Bitcoin: Climate Ally, Not Climate Disruptor
A lot has been said in recent years about the sustainability of Bitcoin and its necessary proof-of-work mechanism which requires high energy input. Unfortunately, the ongoing discussion about Bitcoin mining has still not been resolved. Pushing this debate forward, we propose a holistic approach considering Bitcoins’ value proposition, and understanding how criticism of Bitcoin’s energy demand is often rooted in political arguments.
While Bitcoin is heavily criticized for its “energy consumption and inefficient consensus mechanism”, the network has a higher use of sustainable energy sources than most Western countries (In 2022: USA has a sustainable energy mix of ~41% and Bitcoin mining has a sustainable energy mix of ~59,5%) and the network’s total energy consumption is well below 1% of global energy usage. Furthermore, it is paramount to consider how the presence of a decentralized, tamper-proof and secure digital asset may be seen by some as a threat to existing power structures and monetary stability.
In order to grasp the role of Bitcoin and its potential implications, one must understand that the proof-of-work mechanism is not only necessary for the continued decentralized operation of the Bitcoin network but also potentially able to incentivize and accelerate the global energy transition for a greener future.
The value of Bitcoin and common criticisms
First, this section will cover the fundamentals of Bitcoin mining and the value proposition of Bitcoin. Second, we will examine the role of energy consumption in the context of Bitcoin’s consensus protocol.
Some basics about Bitcoin mining before we get started:
- Miners compete with each other to solve a puzzle and earn rewards when mining blocks.
- Miners primarily incur fixed costs for hardware and variable costs for electricity.
- Miners are assumed to be mainly motivated by profit.
- The profitability of Bitcoin mining determines the activity of miners and where they locate their operations.
How does mining work?
When a transaction is sent to the Bitcoin network, it only becomes a part of the blockchain when it is verified and included in a block by mining. Each block consists of multiple bundled transactions, which needs significant amounts of computational power to prove. The purpose of mining is to validate all transactions in regard to the Bitcoin consensus mechanism proof-of-work. Mining provides security by rejecting malicious or false transactions. Furthermore, the process of mining creates new Bitcoins following a fixed issuance schedule, until the maximum supply of 21 million BTC have been mined.
The cost of mining equals needed energy for validating each transaction on the blockchain while the reward is an accurate and transparent ledger. Therefore, mining achieves a delicate balance between cost and reward. Without proof-of-work and mining, Bitcoin would lose its value as a tamper-proof, secure, and transparent public ledger that replaces a central authority (i.e., a central bank, which uses resources too). Anecdotally, Bitcoin successfully combines a multitude of different technological advancements in cryptography, computer science, mathematics, and game theory of the last 40 to 50 years to achieve that. Bitcoin does not need any central operations or continuous strategic adaptations to work. The embedded monetary values incentivize the public to keep Bitcoin running.
The fact that Bitcoin does what it is supposed to, shows that it is generally possible to solve public problems (i.e., independent money supply without the need for a central authority) if the incentives are chosen correctly. Furthermore, as “there is no free lunch in life,” the network generates both positive and negative external effects. So, when criticizing Bitcoin solely based on energy consumption, focus is placed exclusively on the negative effects without consideration for what we get in return for the energy spent. But is this omission of Bitcoin’s positives attributable to incompetence or malice?
It appears as though this argumentation comes not from a place of genuine concern about the environment. Everything we do has positive as well as negative consequences. Sending an email or watching movies on Netflix consumes electricity and emits CO2 but has someone ever questioned that?
Nevertheless, while it is not feasible to judge technologies by their energy consumption per se, the energy source is what matters most when doing so. It is important to distinguish between renewable sources and fossil fuels. The mining of Bitcoin is mostly organized on an enterprise level. Miners are profit-seeking businesses that aim to maximize their hashrate while keeping their variable costs (energy cost) down. Therefore, Bitcoin will be mined where energy costs are low.
Bitcoin mining could easily become carbon-neutral if mining businesses were to fuel their operations with the energy of renewable sources. Today, Bitcoin mining is estimated to utilize about 59,5% renewable energies and not because miners specifically want to use sustainable energy for environmental reasons but primarily for economic reasons. Bitcoin mining operations are most profitable where energy is plentiful and thus cheap. In El Salvador, for example, solar, wind, and geothermal energy sources are used to mine Bitcoin. (Interestingly, this German article calls it “controversial mining”.)
The same economic effect that leads miners to choose energy-rich locations can be seen on Iceland where Bitcoin miners use volcanic geothermal energy to mine Bitcoin or in Norway where Bitcoin miners make use of the abundant energy produced by hydropower plants. Because Bitcoin is a decentralized network and mining can be carried out from anywhere, it is only a matter of time before mining operations move to energy-rich locations with high surplus electricity. Additionally, Bitcoin mining accelerates national transitions to renewable energies by using excess electricity from solar, wind, or biogas plants that would otherwise be wasted. This is in everyone’s interest because of the efficient outcome of monetizing excess energy. Additionally, in winter, the heat generated by mining could be used to fill district heating storage tanks and thus save heating costs for public facilities such as swimming pools or greenhouses.
Ignoring Negative Externalities
The prices of power and hardware, much like most goods in general, don’t reflect the negative effects they have on the environment. This is nothing new: a 2013 study found that the world’s biggest industries burn through $7.3 trillion worth of free natural capital per year and it’s the only reason they were profitable. Conclusively, if one would factor in all external costs, most products wouldn’t be profitable. Furthermore, if external costs are not factored in, who pays for them?
Unlike Bitcoin, which is a relatively simple system kept running by built-in incentives, the whole traditional economy relies on constant government intervention and investment (e.g.: Fossil Fuels received $5.9 Trillion in subsidies during 2020).
To preserve the environment, we need to either integrate the costs caused by negative externalities into the price of goods in the form of taxes or fees. However, this option only works if the earned tax is used to directly counter externality, in this case for example by improving infrastructure or developing new technologies that are beneficial to the environment.
The graph above shows the rising cost of public services while everyday consumer goods, which oftentimes have the most severe negative effects on the environment, are getting cheaper. Again, the current economic system suffers from false incentives.
Rules of the Game
Contemporary business philosophy seems to be “if it’s legal and profitable why not?” or “if I don’t do it someone else will.” This is the undeniable status quo. Bitcoin miners are playing by the same rules as everyone else. The carbon intensity of Bitcoin is only a symptom, not the problem.
Miners in the US, for example, are exposed to the carbon-intensive composition of the energy mix. Therefore, there is no reason to hold Bitcoin mining to a different standard than anything else. In fact, one might argue that the deflationary monetary policy of Bitcoin would, if widely adopted, actually discourage users from unnecessary spending and consumption and if used right could furthermore accelerate the energy transition by monetizing surplus energies, public heating, encouraging the development of carbon-neutral energy sources, and so on.
Summary
Making green power feasible
Bitcoin mining is used to balance energy overproduction from power plants operating as backups for intermittent renewable energy. In this way, Bitcoin may actually negate some of the shortcomings of current climate policy, and make the transition to renewable energy economically feasible and efficient. In practical terms, it takes the form of: Solar plants produce a surplus of energy in the summer, which can then be used to mine Bitcoin, which can be sold. In the winter, Bitcoin miners feed district heating power plants and thus produce needed warmth but also create extra profits. If electricity prices were higher, it might only be feasible to mine when a surplus is produced in the summer.
Mining emissions in perspective
Finally, it is important to remember the social good Bitcoin is doing in leveling the global economic playing field by protecting the most vulnerable members of society from inflation, remittance surcharges, and more. To put things into perspective, the Bitcoin Network was responsible for ~0.7% of global emissions in 2024. For comparison, the U.S. armed forces alone were responsible for 1.1% of global emissions during the same time period.
So you want to ban Bitcoin
Let’s say none of the points above matter to you. You are convinced that Bitcoin needs to be shut down in order to save the environment. Okay, now what? The most that can be done politically is banning crypto/fiat gateways and potentially a legally enforced mining ban. Will this solve the problem? Probably not, miners will just move to a country with less stringent laws or more corrupt officials. Such countries would likely also have a more carbon-intensive energy mix. As the number of miners decreases, profitability increases and miners will continue to seek profit.
Conclusion
The market solves a lot of problems if it is used wisely. Attempting to solve pollution and environmental degradation by willfully stagnating solves nothing. These issues need to be solved on the energy-production side. Bitcoin is not going anywhere, neither is human greed. Honest, and comprehensive energy policy is the best shot we have at minimizing the damage done by climate change. This means taxing environmentally harmful industries instead of subsidizing them, properly funding research and infrastructure related to alternative energy technologies such as primary energy sources like solar, secondary sources like hydrogen, and extensively investing in carbon capture technologies (i.e., algae farms and reforestation projects). Singling out Bitcoin as some sort of ecological boogie man helps no one — except maybe a questionable agenda. It’s time to move on…
About the authors
Julian Proft is a crypto expert with over three years of expertise in project management and digital transformation. Julian holds a Master in Management (M.Sc.) which he completed in Germany and the United States with a focus on Game Theory, Social Philosophy and Digital Transformation. Julian is passionate about fostering the adoption of cryptocurrencies and formerly worked for the Frankfurt School Blockchain Center. You can follow and contact Julian on LinkedIn and Medium.
Cedric Heidt is a research associate at the Frankfurt School Blockchain Center (FSBC) and an all-around crypto enthusiast. His main focus is currently on the sustainability aspects of Bitcoin, play-to-earn gaming, and decentralized finance in general. You can contact him via LinkedIn or by mail.
