The “sustainable bitcoin” paradox

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Welcome back. The annual Banking on Climate Chaos report was released today and shows a modest decline in aggregate fossil fuel financing last year by the world’s 60 largest banks, but surprising increases for some of the largest lenders. Read on to find out which ones.

First, let’s take a dive into the world of cryptocurrencies. With the soaring price of bitcoin offering new incentives to power-hungry “miners” – who already use more electricity than many countries – some are trying to argue that this can support the energy transition. Do they deserve a hearing?

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renewable energy

Can bitcoin ever be green?

If the term “sustainable bitcoin” seems like an oxymoron to you, you are not alone.

By far the world’s largest cryptocurrency, with a total market value of $1.2 trillion, bitcoin’s frighteningly energy-inefficient processing system uses more electricity each year than Ukraine or Pakistan, second estimates from the Cambridge Center for Alternative Finance. Much of that energy comes from power plants that burn fossil fuels. And to the extent that bitcoin “miners” consume renewable energy, critics argue, they are simply absorbing clean energy that could be used much more productively elsewhere.

So I was interested in speaking to Elliot David about Sustainable Bitcoin Protocol last week, at an FT digital assets conference in London.

Founded in 2021, this initiative issues tradable tokens to bitcoin miners who can demonstrate that they use energy from renewable sources or from burning waste methane at crude oil extraction sites that would otherwise have been burned or vented into the atmosphere. (Miners generate bitcoin by deploying stacks of computers to process and verify transactions.)

David, head of climate strategy at SBP, argued that bitcoin miners can galvanize investment in renewable energy, rather than simply absorb electricity that would have been produced anyway.

When grid electricity demand is less than potential supply, operators of renewable plants are subject to “curtailment,” meaning they must reduce or stop production because the electricity cannot be used or stored. By signing limited offtake agreements with bitcoin miners – or simply building their own bitcoin operations – renewable energy companies can secure better economics for plants that might otherwise seem too risky to develop, David argued.

Does this idea have merit? It is worth separating the argument for the SBP initiative from the argument that bitcoin can be green. SBP hopes that as interest in the cryptocurrency increases, more mainstream investors will place a premium on “cleaner” bitcoin. It has so far recruited miners who account for nearly a fifth of global bitcoin processing capacity, SBP says.

If bitcoin transactions are going to happen on a large scale over a long period – and with the price hitting a record high of $75,830 in March, this seems likely – then it seems preferable to have them powered by clean energy, rather than extending their duration. of fossil fuel plants (as has sadly happened since Montana TO in New York state). To the extent that the SBP can help incentivize this, it could play a constructive role.

The argument that Bitcoin’s energy consumption can be good for the climate and society in general is another matter. Notable defenders of bitcoin’s role in energy systems include Senator Ted Cruz of the Texas bitcoin mining hub, where the network operator often pays cryptocurrency miners to disrupt operations.

This system offers a rapid-response way to optimize demand, which may be useful given the growing share of intermittent renewables in Texas power generation. But energy storage systems can do much the same thing, keeping energy available for homes and factories.

Furthermore, the benefits to the grid may be outweighed by significant downsides to Texas families and businesses, for whom this huge new source of energy consumption has driven up electricity prices during periods of high demand. Wood Mackenzie Analysts estimated last September that “bitcoin mining already raises electricity costs for non-mining Texans by $1.8 billion per year, or 4.7%.”

This effect is unlikely to be limited to Texas. According to a January letter from the head of the US Energy Information Administration, about one in 45 units of electricity consumed in the United States is gobbled up by cryptocurrency mining. Bitcoin accounts for most of this due to its dominant market position and its “proof-of-work” distributed validation system, which is much more energy-intensive than rivals like Ethereum (bitcoin proponents say this makes it safer).

Concerns about the impact on network operations and consumer prices prompted the EIA to announce in January a mandatory survey of energy consumption by cryptocurrency miners: an effort that has been forced to fallfor the time being, after a legal challenge from crypto companies.

If the EIA investigation ultimately moves forward, its findings will likely exacerbate concerns about bitcoin’s energy and environmental impact. Despite the specific positive use cases outlined by SBP, it is difficult to believe that these can outweigh the broader complications caused by adding this huge new element to global energy consumption.

Although its growth has been driven primarily by speculation, cryptocurrency has the potential to play socially useful roles, as demonstrated by its incipient adherence by migrant workers for low-cost remittances. But the costs to energy systems and the climate are real.

“So far we don’t see such a high level of adoption and such scalability to really justify the energy use of the bitcoin network,” Larisa Yarovaya, director of the Center for Digital Finance at Southampton Business School, told me. “The question is whether there is enough utility to justify it.”

This article has been edited to clarify that the Sustainable Bitcoin Protocol issues tradable tokens to bitcoin miners using green energy sources, rather than certifying the bitcoin they generate

financing of fossil fuels

Banks continue to “increase their exposure to fossil fuels”

If the world was on track to meet the climate goals of the Paris Agreement, we would see a dramatic collapse in fossil fuel financing by major global banks. Like today Banking on Climate Chaos Report makes it clear that this is not happening.

The study shows that the world’s 60 largest banks by assets provided $706 billion in financing to fossil fuel companies last year. This is at least one figure lower than the $779 billion figure in 2022 and the peak of $956 billion in 2019. But it is financing a further huge expansion of fossil fuel production, which will likely drive the goal of limiting the global warming to 1.5°C. more out of reach.

And while many banks are reducing their financial support for oil, gas and coal, others have seen an opportunity to step in and grow. According to the report, JPMorgan Chase increased its fossil fuel financing by more than 5% to $40.9 billion last year, making it the world’s largest financier for the sector, a crown that has held since overtaking Citigroup in 2021.

The report found that Japan’s Mizuho Financial, in second place, also increased fossil fuel financing last year, as did Wall Street banks Morgan Stanley and Goldman Sachs and European lenders Barclays, Santander and Deutsche Bank.

It’s worth noting that the authors of this report – a large coalition of nonprofit groups coordinated by Rainforest Action Network – have made an important change to the methodology surrounding corporate finance deals. A bank’s financial figure now includes its contribution to corporate finance operations in which it played a support role, rather than just those in which it was lead bookrunner, as in previous years. This year’s report also reaffirmed previous years’ numbers in line with the new methodology, so the change is not the reason for the year-on-year increase in some banks’ funding figures.

Many banks have expressed concern about the report’s findings. Barclays said it did not recognize “the classification or attribution of some transactions” and criticized the authors’ focus on how much revenue its corporate clients derive from fossil fuel-related activities, rather than “the use of the proceeds of the transaction or the actual investment of the company”. activity”.

JPMorgan said it is helping to strengthen “today’s global economy” and that it believes its data “reflects our businesses more fully and accurately than third-party estimates.”

Deutsche Bank said its financed carbon emissions have fallen significantly in the oil, gas and coal extraction sectors and that it has “significantly reduced its commitment to carbon-intensive sectors since 2016”.

Santander said it was “fully committed to supporting the transition to net zero” and had set emissions reduction targets for 2030 across all sectors, including power generation and oil, gas and coal. The other banks mentioned declined to comment.

You’ll find more details in Attracta Mooney’s newsletter for the FT Here.

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