Index. Opened 16 August 2022, from
6 Ibidn2.
7 Digiconomist (2022). Bitcoin Energy Consumption Index.
8 Ibid.
9 Benetton, M., Compiani, G. and Morse, A. (2021, May 14). When cryptomining comes to town: High power consumption to the local economy. SSRN.
10 Canadian Energy Regulator. Market Snapshot: Cryptocurrency Mining Booms in Canada Here’s why.
11 Ibid.
12 CBC. What’s driving the potential bitcoin mining boom in Canada.
13 Hydro Quebec. Allocation of the dedicated block of electricity.
Click here to view the original article
The content of this article is intended to provide a general guide to the subject. You should seek specialist advice about your specific circumstances.
