Originally submitted March 25, 2018. University of Waterloo Ecological Economics (ENVS 220) with Professor Sean Geobey.
Alana Cristante
175 University Avenue
Waterloo, ON N2L
March 25, 2018
Blair Miller
Executive Director of Rates, Alberta Utilities Commission (AUC)
425 Fifth Avenue Place
Calgary, AB
Margaret McCuaig-Boyd
Minister of Energy, Government of Alberta
10800 – 97 Avenue
Edmonton, AB T5K 2B6
Dear Mr. Miller and Mrs. McCuaig-Boyd, respectively:
Cryptocurrency and blockchain technologies are expanding more rapidly than ever, and permeating many facets of today’s society. These technologies have been adopted as investments, as purchasing techniques, and have been introduced into the operations of many businesses, ranging from health care to solar power trading. As they shape the way we live, and create exciting possibilities for the future, they bring with them a high energy-intensity, as a part of the “mining” process that creates and verifies their security.
With new Chinese legislation, the world’s capital of cryptocurrency, in particular bitcoin, miners will be forced to search elsewhere for cheap electricity that can fund their operations. Canada, Alberta in particular, is an attractive destination for these activities. Manitoba Hydro and Quebec Hydro have received over 70 proposals for mining projects in the past year, some of which require up to 300 MW of electricity. With the current state of Alberta’s energy mix and capacity, I have included several policy recommendations that may be implemented to control a sudden increase in Alberta’s electricity consumption and thus, the province’s overall carbon emissions.
I believe that the options included in this brief are amongst the most feasible in terms of managing the influx of bitcoin miners that is to be expected in coming years. As Canada remains dedicated to its goals of emissions reductions as a member of the Paris Agreement, it is important to address this large concentration of electricity usage as soon as possible.
Sincerely,
Alana Cristante
As bitcoin’s popularity and exchange rate continue to grow, more miners around the world, in the form of businesses and individuals, engage in a computational verification process that consumes nearly $10 million of electricity per day (Schiller, 2017). This level of energy intensity carries with it a large carbon footprint, and as bitcoin and blockchain technologies expand rapidly, emphasis must be placed on adapting and mitigating this damage. Mitigation can be achieved by powering the mining process with renewable energy, or adapted by shifting the verification process from the energy-intensive Proof of Work system to its sustainable counterpart, the Proof of Stake system. As China, the world’s bitcoin mining capital, cracks down on mining operations, and more miners enter the industry, the province of Alberta must prepare for the onslaught of miners and implement regulations which control their electricity consumption and subsequent carbon emissions (Schiller, 2017).
The notions of bitcoin and blockchain were added to the public’s lexicon when the exchange rate of the cryptocurrency soared from USD $967 in January 2017 to USD $13,860 in December 2017. Cryptocurrency and blockchain, much like the internet at the time of its conception and broad scale implementation, are technically understood few and far between. That being said, the potential that these tools possess to transform current business, government and societal systems as a whole is prevalently discussed (AlHusseini, 2018).
Bitcoin’s decentralization, security and production is rooted in its computational “mining”. Bitcoin mining consists of computer processing units (CPUs) worldwide competing to solve difficult computational problems as fast and thoroughly as possible. The CPU which is able to do this first will successfully add a new block to the blockchain, which is a public, decentralized ledger which records all bitcoin transactions (Murphy, 2018). As a reward for time and energy expended on mining bitcoin, the successful miner is awarded 12.5 bitcoin, every ten minutes, which is currently valued at roughly $140,000 (Farrell, 2015). This process of computational work is referred to as a Proof of Work (PoW) system, and was first introduced with the conception of Bitcoin, the world’s first cryptocurrency, in 2009. In the years to follow, nearly five hundred other crypto-coins have become available, verified using different systems, such as “Proof of Stake”.
Despite its introduction in an era of energy efficiency and environmental consciousness, the PoW verification system consumes large amounts of electricity that will do nothing but increase in the upcoming future, if left unregulated. PoW is primarily critiqued for this energy intensity, and its creation of economies of scale within the mining community (Farrell, 2015). When the price of bitcoin increases, there is more incentive for miners to enter the competition; thus, the computational problems to solve a new block become more difficult and thus require more processor power, which consumes more electricity (Murphy, 2018). In 2011, the Proof of Stake system was introduced by PeerCoin as a solution to the energy intensity of PoW’s security mechanism (Farrell, 2015). Proof of Stake relies on the ownership of coins by miners themselves, opposed to computational power, to increase the probability of successfully creating a new block and being awarded bitcoin. The downside is decreased robustness in security; most Proof of Stake coins have been fraudulent, as the successful miner does not properly disperse the coins (Farrell, 2015).
The second-valued, next most popular cryptocurrency after Bitcoin is Ethereum, whose creator, Vitalik Buterin, has decided to switch over to the Proof of Stake verification system (AlHusseini, 2018; Fairley, 2017). He explains: “I would personally feel very unhappy if my main contribution to the world was adding Cyprus’ worth of electricity consumption to global warming.” (AlHusseini, 2018). Hence, hybrid bitcoin mining verification has recently been introduced as a feasible middle ground that offers robust security, effective distribution and low energy consumption (Farrell, 2015). In 2015, Proof of Stake held $18 million of the market; PoW held $3.3 billion of the market, and the hybrid of the two held only $30 million (Farrell, 2015).
Buterin’s statement emerges with the attempted quantification of just how much electricity bitcoin mining has consumed globally—an estimated fifteen percent of total energy in 2017 (AlHusseini, 2018). The amount of power required to mine a single bitcoin token is the same amount that the average American household uses in two years (AlHusseini, 2018). To add, the total amount of electricity used for bitcoin mining in 2017 surpassed the total electricity used for all the electric cars on the road in the world, roughly six terawatt hours (TWh), to a total of approximately 36 TWh (Wieczner, 2018). Consumption is dictated by the current exchange rate of bitcoin; increase in value brings increase in mining, which brings an increase in the difficulty of computational problems, and therefore the electricity consumed by CPU’s to solve them (source 8). With the soar in value witnessed at the end of 2017, it is forecasted that the power demand of bitcoin mining will triple by the end of 2018, to 125 TWh, the same amount of electricity expected to be consumed by electric vehicles in 2025 and the current amount that Argentina consumes as a country today (Wieczner, 2018).
It is critical to acknowledge that one of the primary difficulties surrounding this challenge is in regards to the uncertainty of data used. While it is clear to see that bitcoin has an energy efficiency problem, there is no way to verify any calculations predicting its severity (DiChristopher, 2017). Information regarding this topic is currently a black box that is difficult to track due to lack of comprehensive data regarding the identification, geography, and equipment used to mine bitcoin worldwide. The general consensus recognizes somewhere around 13 or 14 TWh as the lower bound of consumption, but an upper bound cannot necessarily be provided using current information (DiChristopher, 2017).
With an onslaught of Chinese regulation pushing masses of cryptocurrency miners outside the country, and other global competitors entering the mining business, there is a global rush to set-up shop in locations with cheap electricity rates, the highest costs of bitcoin mining (Bowmer, 2018; Rud, 2018). In Canada, Winnipeg, Montreal and Drumheller are the most popular locations; in fact, Manitoba Hydro and Hydro-Quebec have received over seventy proposals for mining projects, with energy requirements up to 300 MW (Bowmer, 2018). The issue posed for Alberta lies in its current energy mix, by which 87% of electricity in 2016 was generated using coal and natural gas (National Energy Board, 2018). Alberta already has the largest demand for electricity, in total and per capita, of all Canadian provinces; fossil fuel electricity generation emitted 46.1 megatonnes (MT) of carbon dioxide equivalent (CO2e) in 2016 (National Energy Board, 2018).
Canada was the first nation to establish a tax on virtual currencies (Farrell, 2015). Imposing a tax on the mining of PoW would reduce its mining and large electricity consumption in Alberta. Moreover, it would encourage the mining of Proof of Stake cryptocurrencies, which are sustainable in the long-term and growing in market share. In its current form, PoW cryptocurrency miners publicize the environmental cost of their business and internalize the profit (Murphy, 2018). The implementation of tax internalizes these externalities and will aid in the shift of mining to a socially efficient level. This regulation may enforce a market-based, voluntary standard in which cryptocurrencies such as Bitcoin, which operate under PoW verification methods, investigate switching to hybrid of Proof of Stake methods in order to be efficiently mined across the globe and reduce their energy intensity.
The taxation of PoW policy recommendation is much more effective than potential subsidies, such as subsidies for Proof of Stake mining, or cryptocurrencies mined using renewable energy and such. The introduction of subsidies regarding electricity consumption of cryptocurrencies cause harm due to the subsequent hyperinflation of miners, and thus, market price; this can cause a severe distortion of consumption patterns (Murphy, 2018).
Cryptocurrency mining and technological innovation have boded well together within the past ten years of so of its rise in usage and popularity. The rapid advances made in energy efficiency of mining hardware have stopped consumption from spiraling out of control. That being said, efficiency gains are slowing while competition in mining and its computational difficulty increases almost exponentially (Fairley, 2017). If today’s calculations were computed using CPU’s from bitcoin’s initial launch in 2009, they would consume more power than what is generated globally (Fairley, 2017). In 2013, application-specific integrated circuits (ASICS) were created and heavily adopted for their ability to complete a 256-bit hash at 100 million times the speed, and in a millionth-fraction of the energy as a CPU from 2009 (Fairley, 2017). In order to be financially viable, future hardware will have to be both energy-efficient and possess higher computational capabilities (Odwyer & Malone, 2014).
Miners of Proof of Stake cryptocurrencies do not always bother to invest in the most energy efficiency computers as the rewarding of coins is not dictated by computational capability and speed. Therefore, ensuring there is a standard for the energy efficiency of equipment ensures miners do not use outdated, inefficient equipment for extended periods of time.
The implementation of this mechanism is its greatest disadvantage, for it is not the most feasible option. The proper execution of this policy would involve expensive audits conducted on mining businesses, or the banning of less efficient mining equipment in the province.
My recommendation follows that a matrix of both policy options be implemented in order to maximize the benefits of cryptocurrency mining for the province of Alberta, but minimize the associated carbon emissions that are posed from heightened electricity consumption. Since taxing PoW coins that are mined will encourage the mining of Proof of Stake cryptocurrencies, it is important to implement technological standards that ensure those computing machines are kept efficient, while eliminating the usage of outdated equipment.
These two methods of policy interference allow for the fullest extent of control in ensuring that the profiteers of cryptocurrency mining internalize, rather than publicize, the costs of their business activities, to a further extent than their own marginal costs and benefits. The options ensure that Albertan society can fully embrace the innovations that cryptocurrency and blockchain have to offer in the future.
Cryptocurrency mining does not tend to directly benefit the local economy; for this reason, it is especially critical that mining activities are regulated, especially if they are heavy on electricity consumption and therefore carbon emissions (Rud, 2018). In the face of climate change challenges that the planet is facing today, one may contemplate the true value of cryptocurrency mining and its carbon footprint. Whether the activity is worth it lies in a personal perception of the future of cryptocurrency and blockchain technology as a revolution in decentralization and power dispersal (Schiller, 2017). The current status of cryptocurrency, especially bitcoin, remains surprisingly disappointing from an ecological perspective in today’s day and age. Today’s mining practices use a medium-sized country’s equivalent of electricity on an annual basis, with no internalization of external ecological costs, and show no signs of stopping in the near future, as they are projected to triple by the end of 2018. However, as the industry continues to develop itself, there is a surplus of hope going forward, laying in the possibilities of energy efficiency, effective regulation, Proof of Stake and other coin verification developments, voluntary industry initiatives, and more.