United States Issues Report on Climate and Energy Implications of Crypto-Assets
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 crypto-assets 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 on regulating digital assets in the United States. Our summary of the Executive Order can be found here.
The Report examines the potential for distributed ledger technologies (“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” (“PoS”) system that is expected to reduce energy consumption by approximately 99.95%, according to the Ethereum Foundation.
The OSTP’s Recommendations
To ensure that the responsible development of digital assets aligns with broader U.S. efforts to achieve certain climate commitments, the Report recommends U.S. crypto-asset policy and decision-making focus on the following five key areas:
1. Minimizing greenhouse gas (GHG) emissions, environmental justice impacts, and other local impacts from crypto-assets: The Report encourages the Environmental Protection Agency (the “EPA”), the Department of Energy (the “DOE”), and other U.S. federal agencies to collaborate and develop an “evidence-based environmental performance standard for crypto-asset technologies”. The Report recommends setting standards for energy intensities, water usage, noise generation, and clean energy use by operators. The Report also suggests exploring executive action and legislation, to limit or eliminate the use of high energy intensity consensus mechanisms for crypto-asset mining.
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 operations on electricity system reliability and adequacy. It also directs these organization to develop procedures that reinforce power systems in anticipation of a rise in crypto-asset mining activities.
3. Obtain data to understand, monitor, and mitigate impacts from crypto-asset mining: The Report recommends the Energy Information Administration and other federal agencies consider obtaining data from miners and electric utilities, regarding energy usage and fuel mix, power purchase agreements, environmental justice implications, and demand response participation.
4. Advance energy efficiency standards: The Report calls for greater promulgation of energy conservation standards for crypto-asset mining equipment, blockchains, and other operations.
5. Encourage transparency and improvements in environmental performance: The Report encourages Crypto-asset industry associations, including mining firms and equipment manufacturers to publicly disclose mining locations, electricity usage, GHG emissions under existing protocols and electronic waste recycling performance.
Key Points from the Report
Crypto-Asset Mining is Energy-Intensive
The Report observed that global crypto-asset electricity consumption in 2022 is estimated to be between 120 and 240 billion kWh, exceeding the total annual electricity consumption of many countries, including Argentina and Australia. Moreover, the United States hosts approximately one-third of the world’s crypto-asset operations, accounting for between 0.9% to 1.7% of the nation’s total electricity usage, similar to the amount consumed by all U.S. home computers or residential lighting.
As of August 2022, Bitcoin accounts for between approximately 60-77% of all global crypto-asset electricity usage, while Ethereum accounts for approximately 20%-39%. U.S. Electricity consumption to mine Bitcoin increased tremendously from early 2021 (approximately 8 to 11 billion kWh) to mid-2022 (between 33 to 55 billion kWh).
Certain consensus mechanisms, such as Bitcoin’s PoW, are largely responsible for this enormous energy usage. The OSTP believes the responsible development of digital assets requires a shift toward an alternative, less energy-intensive consensus mechanism.
Distributed Ledger Technologies May Help Innovate Environmental Markets and Energy Management
While blockchain and DLT have seen potential applications in the environmental markets, such as in the voluntary carbon markets, the Report cautioned that innovations should abide by established market rules and must offer an improvement over existing technologies in cost, speed and security without a negative environmental impact.
Other emerging use cases of DLT include energy management, specifically through smart grid technology and coordinating distributed energy resources (DER), such as fuel cells, solar power systems and residential and commercial battery systems. The Report forecasts that an increasing number of electricity consumers could become providers in the future, with DLT offering the potential for automating, decentralizing, and digitizing the operation of an electricity grid. This technology is cited for having the ability to facilitate a clean electricity community marketplace for DER assets.
Concurrently, grid operators could also enhance reliability by auditing, in real-time, all DER services using DLT. With innovations in blockchain technology, DLT could potentially provide these services, while protecting the identity and privacy of DER owners.
Crypto-Assets Poses Challenges to Power Infrastructure
Crypto-asset mining operations can place significant stress on electricity grids. This is primarily attributable to a crypto-asset mining operation’s high load factor (the consistent use of power), and their propensity to operate through peak demand periods. Consequently, this harms equipment life, causes blackouts, and creates fire hazards.
Energy usage predictions are crucial to estimate demands for services, energy supply options and prices in changing macroeconomic environments. However, many energy system models do not accurately predict energy usage of complex digital systems. For example, it is difficult to predict future hashrates for crypto-asset networks. Mining rig efficiencies are closely related to the market value of the cryptocurrency being mined and projections have often produced unrealistic demand expectations for blockchain energy consumption. Based on this uncertainty, and the possibility that crypto-asset electricity usage may grow exponentially in the future, the Report makes 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 mined for use in the manufacturing of computers and related infrastructure, resulting in GHG emissions that exacerbate climate change. The Report estimates current carbon dioxide emissions from crypto-asset mining in 2022 are 110 to 170 million metric tons, globally, and 25-50 million metric tons in the United States alone. Based on these estimates, emissions from crypto-asset mining represents 0.2% to 0.3% of total global emissions. Mining crypto-assets can also harm the planet indirectly, such as contributing noise pollution and water pollution due to the cooling solutions used to keep mining infrastructure running optimally.
The OSTP also observed more natural gas and coal power plants being dispatched (or restarted) to meet electricity loads, raising cost and pollution concerns.
In addition to the environmental harm of crypto-asset mining, the additional demand for electricity inevitably results in greater costs for local residents. According to the Report, crypto-asset mining in upstate New York increased annual household electric bills by $82 and annual small business electric bills by $164, in just two years.
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 regulating crypto-assets, Canadian climate and energy policy makers can benefit from this Report and use it as a source of substantive dialogue. 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 generating capacity in 2018. A similar landscape can be found in other provinces such as Manitoba, as Manitoba Hydro previously disclosed that six major crypto-asset mining firms in the province consumes in total, as much power as 18,000 households.
Given the popularity of crypto-asset mining in Canada, energy regulators across different provinces have engaged with miners in various ways. In a bid to understand the crypto-asset mining landscape and to ensure its compliance with safety requirements, the Alberta Energy Regulator issued a Bulletin 2022-12 April this year, requesting information from regulated entities in regards to their crypto-asset mining operation’s size, energy source and usage. Recently, Hydro-Quebec also announced its plan to launch a process for allocating energy capacity dedicated to cryptographic use applied to blockchain. While it remains to be seen whether Canada will develop a national approach to crypto-asset mining, current or prospective operators in Canada must consider the regulatory regimes and other guidelines that may govern the source and amount of energy consumed during their mining operations.
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