Introduction

The report explores the greenhouse gas (GHG) emissions generated by cryptocurrency networks, focusing on both Proof of Work (PoW) and Proof of Stake (PoS) consensus mechanisms. It addresses how these emissions can be measured, allocated, and managed, considering the increasing regulatory focus on climate-related disclosures. Bitcoin, the largest cryptocurrency, consumed 100 terawatt-hours (TWh) of electricity in 2021, comparable to Chile’s annual electricity use, with other cryptocurrencies adding 50% more consumption. This highlights the urgent need for standardised GHG accounting frameworks.

Understanding cryptocurrency-related GHG emissions

GHG emissions in cryptocurrency networks primarily arise from electricity used in validation and mining activities. PoW protocols, such as Bitcoin’s, require intensive computational power, which scales with the cryptocurrency’s value, incentivising increased mining activity. In contrast, PoS networks, like Ethereum’s upcoming system, consume significantly less electricity as validation is based on “staked” holdings rather than computational effort.

Stakeholders across the value chain, including miners, custodians, and end-users, contribute to emissions through direct or indirect activities. For Bitcoin, block rewards drive 94% of validator incentives, whereas transaction fees only contribute 6%. In Ethereum, 73% of incentives come from block rewards and 27% from transaction fees. These proportions, which can vary over time, influence the allocation of emissions among stakeholders.

The report also highlights challenges in sourcing accurate data on electricity generation and transaction fees, as well as identifying the energy sources used in mining activities. This uncertainty necessitates the use of proxy or average data for emissions allocation. The indirect impact of activities like transaction batching and the role of custodians further complicate emissions attribution.

Allocating cryptocurrency GHG emissions

The report evaluates three methods for allocating GHG emissions: holding-based, transaction-based, and a proposed hybrid approach. The holding-based method allocates emissions proportionate to a stakeholder’s share of network value, reflecting their influence on block rewards. However, it neglects transaction-driven emissions and is less effective in PoS networks where transaction fees play a greater role.

The transaction-based method allocates emissions based on the value of transaction fees paid by users. While this accounts for transaction incentives, it overlooks the emissions caused by holding cryptocurrency, particularly in PoW networks where block rewards dominate. Moreover, this method does not factor in the role of lost coins, which can skew total network value and complicate emissions responsibility.

The hybrid method combines both approaches, considering holdings and transaction fees alongside dynamic factors like block reward proportions. For example, in 2021, the Bitcoin network generated 59.1 Mt CO2e, and Ethereum produced 9.0 Mt CO2e. Using the hybrid method, a company holding 6 BTC over a year would be responsible for 17,700 kg CO2e, while another entity conducting 12 transactions in the same period would be allocated an additional 440 kg CO2e for transaction-related emissions. This method also accounts for emissions from Layer 2 networks, which interact indirectly with Layer 1 systems.

Additional considerations

The report underscores the importance of aligning cryptocurrency GHG accounting with the Greenhouse Gas Protocol. It recommends categorising upstream network emissions as Scope 3 emissions to encourage shared responsibility. Stakeholders must also address Scope 1 and 2 emissions from electricity use in their own operations, such as servers and custodial services, to capture a comprehensive emissions profile.

Several complexities in emissions accounting are highlighted. These include the role of lost coins, which may inflate the network value without contributing to ongoing emissions, and the potential for double allocation in transactions with multiple senders and recipients. Additionally, the indirect emissions from services like decentralised finance (DeFi) and NFTs, built on Layer 1 networks, require separate measurement and integration into the framework.

The report also notes that cryptocurrency value is influenced by external factors, such as the actions of prominent market players and speculative trading. These factors drive network activity and, consequently, emissions. Future research is needed to explore the broader economic and environmental impacts of these dynamics.