DNB’s climate report on bitcoin misses the mark

DNB opens the attack on Bitcoin with the climate report ‘The carbon footprint of bitcoin’, but misses the mark. According to the report, the carbon footprint of a bitcoin transaction is equivalent to two thirds of the monthly carbon footprint of a Dutch household. However, the calculation method falls short: the CO2 footprint of a Bitcoin transaction cannot be derived from the energy consumption of the entire Bitcoin network.

De Nederlandsche Bank (DNB) recently released the climate report ‘The carbon footprint of bitcoin’. In it, it presents a new calculation method to determine the carbon footprint of a bitcoin transaction.

According to the report, the carbon footprint of a single bitcoin transaction in 2020 was comparable to two-thirds of the monthly emissions of an average Dutch family. That’s more than the year before and much more, the report says, than centralized services or other consensus models.

It produces nice one-liners and headlines, but the calculation method falls short and comparison is skewed. This is partly what the authors of the report indicate. The calculation method only takes into account the transactions and the consensus and trust mechanism (mining) of the basic layer of bitcoin, but not for the transaction layers that are built on top of it.

The central banking system sees the report exactly the other way around. In doing so, it only looks at the impact of transactions in the value chain, but does not take commercial banks, the Eurosystem and all activities of authorities to safeguard trust into account. So two different things are being compared.

Transactions through second layers

The distinction matters a lot. The Bitcoin blockchain is usually seen as the basic layer of the Bitcoin economy, a so-called settlement layer . Funds are moved there, but not in a way comparable to banking transactions. For example, a transaction on the blockchain can include multiple payments, called outputs , with multiple recipients. In addition, there are various second layers, such as the increasingly popular Lightning Network or the Liquid sidechain, that serve as transaction layers.

Many bitcoin transactions today take place through these second layers, because they make bitcoin transactions faster, cheaper and more private. For example, the number of Lightning nodes increased tenfold between 2019 and 2020, the number of Lightning channels increased fivefold and the network capacity increased sixfold. In El Salvador, the country that recognized bitcoin as legal tender last year, for example, people are betting big on Lightning.

How many transactions go through second layers such as Lightning is unknown due to the nature of the technology – which is also why the DNB report excludes them. Someone can make a practically infinite number of bitcoin transactions via the Lightning Network, while only one or two transactions are visible on the Bitcoin blockchain. The number of transactions on the Bitcoin blockchain therefore says little about economic activity or the actual number of Bitcoin transactions.

Any calculation of the number of transactions that ignores the multitude of transactions on second layers therefore paints a distorted picture in advance. It is therefore not surprising that the estimate per transaction in the DNB report is (too) high.

Per transaction

A calculation of the carbon footprint per bitcoin transaction is not a good approximation at all. That is because the energy consumption of bitcoin mining is separate from the number of transactions on the blockchain. Bitcoin mining consumes a lot of power, but if the number of bitcoin transactions doubles, it won’t take twice as much power. It also does not save half the energy or CO2 emissions if the number of transactions is halved.

Compare it with heating a living room: that takes a lot of energy, but the amount is independent of how many people are in the room. If the room is warm, one or two people can use it, but also ten or twenty. Based on that, you can hardly conclude generalities about how much energy it costs per person to heat a person in a room, because that varies considerably based on the number of people in the room. You can perhaps conclude that it becomes more efficient as more people are involved.

It works the same way with Bitcoin: it takes a lot of energy, but the amount of energy is independent of the number of transactions on the blockchain. Currently, bitcoin mining uses approximately 0.142% to 0.3% of global energy production, and it is estimated that there are between 100 and 200 million people worldwide who own or use bitcoin. In principle, however, the whole world could use Bitcoin, without a linear increase in power consumption or CO2 emissions.

Above: Bitcoin’s energy consumption compared to other energy consumption. Source: Cambridge Alternative Center of Finance

Energy mix

In addition, the report makes the assumption that the energy mix used by bitcoin miners is the same as the energy mix of the country in which the miners are located. However, that is a questionable assumption and it contradicts other reports.

Miners are not profitable if they use too expensive electricity. That is why miners basically settle in locations where the power is as cheap as possible. These are often places where there is (too) little local power consumption, with a lower electricity price as a result of market forces.

In cities and other densely populated areas, there is a lot of power consumption and there are usually no renewable energy sources nearby, so oil or gas is often used to generate electricity. The electricity price is then relatively high and it is therefore often not profitable or attractive enough for miners to settle there.

Renewable energy sources seem to be very popular among miners. They produce large amounts of energy but are often located in more remote locations, with fewer people and less activity. Such power plants often struggle with overcapacity and energy surpluses. The energy price is therefore lower and bitcoin miners eagerly take advantage of this.

If the local energy demand grows due to more residential or business activity, then energy prices will automatically rise to a more average level and miners will probably eventually move to another location where the energy price is still low. After all, they are primarily driven by the pursuit of profit. Due to this dynamic, miners are unlikely to use the same energy mix as the average in their country of residence.

Lack of data

The authors of the report claim a lack of data on the energy mix. However, several studies are available. The Bitcoin Mining Council (BMC), an association of bitcoin miners that claims to represent 35% of the total global hashrate (computing power), reported that 67.6% of the energy used by BMC members last year was renewable. They estimate that the percentage worldwide is 56%. The most recent figures are even more positive. Research from Coinshares puts the percentage even higher at over 74% and the Cambridge Alternative Center of Finance estimates it hovers somewhere between 20% and 70%.

The energy mix of bitcoin miners is therefore more sustainable than the energy mix of most countries and the global average. By way of comparison: the power grid in the Netherlands is about 25% green and the European average is 20%. Elsewhere in the world, the energy mix is often even less sustainable.

There is also no shortage of coverage of renewable energy bitcoin mining. News sites regularly report on wind-powered mining in Texas, Navajoland, hydropower plants in Canada, Iceland, Laos, Paraguay, Sweden and Norway, nuclear power in Ukraine, and El Salvador generating power from volcanoes. A new trend is mining with excess gas that would otherwise be flared.

Of course, there is still a lot of mining based on climate-unfriendly energy sources such as coal and oil, for example in Kazakhstan, Iran and Venezuela. Yet it seems difficult to ignore the hunger of miners for sustainable energy. Payment giant Square (nowadays Block ) states that bitcoin mining can even accelerate the transition to sustainable energy.

Competition

That a central bank reports on Bitcoin’s climate impact is remarkable. After all, central banks are not known for their climate or bitcoin expertise, and a central bank’s mandate is limited to the currency’s price stability.

Nevertheless, DNB thought it was important to issue an alarmist report on Bitcoin that paints a picture of Bitcoin as a climate destroyer. Perhaps they feel the hot breath of Bitcoin down the neck. After all, Bitcoin is in a way competing with the euro, the banking system and central banks. It is also no secret that central banks, with DNB in the lead, prefer their own digital currency.

While many bitcoiners simply see through the negative framing , such reports are damaging to Bitcoin’s image among politicians and the wider public. After all, the words of a central bank carry weight because central banks are regarded by many as authorities.

Unfortunately, authorities are often wrong, at least when it comes to Bitcoin. For example, the World Economic Forum (WEF) predicted in 2017 that bitcoin mining would consume more energy than the entire world put together by 2020 – also a gross overestimate.

Why does Bitcoin consume so much power? You can read that in an earlier article.

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