CO2-neutral Bitcoin? New approach aims to help investors offset BTC’s CO2 emissions

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Billion dollar companies around the world rely heavily on Bitcoin (BTC). A recent analysis by European investment manager Nickel Digital Asset Management found that 20 publicly traded companies with a market capitalization of over $ 1 trillion have invested approximately $ 9.6 billion in BTC. Private investors are also increasingly interested in the asset.

The “Third Annual Bitcoin Investor Study” by Grayscale Research has shown that the demand for Bitcoin has increased enormously. According to the study, 55% of current Bitcoin investors only started buying the asset in the past 12 months. Grayscale’s report also notes that for those interested in Bitcoin investment products, the market grew to 59% in 2021, up from 55% in 2020 and a little over a third in 2019, which is a steady increase Reflects growth.

But as the world’s craze for Bitcoin grows, concerns about its environmental impact are more evident than ever. For example, Grayscale Research also found in its investor study that over 30% of investors are concerned about Bitcoin’s potentially negative impact on the environment. Interestingly, this consideration didn’t show up until 2021, as the report shows.

Models for calculating Bitcoin’s CO2 emissions

With increasing concerns about Bitcoin’s carbon footprint, new models are emerging that aim to help investors and businesses alike understand how to ensure their BTC holdings are sustainable. For example, the Frankfurt School Blockchain Center and the digital asset manager INTAS.tech published a study on November 16 that outlines a new approach to offsetting the CO2 emissions caused by the Bitcoin network. The formula developed factors in two approaches: a transaction-based approach and an ownership-based approach.

Philipp Sandner, professor at the Frankfurt School Blockchain Center, told Cointelegraph that asset managers and investors in particular across Germany are concerned that Bitcoin’s carbon footprint is in line with environmental, social and governance (ESG) standards. So Sandner stated that he wanted to create a formula that would enable asset managers, mining companies, exchanges, and individuals to calculate their BTC’s carbon footprint:

“We usually assign the greatest burden of carbon offsetting to Bitcoin mining companies, but there are still ETF issuers, companies and exchanges who want to prove to their customers that they are doing something for their carbon footprint, for their Bitcoin to compensate.”

According to Sandner, the aim of the study was to first calculate the global energy consumption of Bitcoin between September 1, 2020 and August 31, 2021. The results show that 0.08% of the global CO2 equivalent came from Bitcoin. Based on that number, Sandner noted that maintaining the global Bitcoin network required 37.97 million tons of CO2 equivalent.

To calculate Bitcoin’s carbon footprint from an investor’s point of view, the study finds that companies can either focus on proportional network usage in bytes relative to Bitcoin blockchain growth over a period of time, or on the amount of Bitcoin available for a certain period of time. According to the document, an average Bitcoin transaction contains 670 bytes on the Bitcoin blockchain, which translates into an estimated carbon footprint of 369.49 kilograms of CO2 equivalent. Sandner explained:

“These CO2 emissions can be offset with a certificate from the EU emissions trading system. A certificate for one ton of CO2 costs around $ 50, which would be the equivalent of around $ 18 to offset a single BTC transaction. If an investor or a company now had a BTC over a period of one year, this would cost around two tons of CO2 emissions. If compensated with the EU emissions trading system, this would then be around 100 US dollars. ”

Benjamin Schaub, senior consultant at INTAS.tech, told Cointelegraph that companies could use the above formula for transactions and ownership of Bitcoin to calculate their carbon footprint, which should then be offset. “The great thing about this model is that all the data you need is publicly available. There are no assumptions here, it’s just about how companies interact with the Bitcoin network. “

Schaub added that Iconic Holding GmbH, which sells products traded on the stock exchange in Germany, is currently using this method to ensure sustainability: “We are also in talks with some very large stock exchanges. I am firmly convinced that this topic will receive more attention from the most important players in the industry over the course of the next year. “

While it’s difficult to predict the future, it’s noteworthy that some major exchanges and exchange traded funds (ETFs) have started using similar approaches to offset Bitcoin’s carbon footprint. Schaub noted, for example, that the BitMEX crypto exchange is trying to make its BTC holdings climate-neutral. According to a recent blog post by BitMEX Research, the company believes the most effective way for users and exchanges to assess Bitcoin’s carbon footprint is through fees for in-chain transactions. A BitMEX spokesperson told Cointelegraph that the company concluded that every dollar spent on Bitcoin transaction fees can stimulate up to 0.001 tons of CO2 emissions based on the company’s formula.

There are currently few approaches to help companies offset their Bitcoin carbon emissions, with Sandner noting that transaction fees become more important as the Bitcoin network ages. Therefore, he believes that companies need to take a transaction-based approach when it comes to ensuring carbon neutrality.

Schaub further pointed out that the power source used should be taken into account, noting that the model developed by INTAS.tech and the Frankfurt School Blockchain Center looked at the energy mix in the US and Germany: “This ensures that We are watching that always more miners are becoming aware of this issue and are looking for electricity from renewable sources. “

In addition to exchanges like BitMEX, which are developing models to calculate Bitcoin’s carbon emissions, some ETFs do the same. For example, the Canadian Bitcoin ETF issuer Ninepoint Partners launched a climate-neutral Bitcoin ETF in May 2021. Alex Tapscott, Managing Director of Digital Assets at Ninepoint, told Cointelegraph that while this is correct, it is also true of the business as a whole:

“Many investors with ESG requirements were concerned about Bitcoin’s footprint and were left on the sidelines. We wanted to make it easier for them to be stakeholders and participate in the upward trend of Bitcoin. “

Tapscott added that often the investors in Bitcoin funds along with the miners themselves are the ones calling for a more sustainable industry. With that in mind, Tapscott believes Bitcoin will be almost 100% renewable in 10 years: “It can even help subsidize the development of renewable projects as it’s a gross and willing buyer to place at the source. In the meantime, carbon offsetting is a good way to fill the gap. “

How accurate are these models?

While it is becoming increasingly important for various companies to offset their Bitcoin carbon emissions, it is important to recognize the challenges associated with the models discussed.

For example, Sandner noticed that all of the numbers put together in the model he helped develop change over time. “The hashrate is changing, for example, as we recently saw with the Chinese mining ban. The hashrate has decreased by 50%. ”For this reason, Sandner is aware that the fluctuations in the metrics must be taken into account. He added that each country has a different mix of carbon-intensive energy, noting that Norway tends to be greener than other regions. Finally, Sandner pointed out that carbon prices needed to be monitored carefully, adding that prices rose in December.

Related: Point of no Return? Crypto investment products could be the key to mass adoption

Additionally, a BitMEX spokesperson mentioned that the company’s formula was not a perfect methodology, noting that the exchange expects and welcomes criticism. However, the company believes the formula improves on other estimates. According to the post, the equation used is pretty simple as it only leverages average bitcoin prices, not estimates of bitcoin mining electricity costs.

Sandner ultimately believes that most of the work that needs to be done is still ahead of us, and notes that most of these approaches are still emerging:

“The Bitcoin Mining Council in the USA, for example, is trying to find new models. Once these methods are developed, companies need to adopt them, but it’s too soon. A consciousness arises, but that’s just the beginning. ”