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Should We Make Bitcoin Cleaner by Subsidizing Mining

Some of the best results can be achieved in philosophy when intuition clashes with logical reasoning. We call these counterintuitive results. The result we discuss today certainly fits this description.

Some of the best results can be achieved in philosophy when intuition clashes with logical reasoning. We call these counterintuitive results. The result we discuss today certainly fits this description. In other words, if policymakers wish to mitigate the emissions associated with bitcoin, they should subsidize mining bitcoin rather than ban it. How can this be accomplished?

In bitcoin mining, miners compete against each other on a single global market. A miner gaining market share means another is losing market share. Therefore, a new unit of hash rate (computer power) is economically inferior to every existing unit of hash rate. Thus, anyone who wishes to reduce the carbon intensity of bitcoin mining should sustainably mine at a loss if necessary. Considering that some miners are unsustainable, a new unit of sustainable or "green" hash rate reduces the Bitcoin network's carbon intensity.

Instead of mining directly, bitcoin holders looking to offset their emissions could invest in a publicly-traded renewables-only miner, like Iris Energy. As a result of a lower cost of capital for a sustainable public miner, holders benefit from green-powered mining over default mining, offsetting the emissions associated with their bitcoin holdings.

Transactions that generate harmful emissions are discouraged by a Pigovian tax. Among examples would be a tax on sugar (obesity-related illnesses consume healthcare resources), tobacco (causes adverse primary health outcomes plus risks from second-hand smoke), or carbon dioxide (climate change). Thus, mining sustainably is de facto a Pigovian tax since it disfavors other miners likely to mine with nonzero emissions.

A fantastic aspect of Bitcoin is that it is a single market where every miner competes for a finite resource (new bitcoins). A new unit of the hash rate no longer benefits existing miners financially. If too many sustainable units come online, especially subsidized ones, some miners may no longer be profitable (so hash rates may be higher than they would typically be at breakeven). Few other industries are as open and competitive.

Thus, for those concerned about bitcoin-related emissions, financial products can be designed that bundle a bitcoin and a share of a sustainable miner. Since offsets are not standardized and generally unclear, Bitcoin plus offset products are far superior. Investing in a publicly-traded miner with a track record of sustainability reduces the cost of capital (some of these companies fund their operations solely through stock issues), thereby directly benefiting the miner compared to its dirtier competitors. In order to cater to this new demographic of motivated buyers, some miners will orient their operations toward full sustainability.

On a policy level, the same logic applies. Despite recent considerations of banning bitcoin mining in New York, the state should consider doing the exact opposite if it cares about bitcoin's greenhouse gas emissions. Hydropower is abundant in upstate New York. I have personally visited the Coinmint mine in Massena, N.Y., an old Alcoa aluminum smelting facility perched on the St. Lawrence River. It would take some time to determine this fully, but I believe bitcoin mining operations in New York are more sustainable than Bitcoin's generic energy mix. A ban on bitcoin mining would therefore increase Bitcoin's carbon footprint. Instead, governments should subsidize mining operations located in clean areas.

A few forward-looking policymakers have already applied this logic. Wyoming recently created a tax incentive to encourage mining of otherwise-flared natural gas. The methane associated with oil well operations is flared anyway (it's often uneconomical to capture or store) so using it to power a bitcoin operation is net neutral from a greenhouse gas perspective. It is generally favorable to accept Wyoming's offer since a controlled burn in a generator is cleaner than a simple flare.) If miners accept Wyoming's request, a new portion of the hash rate will emerge carbon-neutral, displacing dirtier energy. Likewise, the converse is true.

El Salvador's President Nayib Bukele has already implemented this idea at the national level. President Bukele mused in a historic Twitter Spaces conversation about mining bitcoin using otherwise-untapped - and carbon-neutral - geothermal energy. After keeping his promise, mining operations began this week. El Salvador disempowers any non-sustainable miner by subsidizing mining with geothermal energy that is fully sustainable. El Salvador can therefore claim two firsts: ratifying bitcoin as legal tender and imposing a Pigovian tax on dirty bitcoin miners.