The paradox of ‘sustainable bitcoin’

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

First, we take a dive into the crypto world. With bitcoin’s soaring price level giving new incentives for 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?

What does diversity and inclusion really mean in a modern workforce — and what is the right approach for companies to take towards these issues? That’s the focus of our next deep-dive Moral Money Forum report, featuring valuable insights from readers. Have your say by completing this short survey.

renewable energy

Can bitcoin ever be green?

If the term “sustainable bitcoin” sounds to you like an oxymoron, you’re not alone.

By far the world’s biggest cryptocurrency, with a total market value of $1.2tn, bitcoin’s fearsomely energy-inefficient processing system uses more electricity each year than Ukraine or Pakistan, according to estimates by the Cambridge Centre for Alternative Finance. A large part of that energy comes from fossil-fuel burning power plants. And to the extent that bitcoin “miners” consume renewable power, critics argue, they’re just absorbing clean energy that could be used far more productively elsewhere.

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

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

David, SBP’s head of climate strategy, argued that bitcoin miners can galvanise investment in renewable energy, rather than simply soaking up electricity that would have been produced anyway.

When grid electricity demand falls short of potential supply, renewable plant operators are subject to “curtailment” — meaning they have to reduce or halt generation because the electricity cannot be used or stored. By signing limited offtake agreements with bitcoin miners — or simply building their own bitcoin operations — renewable power businesses can secure better economics for plants that might otherwise look too risky to develop, David argued.

Does this idea have merit? It’s worth separating the argument for the SBP initiative from the argument that bitcoin can be green. SBP is hoping that, as interest in cryptocurrency broadens, more mainstream investors will attach a premium to “cleaner” bitcoin. So far it has signed up miners representing nearly a fifth of global bitcoin processing capacity, SBP claims.

If bitcoin transactions are going to happen at a large scale for a long time — and with the price hitting a record high of $75,830 in March, this looks likely — then it seems preferable to have them powered by clean energy, rather than extending the lifetime of fossil fuel plants (as has infamously happened from Montana to upstate New York). To the extent that SBP can help to incentivise this, it could be playing a constructive role.

The argument that bitcoin’s energy consumption can be good for the climate, and for society more broadly, is another matter. Notable defenders of bitcoin’s role in energy systems have included Senator Ted Cruz of bitcoin mining hub Texas, where the grid operator frequently pays crypto miners to halt operations.

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

Moreover, the benefit for the grid may be outweighed by the sizeable downsides for Texan households and businesses, for whom this huge new source of energy consumption has pushed up electricity prices at times of high demand. Analysts at Wood Mackenzie estimated last September that “bitcoin mining already raises electricity costs for non-mining Texans by US$1.8bn per year, or 4.7 per cent”.

That effect is unlikely to be confined to Texas. According to a letter in January by the head of the US Energy Information Administration, roughly one in every 45 units of electricity consumed in the US is gobbled up by cryptocurrency mining. Bitcoin accounts for the vast bulk of this due to its market dominance and its distributed “proof-of-work” validation system, which is far more energy-intensive than rivals such as Ethereum (bitcoin advocates say this makes it more secure).

Concerns about the impact on grid operations and consumer prices prompted the EIA to announce in January a mandatory survey of energy usage by crypto miners — an effort that it has been forced to drop, for the time being, after a legal challenge from crypto companies.

If the EIA survey eventually goes ahead, its results are likely to compound worries about the energy and environmental impacts of bitcoin. Despite the specific positive use cases outlined by SBP, it’s hard to see that these can outweigh the broader complications caused by adding this massive new element to global energy consumption.

While its growth has been driven mainly by speculation, cryptocurrency does have the potential to play socially useful roles — as shown by its incipient uptake by migrant workers for lower-cost remittances. But the costs for 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 usage of the bitcoin network,” Larisa Yarovaya, director of the Centre for Digital Finance at Southampton Business School, told me. “The question is whether there is enough utility to justify it.”

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

fossil fuel financing

The banks still ‘increasing their fossil fuel exposure’

If the world were on track to meet the climate goals of the Paris agreement, we’d be seeing a dramatic slump in fossil fuel financing by top global banks. As today’s Banking on Climate Chaos report makes clear, that is not happening.

It shows that the world’s 60 biggest banks by assets provided $706bn of financing to fossil fuel companies last year. That is at least lower than the 2022 figure of $779bn, and the peak of $956bn in 2019. But it is funding a further huge expansion of fossil fuel production, which is likely to put the goal of limiting global warming to 1.5C ever further out of reach.

And while many banks are cutting back their financial support for oil, gas and coal, others have seen an opportunity to step in and grow. JPMorgan Chase increased its fossil fuel financing over 5 per cent to $40.9bn last year, according to the report, making it comfortably the world’s biggest bank financier for the sector — a crown it has held since overtaking Citigroup in 2021.

The report found that second-placed Mizuho Financial, of Japan, also increased its 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 creators of this report — a large coalition of non-profit groups co-ordinated by Rainforest Action Network — made a major change to the methodology around corporate finance deals. A bank’s financing figure now includes its contribution to corporate finance deals where it played a supporting role, rather than only those where it was the lead bookrunner, as in previous years. This year’s report also restated 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’ financing figures.

Several of the banks raised concerns about the report’s findings. Barclays said it did not recognise “the classification or attribution of some transactions”, and criticised the authors’ focus on how much revenue its corporate clients derived from fossil fuel-related business, rather than “the transaction’s use of proceeds or the company’s actual investment activity”.

JPMorgan said it was helping to power “today’s global economy”, and that it believed its own data “reflects our activities more comprehensively and accurately than estimates by third parties”.

Deutsche Bank said its financed carbon emissions had decreased significantly in the oil, gas and coal mining sectors, and that it had “significantly reduced its engagement in carbon-intensive sectors since 2016”.

Santander said it was “fully committed to supporting the transition to net zero” and had set emission reduction targets for 2030 across 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 news report for the FT here.

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