Executive Order: Attacking Bitcoin’s Energy Use

Per a White House executive order, a report was released yesterday covering the climate implications of Bitcoin’s PoW mining. Read our recap, highlights and major concerns outlined in the report.

Bitcoin And The Climate Emergency

Yesterday, the White House Office of Science and Technology released a long-awaited executive order report, Climate And Energy: Implications Of Crypto-Assets In the United States. Throughout 2022, there’s been increased political and regulatory focus on bitcoin and other cryptocurrencies as many seek to understand the industry in-depth for the first time. The executive order and report also comes at a time when the government is unsure how Bitcoin’s proof-of-work (PoW) consensus protocol fits within their own climate agenda goals amid a growing global energy crisis.

The main framing of the report is nothing new: the current administration is focused on a climate emergency, has ambitious emission reduction targets over the long term and highlights many ways why growing PoW electricity use may conflict with this agenda. A bias towards a less energy-intensive proof-of-stake (PoS) consensus protocol is clear in the report. 

The main takeaway is that there is still little understanding about Bitcoin and more studies will likely need to be done. The key academic literature cited has been heavily debunked (i.e., de Vries, Mora et al.) and the report reads as a mix of many different voices and viewpoints taking a first pass at a deep dive into the industry. It’s not a report that will shape immediate policy but instead gives us an idea of what current scientists and regulators are thinking. The report largely outlines reasons why PoW mining is a net negative to key environmental goals while highlighting only a couple key benefits.

For more in-depth commentary on the report (from those who submitted materials for consideration and are trying to work with Washington on Bitcon’s behalf), listen to the latest Twitter spaces from the Bitcoin Policy Institute. 

Below we dive into some key concerns and benefits from the report. 

Main Concerns

A key concern in the report is the energy use and comparison of PoS and PoW; it’s a theme throughout. The below section doesn’t focus on the technical difference between the two and rather equates them by highlighting that there are growing calls for PoW blockchains to switch consensus mechanisms just because of energy use estimates. Bitcoin isn’t Bitcoin without PoW and there are no legitimate movements to change the consensus mechanism, a point the report fails to address. 

“An alternative, less energy-intensive consensus mechanism, called Proof of Stake (PoS), was estimated to consume up to 0.28 billion kilowatt-hours per year in 2021, less than 0.001% of global electricity usage. Current discussions about reducing crypto-asset electricity usage primarily focus on PoW blockchains, particularly Bitcoin.17,18 There have been growing calls for PoW blockchains to adopt less energy-intensive consensus mechanisms. The most prominent reaction has been Ethereum’s promised launch of “Ethereum 2.0,” which uses a PoS consensus mechanism.”

Another concern is the growing desire to compare Bitcoin’s total electricity use to a range of countries and industries to understand if it “uses too much electricity.” The much more apt comparison is to build cost estimates of the current monetary and payment networks and the government infrastructure needed to secure and operate those networks. Anything short of that produces little insight into what is actually being compared and for what purpose. 

The report does highlight the blanket electricity comparison to current payment networks (excluding FedWire, banking system and the vast government infrastructure needed to support them) while not citing any research about Layer 2 or Layer 3 scaling solutions like the Lightning Network or the total benefits and costs of a decentralized final settlement payment network. This is par for the course for many critiques to focus on electricity usage per on-chain transaction without articulating Layer 2 potential and scalability in the future. 

“Noting direct comparisons are complicated, Visa, MasterCard, and American Express combined reported around 0.5 billion kWh of electricity usage in 2020, inclusive of all operations, in addition to electronic payments. In other words, these three entities consumed less than 1% of the electricity that Bitcoin and Ethereum used that same year, despite processing many times the number of on-chain transactions and supporting their broader corporate operations. Responsible development of digital assets includes ensuring operations with dramatically lower energy intensity, as digital assets are adopted.”

Emissions and emissions reduction is a clear focus that specifically highlights Bitcoin. There is also a section on the restarting of fossil fuel plants for mining that is eroding U.S. progress in reducing GHG emissions. It’s increasingly clear that any “non-green friendly” mining activities will be flagged and come under scrutiny if they don’t fit within the correct box. 

“Global crypto-asset mining emissions, at a rate of 140 Mt CO2/y, 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.122 Bitcoin alone generates approximately two-thirds of global crypto-asset GHG emissions.Bitcoin emissions have increased rapidly from a range of 2 to 16 Mt CO2/y in to 100 ± 20 Mt CO2/y from May 30 to June 16, 2022, an increase of approximately 10 times in five years.”

Lastly, the key language that is most concerning is the possibility that Congress might consider limiting or eliminating PoW mining in the worst-case scenario. This language is full of “what-ifs” and a hypothetical scenario if standards are not met. This is not a declaration of a ban or even insight that a ban is on the horizon. We seem to be far from that discussion with this exploratory report being the first of its kind and no Congressional member opinions even disclosed in the report to back the claim.

Game theory would suggest that total energy use from Bitcoin mining wouldn’t necessarily be reduced but rather just move and exist outside the United States instead. There would be substantial pushback from many states where PoW mining is thriving and proving to be beneficial and in demand.

What’s more likely is the point below about “environmental performance standards” or “energy efficiency standards” being rolled out or possible tax policies unleashed to try and curb user demand and adoption in hopes to curb more mining activity. What seems to be unfair and unique is the level of scrutiny around Bitcoin mining relative to other energy-intensive industries and as a result, it’s possible we see stricter environmental standards imposed on large-scale American miners in the future. 

“The Environmental Protection Agency (EPA), the Department of Energy (DOE), and other federal 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. These should include standards for very low energy intensities, low water usage, low noise generation, clean energy usage by operators, and standards that strengthen over time for additional carbon-free generation to match or exceed the additional electricity load of these facilities. Should these measures prove ineffective at reducing impacts, the Administration should explore executive actions, and Congress might consider legislation to limit or eliminate the use of high energy intensity consensus mechanisms for crypto-asset mining.”

Main Benefits 

There is a section that acknowledges and highlights the benefits of mining with stranded and renewable energy sources, particularly vented or flared methane gas. This has easily been one of the most “pro-climate” examples and best selling points of what Bitcoin energy innovation can achieve and the report hones in on that as it fits within its framing and goals. In many countries, pilot projects for this use case continue to grow across major players like ExxonMobil and ConocoPhillips as they are profitable strategies that significantly reduce emissions.

To this point, many have yet to understand that the majority of Bitcoin’s energy use is non-rival and isn’t in competition with other demand. It’s largely energy coming online that otherwise would not be used. 

“The crypto-asset industry can potentially use stranded methane gas, which is the principal component of natural gas, to generate electricity for mining. Methane gas is produced during natural gas drilling and transmission, and by oil wells, landfills, sewage treatment, and agricultural processes. Methane is a potent GHG that can result in 27 to 30 times the global warming potential of CO2 over a 100-year time frame, and is about 80 times as powerful as CO2 over a 20-year timeframe.Reducing methane emissions can slow near-term climate warming, which is why the Biden-Harris Administration released the U.S. methane emissions reduction action plan in 2021… Crypto-asset companies are now exploring ways to use electricity generation from vented and flared methane at oil and gas wells and at landfills.”

Another benefit is the acknowledgment of Bitcoin mining’s ability to act as a demand response tool. They highlight the use case of Riot this summer in which they earned more revenue in the ERCOT demand response program by shutting off machines relative to what they would have made by mining bitcoin instead. The idea that Bitcoin mining can strengthen and stabilize energy grids is one we expect more people to catch on to as education and examples continue. It’s briefly highlighted in this report. 

“Crypto-asset mining operations can quickly decrease the amount of electricity used by scaling back or switching off mining rigs. Bitcoin miners can participate in utility and grid operator programs that pay major electricity users to decrease consumptions during times of peak grid stress, or to balance supply and demand — a process called demand response.”

Final Note

Considering this report is in a way framed against Bitcoin mining, it’s good to see some glimpses of recognition around the benefits of Bitcoin mining. However, there’s clearly a bias against Bitcoin’s energy use and discussions are increasing at the national level on how to limit it. There’s a lot more work to do to produce quality data and research that pushes back against many of the report’s points.  

There’s a key point in dissecting and analyzing the costs of Bitcoin’s energy use and impacts: you must first understand or at least acknowledge its value proposition. If you don’t think Bitcoin has any value then one will always see the costs to run and secure the network as wasteful or a net drag on society. 

We will also increasingly live in a world where the idea of more energy use is a dangerous one, despite the direct correlation of rising energy use and the population’s higher standard of living over time. That’s a clear idea in this report. 

Bitcoin goes directly against that; its energy use will only keep increasing over time. That will be the constant political battle about its place in the world as more will need to understand its value proposition and net positive impacts on energy innovation. 

As a bonus, the latest Arcane Research report, “How Bitcoin Mining Can Transform The Energy Industry,” addresses many of the benefits that this White House report is missing. 

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Not financial advice.