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How crypto made me fall in love with carbon pricing all over again

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[Note: Some readers have read this post to suggest that carbon pricing is *the* solution to crypto mining's exorbitant energy use, or that carbon pricing is a substitute for strong regulation, such as that proposed in New York State, to establish moratoria on the most energy-intensive and environmentally destructive crypto mining processes. That is not the argument we are making. Rather, it is that the experience with Bitcoin shows that we need tools and strategies to slow or stop the *next* low-value, high-GHG practice that comes down the pike - whatever it may be. Carbon pricing is one of those strategies, as are, as we note toward the end of the piece, direct regulatory approaches.]

Abundant, cheap renewable energy is an essential part of a zero-carbon future. It is not enough to get us there on its own.

The reason can be summed up in one word: Bitcoin.

OK, Bitcoin isn’t literally the reason why ramping up renewable energy is insufficient (if necessary) to get us to a zero-carbon economy on the timescale necessary to prevent the worst impacts of global warming. But it does provide a reminder that, when it comes to the climate, the amount of clean energy we use is irrelevant. It’s the amount of dirty fossil fuels we burn that matters. And even if we produce enough clean energy to meet our needs, our progress toward a stable climate will be slower than needed if our consumption of energy expands without limit. 

Carbon pricing and other tools to limit fossil fuel consumption are a necessary complement to policies to expand clean energy production. The recent experience with cryptocurrency helps explain why.

Back to the mines

America’s track record on climate issues has been horrific, but the one area where we have made indisputable progress is in cutting carbon pollution from electricity generation. Not long ago, electricity production was the nation’s biggest source of greenhouse gas emissions. Since 2005, however, those emissions have fallen by about 40% – partly because of the growth of renewable energy, partly because of (alas) the increased use of gas [1], and partly because America’s demand for electricity has flatlined, thanks in part to improvements in energy efficiency. (See below.)

End-use electricity consumption in the United States. Source: EIA

Together, these factors have rendered many of America’s dirtiest coal-fired power plants obsolete, driving down emissions.

Yet, some dirty power plants that had previously been shut down or were on their last legs are now being brought back to life to power cryptocurrency mining operations. 

Bitcoin and other cryptocurrencies rely on highly energy-intensive computing operations to verify transactions. That “work” is then rewarded through the issuing of new cryptocurrency. These crypto “mining” operations are stunningly voracious consumers of electricity: A 2021 New York Times analysis estimated that the process of creating Bitcoin worldwide consumed 91 terawatt-hours of electricity annually – about the annual electricity consumption of the state of Louisiana

Crypto mining is undoing some of the progress that has been made to clean up America’s energy system. But we shouldn’t be surprised that the rise of cheap renewable power would be matched with efforts to put the cheapest, dirtiest fossil fuel power plants back to work. 

It’s simple economics. 

Jevons’ revenge

In energy policy circles, there is a well-known phenomenon known as the “rebound effect.” Simply: If you make something cheaper, people will do more of it. Energy efficiency makes energy-consuming activities cheaper, and leads to an increase in utilization that cuts into the energy-saving benefits that were the goal of the efficiency measures in the first place. 

If you replace a gas-guzzling car with a fuel-sipping hybrid, for example, it’s only natural to be less conscious about limiting the number of miles you drive. The size of the rebound effect varies (and is often hotly debated), but in its most extreme form – such as that argued by mid-19th century Briton William Jevons – improving efficiency could, through a variety of economic and societal forces, lead to a net increase in energy consumption over time.

Jevons paradox has often been used over the years to critique energy efficiency programs. But less well-known is the fact that similar dynamics also apply to energy production. After all, if it’s the cost of energy-consuming services that matters to the consumer, it shouldn’t matter if those services become cheaper as a result of greater efficiency or lower energy prices.

Over the last decade, the cost of producing renewable energy has dropped dramatically (see chart below). The resulting influx of renewable energy has caused wholesale electricity prices in parts of the country to plummet at times when clean energy is abundant. And the long-term trend is toward lower retail electricity costs after adjustment for inflation 

Change in cost of key clean energy technologies. (Source: Environment America and Frontier Group, We Have the Power, 2021)

I have always been skeptical that Jevons paradox applies in the same way to an economically and demographically mature economy like the 21st century United States as it did to a rapidly industrializing 19th century Britain. The quantum leap in energy efficiency provided by LED lighting is a good example – aside from ever-expanding Jumbotrons at sports stadiums, how many things are there that we really need or want to light that we weren’t lighting already? (Outside of the U.S., of course, it is a different story.)

Crypto has me rethinking all that. 

An abundance agenda about nothing?

Some writers, such as Matthew Yglesias, contend that the rise of cheap clean energy means we needn’t concern ourselves with energy efficiency or, really, with limits on energy consumption at all. If we can have electricity without carbon pollution, why not pursue a so-called “abundance agenda” that explicitly aims to use more energy rather than less (and spares anyone the need to change their behavior to avert climate catastrophe)? [2]

Advocates of an “energy abundance” approach argue the rise of clean, cheap renewable electricity opens up vast new possibilities for human flourishing. Just think of everything we could do with that energy. Desalination! Urban agriculture! Cranking up the thermostat in the wintertime!

In many ways, increasing electricity consumption could make life better for people. But there are two big problems with relying on clean energy abundance as a sole strategy for building an energy system consistent with a livable climate.

The first is rooted in the basic economic concepts of supply and demand. Econ 101 tells us that the price of a good is determined by the point at which the supply and demand curves intersect. Technological changes that make energy cheaper shift the supply curve downward, which results in falling prices and (in most cases) rising demand. 

Think now of the electricity supply curve as made up of a series of points – each of those points representing a generator that is willing to offer electricity at a specific price. Over the last decade, the far left hand side of the supply curve has been filling up with cheap renewable power, pushing older, more expensive forms of power generation like coal off the right-hand side of the chart. 

An example of a supply curve. The growth of renewables has added more green dots to the left side of the curve since 2011. Source: EIA

But remember that the goal here – at least from the perspective of fighting climate change – is to cut carbon pollution as quickly and deeply as possible. And so, until we’ve pushed carbon-intensive forms of electricity generation out of the picture completely, reductions in electricity prices driven by cheap clean energy will result in increases in demand that will result in some of the dirty old energy sources remaining on the grid. In energy economics terms, dirty energy sources will remain “on the margin” – that is, every new unit of electricity consumption will result in the combustion of more fossil fuel.

If that increase in electricity consumption is the result of substituting electricity for the direct burning of fossil fuels in our cars and buildings, that’s a good thing from a climate change perspective. The inherent efficiency of technologies like electric vehicles and heat pumps means that the increase in fossil electricity consumption will be more than canceled out by a reduction in fossil fuel combustion elsewhere. And even if it weren’t, electrification is a necessary step to achieve carbon reductions in the long run as the grid becomes cleaner. The temporary emissions “hit” is likely worth the emission reductions likely to occur in the future.

Increases in electricity demand are much less OK, however, if that additional energy consumption is simply wasted.

Which brings us to the second problem: There is no guarantee that all the new energy demand caused by falling prices will be societally necessary or even beneficial. Cheap lighting, for example, runs the rsk of harming the health of wildlife and people, while diminishing our enjoyment of the night sky. And while we might use cheap electricity for all sorts of societally beneficial purposes, we might also use it to power giant banks of computers solving unnecessary math problems in order to float a global speculative market in fake currency. Which is what we’re doing now. 

Making renewable energy cheap and abundant can address societal problems while cutting carbon pollution. There is, however, no guarantee that it will, unless we take other steps to guide the energy transition.

Yes, Virginia, we really do need to price (or limit) carbon 

None of this is to say that abundant, cheap renewable energy – like energy efficiency – is not a very good thing, or that it shouldn’t be an important goal of public policy. Cheap renewable energy opens up tremendous vistas of opportunity for a cleaner environment and better lives.

But we can’t be fooled into thinking that it’s a sufficient response to the climate crisis. 

Clean energy tools such as renewables and efficiency are important for decarbonization because they enable us to substitute low-carbon energy for carbon-intensive energy to meet human needs. Hastening that substitution requires not only that we flood the zone with clean energy, but also that we adopt policies that politely but firmly escort fossil fuels to the exit door. 

Carbon pricing is one policy – though not the only one – that can achieve this goal. There is no earthly reason why Bitcoin miners should be allowed to pollute the atmosphere cost-free to support an endeavor whose contribution to our well-being is minimal, if not negative. In 2021, we at Frontier Group issued a white paper arguing in support of carbon pricing and laying out the options for policymakers. It’s worth a fresh look.

Other tools that make burning fossil fuels more expensive or less convenient can also play a role – from carbon caps, to tighter emission standards on power plants, to bans on new gas hookups for buildings, to keep-it-in-the-ground policies that limit fossil fuel production. And while an outright ban on crypto mining might be a bridge too far for some, imposing stricter limits on egregiously wasteful energy-consuming activities is worth considering. 

Cryptocurrency may be an environmental nightmare, but if it can serve to remind the public and policymakers of the need for a full spectrum approach to climate mitigation – one that includes both carrots and sticks, both bold new technologies and thoughtfully imposed limits – perhaps it can inadvertently achieve some of its long-hyped promise to leave the world a better place.

[1] The shift from coal to gas has led to increases in emissions elsewhere in the energy system, however, that have wiped out many of those gains. See our 2016 white paper, Natural Gas and Global Warming.

[2] To be clear, Yglesias states upfront that “we don’t want to replace 100% of our current dirty energy,” which says all that needs to be said about the seriousness of this approach from a climate change mitigation perspective.

Photo: Mark Agnor via Shutterstoc