Crypto and climate change: Can web3.0 help get us to net zero

By Kirti Sharma

Web3.0 will operate on blockchain-enabled technology working on P2P network. It will transform netizens’ experience but the flow of information will be administered by the participants themselves and no control shall be enforced by any single authority. In the absence of a third party like a bank to vet the transaction there is a need to validate ‘system security’ by solving complex puzzles by the cryptographers on devices which are energy hungry. Only after solving the puzzle, miners add a new block to the chain and receive a token as a reward.

A report published by The Office of Science and Technology Policy (Whitehouse, US) in August 2022 stated that the “total global electricity usage for crypto-assets was between 120 and 240 billion kilowatt-hours per year. This falls in a range that exceeds the total annual electricity usage of many individual countries like Argentina or Australia and equivalent to 0.4% to 0.9% of annual global electricity usage. This is comparable to the annual electricity usage of all conventional (i.e., non-crypto-asset) data centers in the world”. With current market capitalisation (globally) for crypto assets touching almost $1 trillion and almost 38 kilotons of annual e-waste produced due to Bitcoin

mining (it is a by-product as mining hardware becomes obsolete very quickly), crypto assets are becoming a strong source of GHG emissions and could stifle efforts to achieve net-zero carbon pollution hampering climate commitments. Non Fungible token’s carbon footprint is comparable to a month’s worth of electricity for a person living in the EU, probably more than that (invetopedia.com).

A report issued by the US government on ‘climate and crypto assets’ quoted that crypto assets not only use a significant amount of electricity but also result in increased carbon emissions in the environment for the generation of this electricity. It is important that the growth of crypto is done responsibly to achieve carbon neutrality. Therefore, the exponential growth of crypto currencies like Ethereum, Bitcoin and Dogecoin needs to be checked.

The good news is that blockchains can help in reducing carbon footprints. This is called as Digital Monitoring, Reporting and Verification (D-MRV). As per Lucas Belenky, a climate change consultant, “blockchain technology can be used to create immutable and auditable data and transfer records (including creation of mitigation outcomes in digital form) with smart contracts. The industry is working on designing and implementing end-to-end digitization of carbon markets using this technology”. He opines that D-MRV systems will have an important role to play in future carbon markets. They create tokenization of carbon assets through blockchain technology hence these

should be leveraged to reduce carbon emissions. This is an interesting use-case where blockchain itself can be used to reduce carbon footprints.

Digiconomist is cryptocurrency analytics site which publishes regular data on the energy

consumption of crypto assets and its negative impact on the environment. The World Wildlife Fund has been relying on reports published by Digiconomist to assess the impact of these technologies on the environment. Digiconomist suggests exploring non-fungible tokens (NFTs) on top of a Polygon network. Polygon network is considered to be eco-friendly as each transaction on Polygon “produces just 0.206587559 grams CO2, which is a long way from the 124.34 kilograms of CO2 per transaction

on the Ethereum network” (Digiconomist, 2022). This implies that use of Polygon for mining of NFTs will have limited environmental impact. Unfortunately, in its original form, polygon works on a set of contracts linked to the Ethereum network which does not make it environment friendly completely.

There is a need to develop Polygon as independent platform to leverage on its energy-efficiency features. The U.S. government panel on Climate Change (IPCC) claims that a reduction in global anthropogenic greenhouse gas (GHG) emissions to net-zero by mid-century will be beneficial for the environment. They have set a target of net-zero emissions by 2050. There are a few ways to reduce energy consumption while using cryptocurrencies. Firstly, use renewable sources of energy for powering energy-intensive networks. Second ‘Proof of Stake’ is preferred to ‘Proof of Work’ as it is not as energy inefficient as proof of work. Ethereum is already working in that direction. Third bundling of transactions by creating a layer above the blockchain layer and using the main blockchain only for settling the transaction and adding the block to reduce

energy consumption. It is important that these measures are real and not ‘pipe-dream’.

With sustainable development goals becoming one of the goals of the UN, businesses globally need to be mindful. Being accountable to the environment has been ignored in the past but not now. An ethical approach wherein the economy and environment thrive as a ‘win-win’ model is much needed.

The author is an assistant professor of accounts and finance at the Great Lakes Institute of Management.