The rising price of cryptocurrencies is resulting in higher demands for electricity in order to produce them, writes Professor John Quiggin.
TWO RECENT DEVELOPMENTS in financial markets have big and directly opposed implications for the future of the global climate. On the one hand, financial institutions of all kinds are divesting from carbon-based fuels. On the other hand, they are increasingly embracing one of the most pointless and destructive trends of recent times — cryptocurrencies such as Bitcoin.
Let’s start with the good news. Not so long ago, divestment from coal mines and coal-fired power stations appeared a symbolic moral gesture, undertaken by socially-minded investors who were willing to narrow their investment options rather than profit from environmental destruction. As it turned out, the socially-minded investors did well, while the hardheads who kept coal miners and oil companies in their portfolios lost badly.
Jumping forward to the present, divestment has become the norm, though the process has typically been made in a series of baby steps. At this point, nearly all financial institutions in developed market economies have limited their exposure to coal and indicated a strategy to end any association with thermal coal, used in power generation. (Alternatives to metallurgical coal, used in steelmaking, are in an early stage of development, unlike solar and wind electricity generation).
As a recent inquiry has shown, the key issue for financial institutions is the ‘grief to income ratio’. Lending to, or investing in, coal is guaranteed to attract plenty of hostile attention, not only from environmental activitists but from regulators, whose assessment of the future is necessarily based on the assumption that global commitments to decarbonise the economy will be adhered to.
On the other side of this equation, the risk that investments in coal will become “stranded assets” both unusable and unsalable is increasing all the time. Most global corporations (with the notable exception of Glencore) have sold off their coal assets, taking substantial losses in the process.
The result is that coal mines are now owned mostly by marginal operators willing to take a chance on extracting enough short-term profits. Such firms aren’t great credit risks, reinforcing the unwillingness of financial institutions to deal with them.
The results have been made clear in a recent Parliamentary Inquiry called at the instigation of pro-coal MP George Christensen. Coal miners including Whitehaven and New Hope complained that it was almost impossible to secure finance from Australian banks. Although Asian banks were more willing to lend to coal, they were put off by the absence of home country support. Furthermore, as Japanese and Korean lending institutions join the divestment movement, China is increasingly the sole source of financial support for coal.
The purpose of the Inquiry was to put pressure on Australian financial institutions to support coal, but it seems to have had the opposite effect. Even as the hearings were taking place, Macquarie Bank announced that it would completely divest from coal by 2024. The submission from the Australian Prudential Regulation Authority warned financial institutions that they needed to account for their exposure to climate risk and limit holdings accordingly.
The progress being made on divestment from coal contrasts sharply with the eager embrace of Bitcoin and other cryptocurrencies. Although they were once supposed to replace existing currencies as a medium of exchange, cryptocurrencies are now used only as a speculative asset and as a way of conducting illegal transactions like ransomware payments.
The “proof of work” process by which Bitcoins and other cryptocurrencies are generated depends on “miners” competing to solve increasingly elaborate, but pointless, mathematical problems using specially designed computers and lots of electricity. The higher the price of Bitcoins, the more electricity it is worth burning to generate them.
Calculations a few years ago suggested that the electricity used in Bitcoin mining was comparable to the total demand of a small country like New Zealand. But as the price has risen, so has the demand on electricity resources, to the point where abandoned coal-fired power stations are being reopened. Even when Bitcoin is mined using renewable electricity, that electricity is diverted from other uses, which must then rely on coal-fired or gas-fired electricity.
As concerns have risen about the environmental damage caused by cryptocurrencies, attempts have been made to find “green” ways of producing them. Past efforts of this kind have failed, but perhaps these will succeed. However, we don’t have time to wait and see. Financial institutions need to divest from cryptocurrencies and financial regulators need to shut them down. When and if an environmentally safe version emerges, we can take another look.
John Quiggin is Professor of Economics at the University of Queensland. His new book, The Economic Consequences of the Pandemic, will be published by Yale University Press in late 2021.
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