The recent surge in Bitcoin’s value, and the incoming Trump administration’s potential embrace of alternative currencies that caused it, has reignited discussions around cryptocurrency’s future. With those discussions comes the implicit question of what is to be done about crypto’s impact on the planet.
As Bitcoin climbs to new heights, so does the energy consumption associated with mining it. The electricity needed for a single Bitcoin transaction can equal the energy a person in Germany consumes in three months. While crypto enthusiasts may celebrate the booming market, the hidden costs of its growth need to be borne by someone—and as it stands they’re externalized to society writ large.
The concept of a crypto tax is gaining traction globally and may offer a promising solution. By taxing electricity consumed by mining, incentives are created for more sustainable practices while at the same time funds are raised to combat the corresponding effects on climate change.
At COP29, new countries joined the Coalition for Solidarity Levies which, among other climate and development finance gap initiatives, propose levies on cryptocurrency mining. The total coalition has grownto seventeen members, with the addition of the Republic of Togo, the Federal Republic of Somalia, Republic of Zambia, Fiji and Djibouti this year.
Climate and Energy Costs of Crypto Mining
Cryptocurrency, often hailed as the future of finance, often comes with a steep price tag: massive energy and water consumption. The process of mining Bitcoin involves solving complex mathematical puzzles to validate transactions, demanding significant computational power. This power translates into truly staggering levels of electricity usage, often rivaling that of entire countries.
Baked into every Bitcoin, then, is some amount of value that has been externalized—effectively stolen—from society writ large. The environmental toll from mining operations stems chiefly from its reliance on fossil fuel-powered electricity generation, exacerbating air pollution and accelerating global warming.
With Bitcoin’s soaring value will come increased incentive to mine—and the energy footprint of cryptocurrencies will grow exponentially.
The payment by miners for the electricity used in their mining would be sufficient to internalize the cost of energy generation if the cost of a kilowatt of electricity fully represented the cost to society in its generation—it doesn’t. Consequences of increased fossil fuel usage ripples outward, fueling more frequent and severe natural disasters like storms, droughts, and wildfire.
As the world grapples with the realities of climate change, it is clear that unchecked crypto mining is incompatible with a sustainable future.
Borrowing Crypto Tax Policy from Abroad
Some states have already begun taking steps to grapple with the growing issue of cryptocurrency mining externalities. At the forefront of these efforts is the aforementioned Global Solidarity Levies Task Force, a coalition led by Kenya, Barbados, and France.
During a recent United Nations climate conference, task force members proposed a climate tax on crypto mining set at $0.045 per kilowatt-hour (kWh) of electricity consumed. This levy could generate as much as $5.2 billion annually. It takes approximately 155,000 kWh to mine one Bitcoin, which would mean an effective tax of $6,975 per individual Bitcoin—a little more than a 7% tax at the trading price as of publication.
The tax would do more than just raise revenues – by increasing the cost of operations for miners, it could help push the industry toward adopting more energy-efficient practices and renewable energy sources.
The Biden administration had previously floated a 30% tax on electricity used by crypto miners, but the shifting political landscape complicates its prospects. President-elect Donald Trump, backed by many crypto-friendly donors, is likely to oppose any such measures—making international examples all the more critical in demonstrating their viability for a future administration.
US Leadership
A US-based crypto tax could address several pressing issues: first, it would help reduce emissions by making it costlier for miners to rely on dirty energy sources. This would likely be a boon for cryptocurrencies that rely on more energy efficient mining technologies. Incentivizing the adoption of energy-efficient hardware and alternative validation methods, such as the proof-of-state model adopted by Ethereum, could serve to reduce the overall climate impact of the crypto sector.
More to the point, enacting a crypto tax would align with the broader principles of fiscal justice—industries that disproportionately contribute to pollution should bear the costs of their actions. Crypto mining consumes more electricity than many countries, but its benefits redound only to the miner and parties to the transaction. Currently, the mining industry exemplifies an underregulated sector with significant externalities.
The US could also strengthen its position in global climate negotiations. Demonstrating leadership in cutting-edge industries like cryptocurrencies would underscore America’s commitment to combatting climate change—and could encourage other players to adopt similar revenue-producing measures.
The US is at a crossroads. With Bitcoin’s value soaring and mining likely to expand to meet demand, the need for action has never been more pressing. A crypto tax isn’t just an environmental necessity, it is an opportunity to lead the charge in crafting a more sustainable future.
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