Assessing the Carbon Footprint of Cryptoassets : Evidence from a Bivariate VAR Model

Bitcoin’s energy hunger has recently triggered a heated debate in academic literature due to its massive energy consumption and carbon footprint. Unfortunately, it is difficult to measure Bitcoin’s actual electricity consumption, and literature on the topic produces inconsistent estimates that lead to different assessments of the network’s carbon footprint. The objective of this chapter is to provide a sensible economic approximation and a meaningful forecast of the carbon footprint of cryptoassets following Bitcoin’s alarming energy demands. To this end, we examine the relationship between cryptocurrencies’ trading volumes and Bitcoin’s energy consumption using a vector autoregression (VAR) framework. Using causality tests, we find evidence of one-way directional causality from bitcoin’s trading volume to the network’s electricity consumption. By making sensible assumptions about the network’s energy sources, we find that bitcoin mining is responsible for approximately 43 million metric tons of carbon in 2020. This is equivalent to 0.14% of the world’s total yearly carbon emissions in that year. Using an impulse-response analysis, we find that the impact of one standard deviation shock in bitcoin’s trading volume on the network’s energy consumption is persistent and amounts to 8.8% on average per month (or 63% annually) over a period of twelve months. This growth rate implies that the total electricity consumption of Bitcoin is expected to generate 492 million metric tons of carbon emissions by the end of 2026. This translates to approximately 1.6% of today’s total carbon emissions worldwide. This alarming figure warrants attention and brings into focus the negative environmental impact of such digital currencies