Carbon-neutral Bitcoin? New approach aims to help investors offset BTC carbon emissions

Billion dollar companies around the world are betting big on Bitcoin (BTC). Recent analysis from European investment manager Nickel Digital Asset Management found that 20 publicly traded companies with a market capitalization of over $ 1 trillion have around $ 9.6 billion invested in BTC. Individual investors are also becoming increasingly interested in the asset.

Grayscale Research's "Third Annual Bitcoin Investor Study" found that demand for Bitcoin has increased tremendously. According to the study, 55% of current Bitcoin investors started buying the asset in the last 12 months alone. The Grayscale report also notes that the market for those interested in Bitcoin investment products expanded to 59% in 2021, up from 55% in 2020 and just over a third in 2019, reflecting steady growth. .

However, while the world's enthusiasm for Bitcoin may be increasing, concerns regarding its environmental impact have become more apparent than ever. For example, Grayscale Research also found in its investor study that more than 30% of investors are concerned about the potentially negative impact of Bitcoin on the environment. Interestingly, this consideration only became apparent in 2021, as the report shows.

Models for calculating the carbon emissions of Bitcoin

Given the growing distress over Bitcoin's carbon footprint, new models are emerging that aim to help investors and businesses understand how to ensure their BTC holdings are sustainable. For example, the Blockchain Center of the Frankfurt School and the digital asset manager INTAS.tech published a November 16 study outlining a new approach to offsetting CO2 emissions caused by the Bitcoin network. The formula developed factors in two approaches: a transaction-based approach and a property-based approach.

Philipp Sandner, a professor at the Frankfurt School Blockchain Center, told Cointelegraph that asset managers and investors in Germany, in particular, are concerned that Bitcoin's CO2 footprint meets environmental, social and governance standards. (IS G). As such, Sandner explained that he wanted to create a formula that would allow asset managers, mining companies, exchanges, and individuals to calculate the CO2 footprint of their BTC:

"Normally, we assign the largest CO2 offset burden to Bitcoin mining companies, but you still have ETF issuers, companies, and exchanges that want to demonstrate to clients that they are doing something with their CO2 footprint to offset their Bitcoin."

According to Sandner, the goal at the beginning 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 world's CO2 equivalent came from Bitcoin Based on this number, Sandner commented that maintaining the global Bitcoin network required 37.97 million metric tons of CO2 equivalent.

To calculate Bitcoin's carbon footprint from an investor's perspective, the study notes that companies can focus on proportional network usage in bytes relative to the growth of the Bitcoin blockchain over a specific period of time. or in the amount of Bitcoin held over a period of time. specific period. According to the document, an average Bitcoin transaction contains 670 bytes in the Bitcoin blockchain, representing an estimated carbon footprint of 369.49 kilograms of CO2 equivalent. Sandner explained:

“These carbon emissions can be offset with a certificate from the EU Emissions Trading System. A certificate for a ton of CO2 costs around $ 50, which would be roughly $ 18 to offset a single BTC transaction. Now, if an investor or company had a BTC for a period of one year, this would cost about two tons of carbon emissions. If offset by the EU Emissions Trading System, this would be around $ 100 ”.

Benjamin Schaub, a senior consultant at INTAS.tech, told Cointelegraph that companies could apply the aforementioned formula for Bitcoin transactions and ownership to calculate their carbon footprint which should then be offset. “What makes this model great is that all the necessary data is publicly available. There are no assumptions here, it's just about how businesses relate to the Bitcoin network. "

Schaub added that Iconic Holding GmbH, which offers listed products in Germany, is currently applying this method to ensure sustainability: “We are also in discussions with some very large exchanges. I strongly believe that over the next year, the major players in the space will care more about this issue. "

While the future is difficult to predict, it is notable that some major exchanges and exchange-traded funds (ETFs) have started applying similar approaches to offsetting Bitcoin's carbon footprint. For example, Schaub noted that the crypto exchange BitMEX is trying to make its BTC holdings carbon neutral. According to a recent BitMEX Research blog post, the company believe that the most effective way for users and exchanges to assess Bitcoin's carbon footprint is through on-chain transaction fees. A BitMEX spokesperson told Cointelegraph that the company concluded that every dollar spent on Bitcoin transaction fees can incentivize up to 0.001 metric tons of carbon emissions, based on the company's formula.

Currently, there are only a few approaches available to help companies offset their carbon emissions from Bitcoin, and Sandner commented that transaction fees become more important as the Bitcoin network ages. As such, he believes that companies should consider a transaction-based approach when it comes to ensuring carbon neutrality.

Schaub further noted that the source of electricity being used must be taken into account, noting that the model developed by INTAS.tech and the Frankfurt School Blockchain Center analyzed the power mix as applied in the United States. and Germany: "This ensures that we can see that more miners are becoming aware of this issue and are looking for electricity from renewable sources."

In addition to exchanges like BitMEX developing models to calculate Bitcoin's carbon emissions, some ETFs are doing the same. For example, Canadian issuer of Bitcoin ETFs Ninepoint Partners launched a carbon neutral Bitcoin ETF in May 2021. Alex Tapscott, Ninepoint's managing director of digital assets, told Cointelegraph that while this was the right thing to do, it also benefits the company as a whole:

“Many investors with ESG requirements were concerned about Bitcoin's footprint and have stayed on the sidelines. We wanted to make it easier for them to be interested parties and participate in the advantages of Bitcoin. "

Tapscott added that it is often investors in Bitcoin funds, along with the miners themselves, who demand that the industry be more sustainable. Given this, Tapscott believes that in 10 years, Bitcoin will be close to 100% renewable: “It can even help subsidize the development of renewable projects because it is a sharp and ready buyer that you can place at the source. In the meantime, carbon offsetting is a good way to close the gap. "

How accurate are these models?

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

For example, Sandner commented that all the numbers compiled within the model he helped create are changing over time. “The hashrate is changing, for example, as we saw recently with the Chinese mining ban. The hash rate was reduced by 50%. "As a result, Sandner is aware that fluctuations in metrics must be taken into account. He added that each country has a different combination of CO2-intensive energy, noting that Norway tends to be greener than other regions.Finally, Sandner noted that carbon prices need to be watched carefully, adding that prices have been growing during December.

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Additionally, a BitMEX spokesperson mentioned that the company's formula is not a perfect methodology, noting that the exchange expects and welcomes criticism. However, the company believes that the formula improves over other estimates that exist. According to the post, the equation used is quite simple, as only average Bitcoin prices are leveraged rather than estimates of electricity costs from Bitcoin mining.

Sandner ultimately believes that most of the work to be done has yet to be done, noting that most of these approaches are still emerging:

“The Bitcoin mining council in the US, for example, is trying to find new models. Once these methods have been developed, companies will need to adopt them, but it is still too early. Consciousness is beginning to emerge, but this is only the beginning. "