Blockchain technologies may bring disruptive innovations to a number of fields, but regulatory systems will also need innovation to rein in the massive air quality and climate threats associated with cryptocurrency mining.
Bitcoin is, by far, the largest cryptocurrency based on market capitalization, but it suffers from the astronomical levels of energy consumption necessary to grow its underlying blockchain. With no central authority to validate transactions and determine when new blocks are added to the chain, a consensus mechanism must be used. For this, Bitcoin and similar cryptocurrencies use a trial-and-error process known as a “proof of work.” Essentially, the first “miner” to assemble a valid block of transaction data is rewarded with newly created Bitcoin. Everyone else’s efforts are essentially wasted.
To keep the rate of Bitcoin creation relatively constant and avoid hyperinflation, the proof of work becomes difficult as more mining capacity is added to the network. This drives miners to maximize their “hash rate”—the number of potential blocks that can be tested every second. Chasing extreme hash rates is incredibly energy intensive, requiring miners to pool many thousands of power-hungry devices known as Application Specific Integrated Circuits (ASICs). Together, they demand over 15 gigawatts of energy at any one time, with an annualized consumption of 138 terawatt hours according to the Cambridge Bitcoin Electricity Consumption Index.
The relatively short 18- to 24-month competitive life of ASICs and the need to maximize hash rates drives miners to energy sources that let them run their operations 24/7. In most places, this means burning polluting fossil fuels. Yet in testimony, Bitcoin advocates still tout perceived environmental benefits of their operations: Waste coal operators claim they clean up land and water, overlooking the cost of increased air pollution, and other advocates claim they can utilize “otherwise wasted clean energy” or methane gas that would otherwise be flared. Hearing on “Cleaning Up Crypto” Before the U.S. House Energy & Commerce Comm. (Jan. 20, 2022). In spite of this rhetoric, wasting energy is bad, particularly when clean energy is being wasted. When clean generation is diverted from the grid to mining, lost capacity may be backfilled by more expensive resources that often also pollute more.
In Pennsylvania, Bitcoin miners are focusing on three main sources of energy, all of which lack appropriate regulation for that task. First, companies are using dirty waste coal plants that burn low-energy-value discards from past coal-mining operations. Last year, one such company, Stronghold Digital Mining, purchased the Scrubgrass and Panther Creek waste coal plants and is apparently looking to purchase a third plant. At these locations, they plan to install over 57,000 ASICs for bitcoin mining operations. While low-energy-value waste coal is usually one of the more expensive sources of generation, Stronghold announced it would benefit from state-mandated subsidies forcing taxpayers and ratepayers to cover 60% of their generation costs. This includes a recent modification to Pennsylvania’s Tier II Alternative Energy Performance Standard (AEPS), which now requires in-state consumption of energy from sources like waste coal and has caused Tier II credit prices to spike from less than $1 to over $16 per megawatt hour.
Second, we are seeing mining operations run off of portable generators installed directly at methane gas well sites. See Lisa A. Decker, Bitcoin Mining and Innovations in the Oil Field, 36 Nat. Res. & Env’t 50 (2021). In Pennsylvania, operators are installing such generators on well pads without a state plan approval or permit. And state legislators are looking to weaken regulatory oversight of such operations. See, e.g., Co-sponsorship Memo, Sen. Wayne Langerholc, Emerging Technologies Permitting Oversight (Mar. 15, 2022).
Third, we see nuclear power being used for Bitcoin mining. Talen Energy has recently signed contracts to deliver power from its Susquehanna nuclear power plant to power Bitcoin mining operations. It was recently reported that this operation has qualified for Pennsylvania’s data center tax exemption, which could save them well over $10 million in operating costs. S. Caruso, Pa. Passed a Tax Break for Data Centers. Now Crypto-miners Are Taking Advantage, Penn-Capital Star, Mar. 13, 2022.
These activities show that policymakers and regulators have been largely unprepared to regulate the cryptocurrency industry and protect the health and safety of people and the environment. With Bitcoin miners looking for the cheapest energy sources to power this wasteful endeavor and market forces alone doing little to encourage more environmentally favorable cryptocurrencies, we turn to what the regulatory community can do.
Federal Regulation. On March 9, 2022, President Biden signed Executive Order 14067 on “Ensuring Responsible Development of Digital Assets.” Exec. Order 14067, 87 Fed. Reg. 14143 (Mar. 14, 2022). This order notes that we need to reduce the “negative climate impacts and environmental pollution, as may result from some cryptocurrency mining.” It also requires that the U.S. Environmental Protection Agency (EPA), the national climate advisor, and others to work on developing a report that “address[es] the effect of cryptocurrencies’ consensus mechanisms on energy usage, including research into potential mitigating measures and alternative mechanisms of consensus and the design tradeoffs those may entail.” This clearly identifies the problem with Bitcoin’s wasteful-by-design proof of work system and recognizes that better alternatives exist, but it does not take concrete steps to see those are implemented through either existing regulatory authority or new legislation.
One model for such regulation is section 111(d) of the Clean Air Act. That says that if the EPA Administrator makes a finding that a certain category of sources “causes, or contributes significantly to, air pollution which may reasonably be anticipated to endanger public health or welfare,” the EPA must develop regulations specifying “standards of performance” for those sources and states may, in turn, develop their own regulations implementing those standards. Here a “standard of performance” is defined as the “degree of emission limitation achievable through the application of the best system of emission reduction which . . . the Administrator determines has been adequately demonstrated.”
In the case of cryptocurrency, there are existing consensus mechanisms that don’t suffer from the inherent wastefulness of proof of work systems. Ethereum, the second largest cryptocurrency by market capitalization behind Bitcoin, even has plans to switch to one of these mechanisms known as “proof of stake.” The “adequately demonstrated” requirement may be met, but whether section 111(d) of the Clean Air Act is directly applicable to Bitcoin at all depends on how “sources” are defined. If the source is the electric generating unit and not the miner, that would not address wasteful end uses of the energy.
Another potential model is the federal Energy Conservation Program for Consumer Products developed under the Energy Policy and Conservation Act in 1975. This program allows the U.S. Department of Energy to set energy efficiency standards for a specific set of regulated equipment including, at present, over 50 different products. Bitcoin advocates have argued that, because their hardware is highly optimized for what it does, its energy intensity per calculation is much lower than more general-purpose computers used in conventional data centers. Hearing on “Cleaning Up Crypto” Before the U.S. House Energy & Commerce Comm., supra. This argument attempts to equate energy efficiency with energy conservation, but they aren’t the same thing. While ASIC mining hardware may be very efficient at what it does, that doesn’t change the fact that it wastes energy because much of what it does isn’t necessary. We can have digital currency, blockchain technology, and all the associated capabilities of distributed finance and smart contracts without wasteful proof of work mining.
State Regulation. States may have a key role in implementing any federal cryptomining regulations, particularly if those regulations rely on the Clean Air Act or adopt a similar model that relies on cooperative federalism. States can take other measures as well.
Possibly the most direct form of state regulation would be an outright moratorium on proof of work cryptomining. A version of this recently proposed in New York would bar the issuance or renewal of permits to fossil fuel electric generators that provide power behind the meter to proof of work cryptominers. A.B. 7389C & S.B. 6486D (N.Y. 2021). While the New York bill would stop most proof of work operations, it falls short of a total ban by targeting the electric generation and not the end use. This bill also would not stop miners from diverting clean energy that would otherwise go to the power grid, even if that loss is backfilled with polluting fossil fuel generation.
Another measure states could take is to ensure that they are not subsidizing wasteful operations. State subsidies can take many forms, but they can broadly be grouped into four categories: direct spending, forgone revenue, induced transfers, and transfer of risk. Of these, direct spending (such as appropriations or below-market-rate loans) is not the most common type of subsidy.
In Pennsylvania, we’ve already seen forgone revenue in the form of tax expenditures such as the Computer Data Center Equipment Program and the Coal Refuse Energy and Reclamation Tax Credit. We may also see Bitcoin miners use the Keystone Opportunity Zones program to avoid state and/or local taxes. We’ve also seen induced transfers such as the Tier II AEPS, which effectively require consumers to pay above-market rates for power from waste coal. The lack of a carbon price allows polluters to harm public health and the environment without financial consequences. Finally, risk transfers such as loan guarantees, debt cancellation, low-cost bonding, or assumption of other liabilities are common forms of fossil fuel subsidies that will likely be sought by mining operations.
While some states currently use these types of subsidies to benefit the fossil fuel industry, state legislators should prohibit use of them by or extension to proof of work mining. Unfortunately, the trend seems to be in the opposite direction. States like Montana and Wyoming have recently made it easier for cryptomining companies to set up in their states through tax incentives and weak or nonexistent regulation.
Local Regulation. Local municipalities have limited power to regulate Bitcoin mining. After all, power plants and power generation are regulated at the federal or state level. Nonetheless, traditional zoning ordinances can be utilized to reduce the impacts in those situations where mining occurs at industrial or fracked gas sites.
In some states such as New York, local municipalities have the ability to ban specific uses. But in “fair share” states like Pennsylvania, municipalities would need to be more creative in utilizing their zoning ordinances to minimize or mitigate the local impacts from these facilities. In 2021, Missoula County in Montana adopted specific cryptocurrency mining zoning regulations to address threats from proof of work cryptomining, including imposing renewable energy offset and electronic waste disposal requirements. Moratoriums on cryptocurrency mining facilities could give municipalities a chance to explore the threat, hold public hearings, and develop the most impactful ways to mitigate impacts. Local noise ordinances may also come into play because the cooling fan noise from tens of thousands of miners can be extremely unpleasant. Zoning Bitcoin mining as an industrial use and utilizing the conditional use process may also help to protect the health, safety, and welfare of local communities.
The present boom of Bitcoin, with its energy-intensive, wasteful-by-design blockchain mining scheme means that regulators at all levels need to act now to get out ahead of the technology.
