US Report on Climate and Energy Impacts on Crypto Assets - Fin Tech

US Report on Climate and Energy Impacts on Crypto Assets – Fin Tech

On September 8, 2022, the White House Office of Science and Technology Policy (“”OSTP“) publish a report (”a report“) On the Climate and Energy Impacts on Crypto Assets in the US.

This report was published in response to Executive Order 14067, which President Joe Biden signed on March 9, 2022. Executive Order 14067 sets out the first “comprehensive government” strategy for regulating digital assets in the United States. Our summary of the executive order can be found here.

The report examines the potential of distributed ledger technologies (“DLT”) to influence efforts to tackle climate change and transition to cleaner energy sources. The report was published just in time as the Ethereum blockchain underwent a major software upgrade, known as a “merger,” on September 15, 2022. “Merge” about the Ethereum blockchain from “Proof of Work” (“Proof of Work”)PoWConsensus Mechanism for “Proof of Stake” (“POS“) a system that is expected to reduce power consumption by approximately 99.95%, according to the Ethereum Foundation.1

OSTP توصيات Recommendations

To ensure that the responsible development of digital assets aligns with broader US efforts to achieve certain climate commitments, the report recommends that US crypto-asset policy and decision-making focus on the following five key areas:

1. Reducing Greenhouse Gas (GHG) Emissions, Sanitation Impacts, and Other Local Impacts from Crypto Assets: The report encourages 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 crypto-asset technologies.” The report recommends standards for energy intensity, water use, noise generation, and clean energy use by operators. The report also suggests exploring enforcement measures and legislation, to limit or eliminate the use of high energy-intensive consensus mechanisms for crypto-asset mining.

2. Energy Reliability Guarantee: The report directs the Department of Energy, the Federal Energy Regulatory Commission, and the North American Electrical Reliability Foundation to conduct reliability assessments of current and projected crypto-asset mining operations on the reliability and adequacy of the electricity system. It also directs these organizations to develop measures that boost energy systems in anticipation of a rise in crypto-asset mining activities.

3. Obtaining data to understand, monitor, and mitigate the effects 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 mixes, power purchase agreements, environmental equity impacts, and participation in response to demand.

4. Advanced Energy Efficiency Standards: The report calls for a greater release of energy conservation standards for crypto-asset mining equipment, blockchain, and other operations.

5. Encouraging transparency and improving environmental performance: The report encourages crypto-asset industry associations, including miners and equipment manufacturers, to publicly disclose their mining sites, electricity use and greenhouse gas emissions under existing protocols, and their e-waste recycling performance.

The main points of the report

Crypto-asset mining is energy-intensive

The report notes that the global electricity consumption of crypto assets in 2022 is estimated at between 120 and 240 billion kWh, exceeding the total annual electricity consumption in many countries, including Argentina and Australia.2 Moreover, the United States hosts nearly a third of the world’s crypto-asset operations, which accounts for 0.9% to 1.7% of the country’s total electricity use, similar to the amount consumed by all home computers or residential lighting in the United States.3

As of August 2022, Bitcoin accounts for approximately 60-77% of all electricity use in global crypto assets4while Ethereum accounts for about 20%-39%.5 US electricity consumption for bitcoin mining has increased dramatically from early 2021 (approximately 8 to 11 billion kWh) to mid-2022 (between 33 to 55 billion kWh).6

Some consensus mechanisms, such as Bitcoin’s Proof of Work, are largely responsible for this massive use of energy. OSTP believes that the responsible development of digital assets requires a shift towards an alternative consensus mechanism that is less energy intensive.

Distributed ledger technologies may help innovate environmental markets and energy management

While blockchain and DLT have seen potential applications in environmental markets, such as in voluntary carbon markets, the report warns that innovations must adhere to established market rules and must offer improvement over existing technologies in terms of cost, speed, and security without negative environmental impact.

Other emerging use cases for DLT include energy management, specifically through smart grid technology and the coordination of distributed energy resources (DER), such as fuel cells, solar energy systems, and residential and commercial battery systems. The report predicts that an increasing number of electricity consumers could become electricity providers in the future, with DLT providing the potential for automation, decentralization, and digitization of the operation of the electricity grid. This technology has been cited for having the potential to facilitate the clean electricity community market for DER assets.

At the same time, network operators can also enhance reliability by real-time auditing of all DER services using DLT. With innovations in blockchain technology, DLT can provide these services, while protecting the identity and privacy of DER owners.

Crypto assets pose challenges to energy infrastructure

Crypto-asset mining operations can put a significant strain on power grids. This is primarily due to the high load factor of the crypto-asset mining process (continuous use of energy), and its tendency to operate during periods of peak demand. Thus, this harms the life of the equipment, causes power outages, and leads to fire hazards.

Energy use forecasts are necessary to estimate the demands for services, energy supply options, and prices in changing macroeconomic environments. However, many power system models do not accurately predict the power usage of complex digital systems. For example, the hashing future of crypto-asset networks is difficult to predict. The efficiencies of mining hardware are closely related to the market value of the cryptocurrencies being mined, and expectations often produce unrealistic demand forecasts for blockchain power consumption. Based on this uncertainty, and the potential for electricity use of crypto assets to grow exponentially in the future, the report outlines the case for improved data collection and monitoring.

Significant impacts on the environment and local communities

Fossil fuels are often burned to generate electricity and extracted for use in the manufacture of computers and related infrastructure, resulting in greenhouse gas emissions that exacerbate climate change. The report estimates the current CO2 emissions from crypto-asset mining in 2022 to be between 110 and 170 million metric tons, globally, and 25-50 million metric tons in the United States alone.7 Based on these estimates, emissions from crypto-asset mining represent 0.2% to 0.3% of the total global emissions.8 Crypto-asset mining can also indirectly harm the planet, such as contributing to noise and water pollution due to cooling solutions used to keep the mining infrastructure running optimally.

OSTP has also noted that more natural gas and coal power plants are being dispatched (or restarted) to counter electricity loads, adding to cost and pollution concerns.

In addition to the environmental damage caused by crypto-asset mining, the additional demand for electricity inevitably increases costs for the local population. According to the report, crypto-asset mining in upstate New York has increased annual household electricity bills by $82 and small business annual electricity bills by $164, in just two years.9

Canadian context

As a popular destination for crypto-asset mining, given our cooler climate, relatively lower electricity prices and the current approach to regulating crypto assets, 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 amounting to 24% of Hydro-Quebec’s total generation capacity in 2018.11 A similar scene can be found in other provinces such as Manitoba, where Manitoba Hydro previously revealed that a total of six major crypto-asset mining companies in the province consumed up to 18,000 households.12

Due to the popularity of crypto-asset mining in Canada, energy regulators in various provinces have engaged the miners in various ways. In an effort to understand the crypto-asset mining landscape and to ensure it complies with safety requirements, Alberta Energy has issued a statement bulletin 2022-12 April this year, requesting information from regulated entities regarding the volume of crypto-asset mining, energy source and use. Recently, Hydro-Quebec also announced its plan to launch a process to allocate dedicated power capacity for the use of cryptography applied to the blockchain.13 While it remains to be seen whether Canada will develop a national approach to crypto-asset mining, existing or potential operators in Canada should consider the regulatory systems and other guidelines that may govern the source and amount of energy consumed during their mining operations.

footnotes

1 Ethereum Foundation. merging. https://ethereum.org/en/upgrades/merge/

2 US Energy Information Administration. (second abbreviation). Electricity data viewer. US Department of Energy. https://www.eia.gov/electricity/data/browser/.

3 US Energy Information Administration. (2022). Annual Energy Outlook 2021 (reference case tables). https://www.eia.gov/outlooks/archive/aeo21/.

4 71 A digital world. (2022). Bitcoin energy consumption indicator. Accessed Aug 16, 2022, from

https://digiconomist.net/bitcoin-energy-consumption.

5 72 Digiconomist. (2022). Ethereum power consumption indicator. Accessed Aug 16, 2022, from

https://digiconomist.net/ethereum-energy-consumption.

6 ibidn2.

7 A Digital World (2022). Bitcoin energy consumption indicator. https://digiconomist.net/bitcoin-energy-consumption.

8 ibid.

9 Benetton, M., Compiani, G., and Morse, A. (2021, May 14). When Cryptomining Comes to Town: High Indirect Effects of Electricity Use on the Local Economy. SSRN. https://ssrn.com/abstract=3779720.

10 Canadian Power Regulator. Market Snapshot: Cryptocurrency mining is booming in Canada. Here’s why. https://www.cer-rec.gc.ca/en/data-analysis/energy-markets/market-snapshots/2018/market-snapshot-crypto-currency-mining-is-booming-in-canada-here- is-why.html

11 The previous reference.

12 CBC. What is fueling a potential bitcoin mining boom in Canada. https://www.cbc.ca/news/business/bitcoin-mining-electricity-canada-1.4543319

13 Hydro Quebec. Allocate the block allocated to electricity. https://www.hydroquebec.com/blockchain/

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The content of this article is intended to provide a general guide to the topic. It is recommended to take the advice of specialists in such circumstances.

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