Discussions of Bitcoin’s energy usage and its indirect environmental impact have occured since the very early days of its release, becoming a recurring subject that tends to get resurrected in full force with each successive market cycle. As concerns began to ramp up last year under the guise of ESG, CoinShares Research developed a comprehensive model to estimate emissions and created their own data collection framework.

Bitcoin’s indirect carbon emissions via its mining network

Usage of energy is a contentious and much misunderstood function of the Bitcoin monetary system. Hotly debated ever since its invention, already in 2010 Satoshi Nakamoto was confronted with the claim that ‘Bitcoin minting is thermodynamically perverse’.

He offered the following comment in response

“The utility of the exchanges made possible by Bitcoin will far exceed the cost of electricity used. Therefore, not having Bitcoin would be the net waste.”

Satoshi Nakamoto

This view is widely shared among Bitcoin proponents. A common argument in support of this view is that the gross and systemic distortion of price signals caused by costless and arbitrary monetary inflation creates malinvestment, economic inefficiencies and waste on a scale that would dwarf Bitcoin’s approximate 0.05% share of global energy consumption.

Nevertheless, discussions of Bitcoin’s energy usage and its indirect environmental impact have pressed onward, becoming a recurring subject that tends to get resurrected in full force with each successive market cycle.

Much of the debate surrounding this issue tends to be based on qualitative and anecdotal evidence, with few attempts to directly quantify the emissions themselves. For this reason, CoinShare research developed a comprehensive model to calculate emissions and created their own data collection framework. The report highlights the overall results of their model, contain an overview of patterns and trends, as well as a short section discussing the use and cost of carbon credits for offsetting emissions.

Bitcoin’s indirect carbon emissions via its mining network

Methodology : a bottom-up approach

The overarching goal of the model is to estimate the carbon emissions indirectly resulting from the Bitcoin mining network, and given the available data, the model should be as simple as possible to return a useful quality of outputs, but no simpler.

Network efficiency is a crucial component of any mining model as it is the basis of the estimation of the total network power draw. Getting the network efficiency wrong directly translates into a proportional error size in the power draw estimation.

“To achieve this, we curate an ongoing time series database of all mining units ever built and make simple assumptions based on efficiency, production and breakdown rates to generate monthly estimates of how many units are available for mining, and which units out of the existing total are actually mining at any given time. The average network efficiency is then used to estimate the ongoing electricity draw of the network from the observable implied hashrate, sourced from the Bitcoin blockchain itself (via CoinMetrics).

The research distributes then the total estimated power draw across a number of individual global mining regions, each of which has its own carbon intensity of electricity generation based upon its unique combination of generation sources.

“Here, we are assuming that the electricity consumption of a mining operation in any given region is responsible for carbon emissions at the average regional intensity of generation. The power draw by region is measured in MW and is estimated month to month. Once the total carbon emissions of the network are calculated we subtract out the negative CO2 equivalent emissions of flare-mitigating oil field miners.”

Bitcoin’s indirect carbon emissions via its mining network

Carbon Emissions

Report estimates that the Bitcoin mining network emitted 36 Mt of CO2 in 2020 and 41 Mt in 2021. Simultaneously, flare mitigation will remove an estimated total of 2.1 Mt CO2 equivalents, bringing the total net emissions to 39 Mt. The total negative emissions from flare miners amounts to approximately 5.2 % of the total.

In a global context this is an insignificant addition to total emissions, amounting to less than 0.08%, or less than 1/1,000th, of the global total (49,360 Mt CO2e)*. As a frame of reference, countries with large industrial bases such as the United States and China emitted 5,830 Mt and 11,580 Mt CO2e in 2016, respectively.

Estimates of the emissions caused by minting and printing fiat currencies come in around 8 Mt per year and the gold industry is estimated to generate between 100 and 145 Mt of CO2 emissions annually. Galaxy Digital estimates that the global banking system uses 264 TWh (2019).

Bitcoin’s indirect carbon emissions via its mining network

Coal, Oil & Gas

All of the emissions result from three different types of generation sources: coal, oil and gas. Out of the three, coal currently produces almost all of the emissions at 76%, with gas and oil in distant second and third place, currently emitting 21 % and 3%, respectively

The average figures for 2021 are 82% (coal), 15% (gas) and 3% (oil). Contrary to what many people might have thought, calculations suggest that, seen in isolation, migration of hashrate out of China marginally increased the annual average carbon intensity of hashing from 486 gCO2/ kWh in 2020 to 495 gCO2/kWh in 2021.

However, the current carbon intensity of the network as of December 2021 is only 466 gCO2/kWh. And, whereas the carbon intensity of the network was previously highly seasonal, it will now likely remain more or less steady throughout the year, meaning the carbon intensity of 2022 is likely to be lower than both 2020 and 2021. So overall, the longer term effect of the Chinese ban will be a reduction of carbon intensity. The overall trend since January 2020 is also down, but we would be cautious to draw any long-term trend conclusions based on less than two years of data.

CoinShare’s model estimates that under average 2021 conditions, the carbon intensity of the Bitcoin mining network was slightly higher than the global average of 492 gCO2/kWh. At the current run-rate of 466 gCO2/ kWh however, the intensity is lower than the global average. We expect the overall carbon intensity of the network to keep trending down over time. At a minimum, they believe emissions will fall in line with the reductions in the carbon emissions of global electricity generation in general.

However, they also expect the reduction to be larger than the global average since miners are more mobile than traditional industries and can move to locations where cheap renewables are constructed, almost no matter how remote the locations may be. This allows miners to take advantage of cheap newly constructed renewable energy generation at a faster rate than other industries.

Most importantly though, it is expected that Bitcoin miners start consuming large amounts of wasted flare gas. If this becomes a large enough share of the mining energy input, the mining network could become carbon negative.

Bitcoin’s indirect carbon emissions via its mining network

Carbon Intensity

Throughout its history, the vast majority of the mining network’s carbon output has likely been generated in non-western countries. Prior to June 2021, the four mining regions of Kazakhstan, Iran, Xinjiang and Inner Mongolia alone produced 53% of the total carbon emissions. Currently, the worst carbon intensity is found in Kazakhstan, Montana, Kentucky and Alberta where large amounts of electricity is generated using particularly carbon intensive fossil fuels such as oil and coal.

These four regions generate 43% of emissions while generating only 26% of hashrate. On the other end of the scale, regions such as Norway, Iceland, Sweden, Quebec and Manitoba produce almost no emissions at all despite generating an estimated 5.2% of current hashrate.

What these low-emission regions all have in common is an abundance of hydropower resources, and a relatively large distance between large generation capacities and major demand centers. Because electricity is not easily transported over long distances, and the marginal cost of hydroelectricity is extremely low, hydropower in locations that are geographically separated from large centers of demand is often some of the cheapest electricity in the world.

The marginal carbon impact of each additional kWh of electricity produced from hydroelectric power generation is effectively zero, and many dams globally operate at suboptimal levels due to seasonal fluctuations in magazines or uneconomical distances to markets. Bitcoin mining is therefore an excellent opportunity to increase the profitability of hydropower facilities without generating emissions, and without consuming resources that are demanded by other market actors.

Bitcoin’s indirect carbon emissions via its mining network

Costs of Bitcoin Carbon Offsets

Another interesting take away from the emissions figures is that they can be used to calculate the carbon offsetting cost of holding one bitcoin for one year. Assuming the cost of emissions is shared equally among all holders of bitcoin, at 18.9 million bitcoin outstanding, each bitcoin would require offsetting 2.2 tonnes of CO2 per year, or roughly the same as one return flight on business class between New York to Tokyo.

The cost of offsetting 2.2 tonnes of CO2 per year will vary depending on the carbon credits one wants to purchase. If using the European carbon credit market, for example, at 79 EUR/tonne (11 January 2022) the total offsetting cost of holding one bitcoin for one year would be 176 EUR, or 200 USD (11 January 2022). At a bitcoin price of 42,000 USD, this would amount to an annual cost of 0.48%.

“While it is clear that there currently are emissions created as a result of Bitcoin mining, these emissions are not only insignificant on a global scale, but they are in no way necessary in and of themselves. Bitcoin will be 100% renewable as soon as our electricity generation is100% renewable. Our focus should be on building out renewable power generation, not on stifling the development of monetary technology.

The current emission cost must be seen within the context of what the likely future global emissions profile will be in perpetuity, what the market currently requests in terms of monetary technology, and what benefits Bitcoin already provides its users. When analysed over the long term and in proper context, we believe that the emission costs of Bitcoin are dwarfed
by its benefits.”


Bitcoin’s indirect carbon emissions via its mining network

Sourve: CoinShare

Bitcoin’s indirect carbon emissions via its mining network