Werner’s blog: The social cost of bitcoin mining in B.C.

Bitcoin mining consumes copious amounts of electric power worldwide, with a related out-sized environmental impact. In the wake of a recent BC Supreme Court ruling blocking a forestry company’s bid to branch out into cryptocurrency mining, UBC Sauder Associate Professor Werner Antweiler’s latest blog post breaks down the difference between the private cost and the social cost of bitcoin mining, and discusses what options the Province has to curtail the expansion of bitcoin mining permanently. An excerpt of the blog post is below.

Each bitcoin transaction requires processing through the network of bitcoin miners that maintain the distributed ledger and are in a race to earn the next bitcoin as compensation for their effort. This race to earn the next bitcoin is known as "proof of work." Other cryptocurrencies, such as Ethereum, use an alternative method known as "proof of stake" that requires little electricity.

There are about a dozen bitcoin miners active in B.C., but in December 2022, British Columbia introduced an 18-month moratorium on new bitcoin mining ventures due to the expected large impact on the provincial electricity grid.

Estimates for the worldwide use of electricity for bitcoin mining range between 100 and 200 Terawatthours [TWh]. That is roughly the amount of electricity consumed by entire countries, with Belgium at the lower end and Egypt at the upper end. Some estimates are even higher, suggesting that worldwide bitcoin mining could consume as much electricity as Australia. In 2021, The New York Times provided an analysis that explains why bitcoin mining uses more electricity than many countries. Reliable estimates such as the Cambridge Bitcoin Electricity Consumption Index point to about 170 TWh/year annual electricity use. All that electricity use comes with a hefty environmental footprint because generating electricity uses fossil fuels in many of the places where bitcoins are mined. Estimates (also from the CBECI) suggest annual emissions of about 86 million tonnes of carbon dioxide (MtCO2e), assuming an average mix of electricity generation worldwide. In the worst case, if bitcoin mining relies much more on coal power at the margin, this total could double.

So what is the true cost of mining another bitcoin, and how does it compare to the revenue from mining another bitcoin? Prices for one bitcoin have varied between $30,000 and $50,000 USD over the course of last year (2023), so mining one bitcoin will result in revenue equal to a price in that range. It is estimated that mining one bitcoin requires about 260 Megawatthours [MWh], including cooling services for the server farms. The cost of electricity in B.C. for large general service, $0.0614/kWh, implies a "production cost" of just $11,000 USD per bitcoin—enough to make a profit for the bitcoin miners. If the bitcoin miner is subject to the medium general service rate (currently $0.0981/kWh), the cost would be $17,600 USD. Add to this the cost for computers, equipment, buildings, leases, labour, and taxes, and the full private cost will be even higher. 

Note that these numbers are changing each time the bitcoin system encounters a "halving" event when producing the next bitcoin will take twice as much effort. The next halving is expected in 2024. This "halving" process is meant to ensure that there will never be more than 21 million bitcoins in total. The consequence of this approach is that the cost of bitcoin mining will rise steadily.

But the social cost of bitcoin mining is much higher than the private cost because of the environmental consequences. Mining a new bitcoin can be associated with about 500 grams of CO2 per kilowatthour, roughly the global emissions from electricity generation. This means that mining one new bitcoin is responsible for releasing 130 tonnes of carbon dioxide. At B.C.'s current carbon price of $65/tonne, this would come to $8,450 CAD. However, the social cost of carbon is calculated by the Government of Canada as $266/tonne for 2024. So the environmental damage from mining one bitcoin is worth about $34,580 CAD, or about $24,000 USD. Adding the environmental cost of bitcoin mining to the electricity cost of bitcoin mining would make bitcoin mining unprofitable in British Columbia if the price for one bitcoin falls below $35,000 USD.

B.C.-based bitcoin miners will argue that using hydroelectricity in B.C. is much cleaner than the world average, and thus they should not pay a carbon price at all. But that argument is a fallacy because it assumes that bitcoin mining takes place exclusively in B.C. Mining one "cleaner" bitcoin in B.C. does not displace mining one "dirtier" bitcoin somewhere else, because the winner of the bitcoin mining race is probabilistic. Bitcoin miners collectively are responsible for their worldwide CO2 emissions and should pay the price. Whichever bitcoin miner wins the race to earn the next bitcoin is responsible for all the emissions, including the losers of that race in other (dirtier) jurisdictions. If the bitcoin mining industry is to be treated just like any other industry, it needs to first face up to its full environmental cost.

B.C.'s lowish electricity rate for large general service (just about six cents per kilowatthour) is not designed for adding vast new demand to the system. Consider the levelized cost of electricity (LCoE) of B.C.'s new site-C dam, which is expected to come online in January 2025 and is reckoned to cost about $16 billion. Fully amortized, Dolter, Fellows, and Rivers (2022) calculate the LCoE of Site-C dam as $170/MWh. Thus the price for large new connections should reflect that, and be at least $0.17/kWh. At that price, mining a new bitcoin in B.C. would cost at least $30,500 USD. Add to this the social cost of carbon of $24,000 USD, and the full social cost of mining a new bitcoin in B.C. exceeds $54,500 USD or $79,000 CAD. Other operational expenses (capital, labour, taxes) are on top, and thus $79,000 CAD is better thought of as the "floor" for the full social cost of bitcoin mining in B.C. In any case, if bitcoin miners were to pay the full social cost for their activity, bitcoin mining would not be profitable in B.C.

In light of the recent ruling by the BC Supreme Court in the case of Connifex Timber Inc. v. British Columbia (Lieutenant Governor in Council), what can the Province do to curtail the expansion of bitcoin mining permanently? As the ruling by Judge Tammen explains, the application for grid access by the bitcoin miner—a lumber firm turned crypto-miner—is in a class of its own because it asked for essentially half of the output from Site-C dam, about 2.5 TWh. The Province has an 18-month moratorium in effect prohibiting access to the grid from new bitcoin miners, but this moratorium is due to expire in May of 2024. The Province could either extend the moratorium or amend the Utilities Commission Act (UCA) to expand BCUC's mandate to expand the scope of the public interest expressed in section 28(3) of the UCA. What constitutes "public interest" should be clarified, including its application to a class of similar parties. The Province has a political prerogative to define what is, and what is not, in the public interest, and elected officials are accountable to British Columbians through democratic elections.

Alternatives to this regulatory approach are implied by the discussion above: raising the price of bitcoin mining in B.C. either through an explicit carbon price on the marginal global emissions from bitcoin mining, and/or creating a new rate class for utility customers who would significantly shift the utility's generating capacity and therefore need to reflect the marginal cost of adding new capacity. The environmental cost of mining one new bitcoin would amount to a $0.133/kWh surcharge. Add this to the marginal cost of new capacity of $0.17/kWh, and an appropriate tariff rate for bitcoin miners should be at least $0.303/kWh. 

Lastly, a word of caution to any current or prospective investor in bitcoins. Bitcoins are a speculative and extremely volatile asset without any intrinsic value. Bitcoin mining may cease if/when the cost of bitcoin mining exceeds the price of bitcoins. Bitcoin operations may also become subject to new regulations, prohibitions, or taxation in different jurisdictions. Buyer beware!