Myth: Crypto, blockchain and its impact on the environment
Crypto's impact on the environment is undoubtedly a complex and controversial topic. As you may know, there are different views and arguments each sides of the debate, and it is important to be aware of the nuances and the various factors that come into play in this discussion. In this article, our goal is to give you just that: more nuances about how crypto and blockchain technology affect the environment.
Criticism of crypto's carbon footprint
On the one hand, critics have raised significant concerns about the carbon footprint that certain cryptocurrencies, particularly Bitcoin, create as a result of their use of the Proof of Work (PoW) consensus mechanism. This has raised concerns about the impact on climate change and the need to reduce crypto's environmental impact. The increased exposure to cryptocurrencies with high CO2 emissions has also increased the risk in the financial system and challenged climate strategies in many countries.
Alternative consensus mechanism and sustainability
On the other hand, proponents of crypto have highlighted that there are alternative consensus mechanisms such as Proof of Stake (PoS) that are far more energy efficient. PoS cryptos, such as Ethereum, have been shown to have significantly lower energy consumption and CO2 emissions compared to PoW cryptocurrencies such as Bitcoin. (In fact, energy consumption is 90% lower or more.) Furthermore, the industry has taken initiatives such as the Crypto Climate Accord and the Bitcoin Mining Council to reduce the crypto industry's carbon footprint and promote the use of sustainable energy.
Blockchain technology and circular economy
It is also worth noting that blockchain technology has the potential to support a circular economy by tracking and managing resources more efficiently through unique identification and transparency. Although the technology is still in the development stage, it has the potential to help reduce waste and promote recycling and reuse of resources. Likewise, increased use of NFTs (which is a unique token and therefore also a cryptocurrency) can reduce the need for the many resources used to document the ownership and authenticity of goods.
Digital Product Passport (DPP) and blockchain potential
The digital product passport (DPP) is a kind of digital sustainability certificate that follows a product all the way from birth to retirement. DPP uses a kind of standard called GS1 and this helps to check, manage and show how sustainable a product is.
DPP has become part of new EU rules called "Ecodesign for Sustainable Products Regulation" (ESPR). These rules will come into force in early 2024 and apply to almost everything you can buy in shops in Europe, except for food, pet food and medicines. The aim of ESPR is to get the EU to keep its promises from the Paris Agreement and the UN's global goals for sustainable development. The rules are to be phased in until 2030.
Digital product passports help create products and businesses that think about the environment. They give the products a kind of unique ID and link them to important information such as how long they last, where they come from and how they can be recycled. To make this work, we need to use solutions enabled by blockchain and cryptocurrencies, so it is very likely that blockchain technology will play an important role in protecting the environment and making the world more sustainable in the future.
The authorities' dilemma
For the authorities, there is a dilemma between promoting innovation on one hand, and protecting the environment on the other. They must weigh the benefits of the technology and its possible societal contribution against its impact on the environment. It is also worth noting that political initiatives can have a significant impact on the crypto industry, and regulation as well as capital requirements can become a reality for businesses and investors.
Investors and ESG targets
Investors should also be aware of environmental, social and governance (ESG) goals when considering investing in crypto. PoW-based currencies may conflict with ESG goals due to their high energy consumption and CO2 emissions.
The narrative of Bitcoin as environmentally friendly is slowly changing; for example, there is a new report from KPMG that describes Bitcoin as ESG-friendly. As previously mentioned, there has been a lot of focus on the harmful effects of Bitcoin, especially its energy-intensive Proof-of-Work (PoW) consensus mechanism. But recent developments are changing the current picture.
Analysts at KPMG have now said that Bitcoin offers a number of benefits within the environmental, social and governance (ESG) framework. Blockchain has the potential to stabilize the energy grid, reduce greenhouse gas emissions and contribute to the sustainable heating of both commercial and private properties.
ESG has become an important factor in assessing a company's impact on the environment. With rising global temperatures, melting ice caps and extreme weather conditions, nations and industries are taking steps to reduce their carbon footprint and earn ESG reward points.
Energy for Bitcoin Mining
Many Bitcoin miners use alternative energy sources to power their mining equipment. Some try to utilize surplus solar energy, while others use surplus heat from oil extraction and gas flares. Some even use cow manure, and Bitcoin miners in Iceland use geothermal energy to mine BTC.
However, critics do not focus on the energy sources; they concentrate primarily on the total energy consumption.
But, an article in the Harvard Business Review claims that Bitcoin only uses 0.55% of the world's total electricity production. This figure places it on par with the energy consumption of the world's tumble dryers. In 2022, the Bitcoin Mining Council even claimed that Bitcoin's global share is only 0.17% of total energy production.
The future of environmental sustainability
It is important to recognize that the debate about environmental sustainability in crypto and blockchain technology continues to evolve. Technological advances and political decisions are likely to shape the future of the crypto industry and its impact on the environment. All stakeholders must remain aware of the nuances and complexities of this topic when looking at solutions that promote both economic innovation and environmental sustainability.