BY DR SOHA MAAD
Introduction
Two recent events are shaping the future of the world, the Conference of the Parties (COP27) in Sharm El Sheikh in Egypt and the Future of Investment Initiative (FII) in its 6th Edition that was held in Riyadh in Saudi Arabia and referred to as “Davos in the desert”. The Future Investment Initiative concluded that the future of investment is dependent on regulating cryptocurrencies, while COP27 warned the world of a climate disaster.
This article debates whether cryptocurrency is the future of investment or a disaster to the climate and the world. Following a brief overview of FII and COP27, the article sheds light on the damage that can be brought to the climate from cryptocurrency and the possibility to overcome this damage by resorting to cryptocurrency that offsets carbon and carbon credit market, and the responsible development of digital assets. The article concludes with recommendation to leverage cryptocurrency prospect while reducing harm to the climate and preserving the planet towards greater world sustainability.
COP27 at a glance
The 27th Conference of the Parties of the United Nations Framework Convention on Climate Change (COP27), held in Egypt from 6 to 18 November 2022, seeks renewed solidarity between countries to deliver on the landmark Paris Agreement, for people and the planet. Heads of State, ministers, and negotiators, along with climate activists, mayors, civil society representatives and chief executive officers (CEOs) gathered in the Egyptian coastal city of Sharm el-Sheikh for the largest annual gathering on climate action. COP27 builds on the outcomes of COP26 to deliver action on an array of issues critical to tackling the climate emergency, from urgently reducing greenhouse gas emissions, building resilience, and adapting to the inevitable impacts of climate change, to delivering on the commitments to finance climate action in developing countries.
Future invesment initiative at a glance
The sixth edition of the Future Investment Initiative (FII) was held in Riyadh from 25-27 October 2022, and gathered the world’s foremost CEOs, policymakers, investors, entrepreneurs, and young leaders to shape the future of international investment and the global economy.
Many experts at the FII see that cryptocurrency, is world-changing and pave the way for big opportunities. It gives the possibility to innovate outside of central banks while abiding by laws and regulations to make daily lives more comfortable.
Although the cryptocurrency space as a whole is still viewed as an unknown territory in finance, the crypto panel at the FII argued that cryptocurrency should be included in investment portfolios, and be properly regulated.
CRYPTO CURRENCY climate impact
According to the Guardian news, environmental damage of producing cryptocurrency averages 35% of its market value over the past five years.
The digital currency’s disproportionate harm to the climate comes from its reliance on a computing process to verify transactions called “proof-of-work mining”, which requires huge electricity expenditures.
Researchers examined, the climate damage from cryptocurrency miners and found out that the damage exceeded the value of the coins produced, overwhelmingly due to high electricity consumption.
IMPACT OF Crypto currency mining
According to Coinbase, mining is the process that Bitcoin and several other cryptocurrencies use to generate new coins and verify new transactions. It involves vast, decentralized networks of computers around the world that verify and secure blockchains, the virtual ledgers that document cryptocurrency transactions. In return for contributing their processing power, computers on the network are rewarded with new coins. It is a virtuous circle: the miners maintain and secure the blockchain, the blockchain awards the coins, the coins provide an incentive for the miners to maintain the blockchain.
There are three primary ways of obtaining bitcoin and other cryptocurrencies: by buying them on an exchange like Coinbase, receiving them as payment for goods or services, or virtually mining them.
Specialized computers perform the calculations required to verify and record every new bitcoin transaction and ensure that the blockchain is secure. Verifying the blockchain requires a vast amount of computing power, which is voluntarily contributed by miners.
Bitcoin mining is a lot like running a big data center. Companies purchase the mining hardware and pay for the electricity required to keep it running and cooling it. For this to be profitable, the value of the earned coins has to be higher than the cost to mine those coins.
Every computer on the network races to be the first to guess a 64-digit hexadecimal number known as a “hash”. The faster a computer can make guesses, the more likely the miner is to earn the reward.
The winner updates the blockchain ledger with all the newly verified transactions, thereby adding a newly verified block, containing all of those transactions, to the chain. And the winner is granted a predetermined amount of newly minted bitcoin.
Beyond releasing new coins into circulation, mining is central to the security of Bitcoin (and many other cryptocurrencies). It verifies and secures the blockchain, which allows cryptocurrencies to function as a peer-to-peer decentralized network without any need for oversight from a third party. And it creates the incentive for miners to contribute their computing power to the network.
According to CNBC news, the United States White House Office of Science and Technology Policy warned that cryptocurrency mining operations could hinder the ability to mitigate climate change. The United States White House produced a report in response to President Joe Biden’s executive order that called on the government to examine the risks and benefits of cryptocurrencies. The report analysed climate and energy implications of crypto assets in the United States. According to the report, crypto operations in the United States now consume as much energy as all home computers or all residential lighting.
Mining cryptocurrency produces planet-warming emissions primarily by burning coal, natural gas and other fossil fuels to generate electricity.
The United States White House report also revealed that in 2022, crypto mining produced between 110 and 170 million metric tons on carbon pollution across the world and roughly 25 to 50 million metric tons in the United States alone. The process produces electricity by purchasing it from the power grid or by producing and disposing of computers and mining infrastructure.
According to the report, the global crypto mining emissions are greater than the emissions of many individual countries and equivalent to the global emissions from all barges, tankers and other ships on inland waterways. Additionally, Bitcoin, the world’s largest digital currency by market value, generates approximately two-thirds of global crypto greenhouse gas emissions.
SCALE OF BITCOIN DAMAGE TO CLIMATE
The Smithsonian Magazine pointed out that bitcoin could rival beef or crude oil in environmental impact. Carbon emissions from mining one coin increased 126-fold from 2016 to 2021. Using the social cost of carbon, a common metric to gauge the financial damages caused by the greenhouse gas, the climate cost of Bitcoin is calculated. On average, it is found that for each dollar in bitcoin value produced, the process resulted in 35 cents in global climate damages (equivalent to 35 percent of its market value). In comparison, beef’s climate damages stand at 33 percent of its market value, and damages from gasoline produced from crude oil stand at 41 percent. In May 2020, Bitcoin’s damages peaked at 156 percent of coin price.
CRYPTO CURRENCY ELECTRICITY CONSUMPTION
The Cambridge University Bitcoin Electricity Consumption Index (CBECI) provides an up-to-date estimate of the Bitcoin network’s daily electricity load. The underlying techno-economic model is based on a bottom-up approach that uses the profitability threshold of different types of mining equipment as the starting point.
Table 1. Cambridge Bitcoin Electricity Consumption Index (CBECI) parameters
|
Parameter |
Description |
Measure/Unit |
Source |
|
Network hashrate, mean daily |
The average rate at which miners are solving hash puzzles on a given day |
Exahashes per second (Eh/s) |
Dynamic: COINMETRICS |
|
Bitcoin issuance value, daily |
The aggregated value of all bitcoins newly issued on a given day |
USD |
Dynamic: COINMETRICS |
|
Miner fees, daily |
The aggregated value of all transaction fees paid to miners on a given day |
USD |
Dynamic: COINMETRICS (Calculation) |
|
Difficulty, mean daily |
The average difficulty level of the hash puzzle on a given day |
/ |
Dynamic: COINMETRICS |
|
Bitcoin market price, close daily |
The fixed closing price of bitcoin as of 00:00 UTC on a given day |
USD |
Dynamic: COINMETRICS |
|
Mining equipment efficiency |
Measures the energy efficiency of a given mining hardware type |
Joules per Gigahash (J/Gh) |
Static: hardware specs from 100+ equipment types, taken from various sources |
|
Electricity cost |
Global average price of electricity incurred by miners |
USD per kilowatt-hour ($/kWh) |
Static: estimate (assumption) |
|
Power usage effectiveness (PUE) |
Measures how efficiently energy is used in a data centre |
/ |
Static: estimates (assumptions) |
CRYPTOCURRENCY MINING MAP
Cambridge University developed also a mining map to track the geographic distribution of Bitcoin’s total hash-rate over time. Cambridge University partnered with several Bitcoin mining pools to collect geolocational mining facility data. This geolocational data is based on Internet Protocol (IP) addresses of mining facility operators (hashers) that connect to the servers of mining pools.
Each participating mining pool aggregates IP addresses on their end to create an average geographic distribution of total pool hash-power by country and region.
Data gathered includes the following parameters:
- Average hash-rate for a given country/region over the selected period.
- Country name from the World Bank classification list.
- Data period (ranging from daily to monthly).
- Period start date in YYYY–MM–DD format.
- Province name for pools that want to provide a more granular regional breakdown within a country.
The solution of carbon backed crypto algorithm
The World Economic Forum is promoting the responsible use of blockchain and is providing the opportunity to engage with regulators to bridge the gap between real-world carbon consumption and cryptocurrency. The World Economic Forum’s Crypto Impact and Sustainability Accelerator (CISA) explores issues at the nexus of policy, sustainability, and social impact to help bring about a systemic, inclusive, and effective approach to governing distributed ledger technology.
In this respect, the world Economic Forum digital economy initiative proposes the solution of a carbon-backed cryptocurrency for tackling climate change, pointing out that the exponential growth of cryptocurrencies has come at the expense of the environment. A carbon-backed, algorithmic currency aims to change that by driving climate action. The responsible development and regulation of digital assets will be also crucial for a green economy.
Over the last decade, cryptocurrency has exploded in growth, onboarding around 300 million new users. This exponential growth has been accompanied by serious environmental side effects stemming from energy intensive activities such as Bitcoin mining, which consumes as much electricity as a small country each year, and transacting on proof-of-work networks, including Ethereum.
Carbon Credit Markets
Cryptocurrency traders are moving into the carbon credit market. Carbon credit markets are trading systems in which carbon credits are sold and bought. One tradable carbon credit equals one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas reduced, sequestered or avoided.
There are broadly two types of carbon markets:
- Compliance markets: are created as a result of any national, regional and/or international policy or regulatory requirement.
- Voluntary carbon markets: for issuing, buying and selling of carbon credits, on a voluntary basis.
The current supply of voluntary carbon credits comes mostly from private entities that develop carbon projects, or governments that develop programs certified by carbon standards that generate emission reductions and removals.
Demand comes from private individuals who want to compensate for their carbon footprints, corporations with corporate sustainability targets, and other actors aiming to trade credits at a higher price to make a profit.
One type of compliance market is emissions trading systems (ETS) which is operating on a cap-and-trade principle. The European Union launched the world’s first international ETS in 2005. China launched the world’s largest ETS, estimated to cover around one-seventh of global carbon emissions from the burning of fossil-fuels. Many more national and subnational ETS are now operating or under development.
The Clean Development Mechanism (CDM), adopted under the Kyoto Protocol in 1997, is another well-known example of an international compliance market. Under the CDM, emission-reduction projects in developing countries have generated carbon credits used by industrialized countries to meet part of their emission reduction targets.
According to Asia Nikkei, crypto-linked trading of carbon credits has spread to the extent that it now accounts for 9% of all transactions. Nikkei investigation shows it is a trend that will change the market-based solution for environmental accountability.
Cryptocurrencies originally did not come with underlying assets that guarantee their values. New crypto-assets pegged to fiat currency or gold are being floated extensively.
Carbon credits have intrinsic value. The carbon credit market, in which companies voluntarily participate, is expanding as more businesses seek to offset their emissions to achieve carbon neutrality.
Cryptocurrency that offsets carbon
KlimaDAO, a decentralized autonomous organization, takes carbon credits that have been converted into digital tokens by cooperating crypto groups, then converts the tokens into Klima, another cryptocurrency. Each Klima is intended to represent at least one metric ton of carbon credits.
KlimaDAO, is aligning economic incentives for a green regenerative economy, making on-chain carbon retirement accessible to all. KlimaDAO’s native token “KLIMA” can only be minted when tokenized carbon credits are locked away in its treasury. This is achieved by offering incentives to users to exchange tokenized carbon in return for KLIMA at a discounted price. The KLIMA token is itself backed by carbon. As the KlimaDAO treasury acquires more carbon over time through its incentives, any newly minted KLIMA tokens are distributed to those who hold KLIMA themselves.
Anyone can acquire KLIMA or through the open, transparent, and fairly priced markets that are hosted on Decentralized Finance (DeFi) exchanges such as SushiSwap. This means for the first time, anyone can participate in the carbon economy without needing to use a third-party broker to source, or offset, carbon.
By using KLIMA as the dominant trading pair for transacting carbon, and with KlimaDAO responsible for providing the liquidity in these markets, an efficient, liquid and transparent market for carbon is emerging. As users transact, trade, and offset carbon assets at market prices, the utility of KLIMA scales. Through the growth of diversified carbon assets, KlimaDAO intends to create the best experience to source and retire carbon assets.
Nikkei Asia has determined that 23 million metric tons of carbon credit were apparently transacted for the purpose of getting Klima between October and May 2022. The traders are mainly speculators on the hunt for short-term profit. Sellers are able to pocket the difference between the carbon credit’s actual value and the Klima’s market value if the crypto gains in price.
Regulating the crypto industry
According to World Economic Forum, regulation has long been a hot topic in the area of cryptocurrency. However, United States President Joe Biden’s recent Executive Order calling for the responsible development and regulation of digital assets, specifically refers to exploratory efforts to investigate the environmental benefits of distributed technologies. This landmark Executive Order shows that governments are beginning to recognize that the debate around cryptocurrency and the environment should not focus just on energy consumption, but on positive projects that are bringing much needed transparency and liquidity to carbon markets.
Responsible development of digital assets
In the Executive Order on Ensuring the Responsible Development of Digital Assets, United State president Joe Biden made clear that the responsible development of digital assets includes reducing negative climate impacts and environmental pollution.
To ensure the responsible development of digital assets, key recommendations of the White House report that analysed climate and energy implications of crypto assets in the United States include the following actions for consideration:
- Minimizing greenhouse gas emissions and environmental impacts: Environment and energy agencies should provide technical assistance and initiate a collaborative process with states, communities, the crypto-asset industry, and others to develop effective, evidence-based environmental performance standards for the responsible design, development, and use of environmentally responsible crypto-asset technologies.
- Ensuring energy reliability: Assessments of reliability and adequacy of current and projected crypto-asset mining operations on electricity system should be conducted. Reliability standards should be enforced and emergency operations procedures to ensure system reliability and adequacy should be undertaken.
- Gathering data to understand, monitor, and mitigate impacts: Various efforts should be undertaken to collect and analyse information from crypto-asset miners and electric utilities in a privacy-preserving manner to enable evidence-based decisions on the energy and climate implications of crypto-assets. Data should include mining energy usage and fuel mix, power purchase agreements, environmental justice implications, and demand response participation.
- Advancing energy efficiency standards: Regulators should promulgate and regularly update energy conservation standards for crypto-asset mining equipment, blockchains, and other operations.
- Encouraging transparency and improvements in environmental performance: Crypto-asset industry associations, including mining firms and equipment manufacturers, should be encouraged to publicly report crypto-asset mining locations, annual electricity usage, greenhouse gas emissions using existing protocols, and electronic waste recycling performance.
- Knowledge building and innovation: For improved analytical capabilities that can enhance the accuracy of electricity usage estimates and sustainability, authorities should set research and development priorities that improve the environmental sustainability of digital assets, including crypto-asset impact modeling, assessment of environmental justice impacts, and understanding beneficial uses for grid management and environmental mitigation. Research and development priorities should emphasize innovations in next-generation digital asset technologies that advance security, privacy, equity, resilience, and climate goals.
Towards cryptocurrency for a sustainable world
Climate change is one of the most pressing problems in the world. Various countries are addressing it in their legislations and policies. Various efforts are undertaken at COP27 for protecting communities from pollution, reducing greenhouse gas emissions, achieving a carbon pollution-free electricity grid, and reaching net-zero greenhouse gas emissions.
To achieve these ambitious goals, emerging technologies should contribute to a net-zero, clean energy future. The use of digital assets, such as crypto currencies, which are based on distributed ledger technology (DLT), is expanding. As an emerging technological innovation, digital assets have provided some benefits and value for businesses across the globe and have the potential for future benefits with emerging uses.
Cryptocurrencies, which are digital assets that are implemented using cryptographic techniques, can require considerable amounts of electricity usage, which can result in greenhouse gas emissions, as well as additional pollution, noise, and other local impacts to communities living near mining facilities. Depending on the energy intensity of the technology and the sources of electricity used, the rapid growth of cryptocurrencies could potentially hinder broader efforts to achieve COP27 climate commitments to reach net-zero carbon pollution.
There are various solutions to this problem. Arab countries and authorities should intensify research and development in areas related to the following proposed solutions:
Solution #1: producing cryptocurrency in a less energy-intensive way
Popular cryptocurrency, such are Ethereum, announced lately a big change in crypto currency production that can help in cutting electricity use by 99 percent. Bitcoin should make a similar move as well.
Solution #2: Using distributed ledger technologies (DLT) for climate monitoring or mitigation
DLT may have a role to play in enhancing market infrastructure for a range of environmental markets like carbon credit markets. Responsible development of this technology would encourage innovation in DLT applications while reducing energy intensity and minimizing environmental damages.
Solution #3: Devising policies and strategies for responsible development and trading of cryptocurrencies
In line with the policies proposed by the White House in the United States, Arab countries and authorities should work together to put strategies and policies towards responsible development and trading of cryptocurrencies. These policies and strategies should address issues such as minimizing greenhouse gas emissions and environmental impacts, ensuring energy reliability, putting energy efficiency standards.
Solution #4: Establishing cryptocurrencies data centres
The cryptocurrencies data centres will collect and analyse information about crypto-assets to enhance efficiency and transparency.
Solution #5: Research and innovation
Arab countries should support research and innovation in next-generation digital currencies and technologies.
Solution #6: Developing carbon credit markets
The concept of carbon credit market is new and various research should be undertaken to explore the potential benefit and risks of these markets and their future prospect.
REFERENCES
COP27, FUTURE INVESTMENT INITIATIVE, The Guardian, Coinbase, Cambridge University, World Economic Forum, ASIA NIKKEI, CNBC, White House Fact Sheet (Climate and Energy Implications of Crypto-Assets in the United States), UNDP, Smithsonian Magazine.
