The social cost of bitcoin mining in BC (2024)

Bitcoin mining consumes copious amounts of electric powerworldwide, with a related out-sized environmental impact. Eachbitcoin transaction requires processing through the network of bitcoinminers that maintain the distributed ledger and are in a race to earnthe next bitcoin as compensation for their effort.This race to earn the next bitcoin is known as "proof of work".Other crypto-currencies, such as Ethereum, use an alternativemethod known as "proof of stake" that requires little electricity.

Image licensedby iStockPhoto.

There are about a dozen bitcoin miners active in BC, but inDecember 2022, British Columbia introduced an 18-month moratoriumon new bitcoin mining ventures due to the expected large impacton the provincial electricity grid.

Estimates for the worldwide use of electricity for bitcoin miningrange between 100 and 200 Terawatthours [TWh]. That is roughly theamount of electricity consumed by entire countries, withBelgium at the lower end and Egypt at the upper end. Someestimates are even higher, suggesting that worldwide bitcoinmining could consume as much electricity as Australia. In 2021,The New York Times provided an analysis that explains why bitcoinmining uses more electricity than many countries. Reliableestimates such as the CambridgeBitcoin Electricity Consumption Index point to about 170 TWh/yearannual electricity use. All that electricity use comes with a heftyenvironmental footprint because generating electricity uses fossilfuels 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 generationworldwide. In the worst case, if bitcoin mining relies much more on coalpower at the margin, this total could double.

So what is the true cost of mining another bitcoin, and how does itcompare to the revenue from mining another bitcoin? Prices for onebitcoin have varied between USD 30,000 and 50,000 over the course oflast year (2023), so mining one bitcoin will result in revenue equal to aprice in that range. It is estimated that mining one bitcoin requires about260 Megawatthours [MWh], including cooling services for the serverfarms. The cost of electricity in BC for large general service,$0.0614/kWh, implies a "production cost" of just USD11,000 perbitcoin—enough to make a profit for the bitcoin miners.If the bitcoin miner is subject to the medium general servicerate (currently $0.0981/kWh), the cost would be USD17,600.

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

But the social cost of bitcoin mining is much higher than theprivate cost because of the environmental consequences. Mining a newbitcoin can be associated with about 500 grams of CO₂ perkilowatthour, roughly the global emissions from electricitygeneration. This means that mining one new bitcoin is responsible forreleasing 130 tonnes of carbon dioxide. At BC's current carbon priceof $65/tonne, this would come to $8,450. However, the socialcost of carbon is calculated by the Government of Canada as$266/tonne for 2024. So the environmental damage from mining onebitcoin is worth about $34,580, or about USD24,000. Adding theenvironmental cost of bitcoin mining to the electricity cost ofbitcoin mining would make bitcoin mining unprofitable in BritishColumbia if the price for one bitcoin falls below USD35,000.

BC-based bitcoin miners will argue that using hydro electricity inBC is much cleaner than the world average, and thus they should notpay a carbon price at all. But that argument is a fallacy because itassumes that bitcoin mining takes place exclusively in BC. Everybitcoin transaction leads to bitcoin mining activity worldwide, andthus a bitcoin miner in BC is responsible for the worldwide race toearn the next bitcoin. Mining one "cleaner" bitcoin in BC does notdisplace mining one "dirtier" bitcoin somewhere else, because thewinner of the bitcoin mining race is probabilistic. Bitcoin minerscollectively are responsible for their worldwide CO₂emissions and should pay the price. Whichever bitcoin miner wins therace to earn the next bitcoin is responsible for all the emissions,including the losers of that race in other (dirtier) jurisdictions. Asthe common German saying has it: mitgefangen,mitgehangen—if you get caught together with them, you getpunished together with them. If the bitcoin mining industry isto be treated just like any other industry, it needs to first faceup to its full environmental cost.

BC's lowish electricity rate for large general service (just aboutsix cents per kilowatthour) is not designed for adding vast newdemand to the system. Consider the levelized cost of electricity (LCoE) ofBC's new site-C dam, which is expected to come online in January 2025and is reckoned to cost about $16 billion.Fully amortized, Dolter, Fellows, and Rivers (2022) calculate the LCoE of Site-C damas $170/MWh. While this is not the cheapest option for expandingBC's electricity grid, it is what is coming online as new capacity.Thus the price for large new connections should reflect that, andbe at least $0.17/kWh. At that price, mining a new bitcoin in BC wouldcost at least USD30,500. Add to this the social cost of carbonof USD24,000, and the full social cost of mining a new bitcoin in BCexceeds USD54,500 or CAD79,000.This calculation does not even include the private cost ofamortizing the computer hardware, buildings, taxes, labour, and otheroperational expenses. Thus CAD79,000 is better thought of asthe "floor" for the full social cost of bitcoin mining in BC. In anycase, if bitcoin miners were to pay the full social cost for theiractivity, bitcoin mining would not be profitable in BC.

In light of the recent ruling by the BC Supreme Court in thecase of Connifex Timber Inc. v. British Columbia (Lieutenant Governorin Council), what can the Province do to curtail the expansionof bitcoin mining permanently? As the ruling by Judge Tammen explains, theapplication for grid access by the bitcoin miner—a lumber firmturned crypto-miner—is in a class of its own because it asked foressentially half of the output from Site-C dam, about 2.5 TWh.The Province has an 18-month moratorium in effect prohibiting accessto the grid from new bitcoin miners, but this moratorium is due to expirein May of 2024. The Province could either extend the moratorium oramend the Utilities Commission Act (UCA) to expand BCUC's mandateto expand the scope of the public interest expressed in section 28(3)of the UCA.What constitutes "public interest" should be clarified, andthe scope of 28(3) needs to cover a "class ofsimilar applicants" to avoid hearing the same case again and againby similar applicants. What is perhaps needed is a clause thatstipulates: "After a hearing and for proper cause, the commissionmay relieve a public utility from the obligation to supply serviceunder this Act to a single party orto a class of similar parties on termsthe commission considers proper and where the public interestinvolves:

1. protecting the stability and resilience of the electricity generation and distribution system, including the ability to meet peak demand;
2. ensuring the affordability of service for all utility customers;
3. giving full consideration to opportunity costs of alternative uses of electricity including exports to other jurisdictions;
4. preventing foreseeable and undue harm to public health and safety;
5. preventing foreseeable and undue harm to the environment;
6. prioritizing public policy goals, which are expressed by applicable legislation or by an Order in Council, over the private interests of parties where providing service to private parties, or a class or private parties, would unreasonably interfere with achieving the express public policy goals."

I trust that government lawyers will be able to express these notionsmore precisely and cogently. But essentially, the Provincehas a political prerogative to define what is, and what isnot, in the public interest, and elected officials areaccountable to British Columbians through democratic elections.

In fact, there are well-established precedents where purposefuldiscrimination by utilities is in the public interest. For example,experienced motorists are eligible for lower insurance premiums thaninexperienced motorists, as there is an actuarial basis for treatingthese groups differently. There is no reason why electricity userscould not be treated similarly if they cause different levels of harmto society, as long as there is no within-group unfairdiscrimination. In turn, society may give benefits to somegroup of utility customers if doing so creates public benefits.BC Hydro's industrial electrification ratesrecognizes a specific CleanBC Industrial Electrification Ratethat provides a rate discount to attract new businesses to BC.As I have made clear above, bitcoin mining is the exact opposite:the industry collectively contributes to global greenhousegas emissions, and BC-based cryptominers are fully complicitain the actions of their network partners worldwide. For that reasoncryptocurrency projects are specifically exempt from the CleanBCincentives.

Alternatives to this regulatory approach are implied by thediscussion above: raising the price of bitcoin mining in BC eitherthrough an explicit carbon price on the marginal global emissions frombitcoin mining, and/or creating a new rate class for utility customerswho would significantly shift the utility's generating capacity andtherefore need to reflect the marginal cost of adding newcapacity. The environmental cost of mining one new bitcoin isessentially equal to a $0.133/kWh surcharge. Add this to the marginalcost of new capacity of $0.17/kWh, and an appropriate tariff rate forbitcoin miners calculates as $0.303/kWh. This is still awfully cheapby world standards; for example, retail customers in Germany currentlypay $0.58/kWh (€0.40/kWh) for their electricity.

Cryptomining was banned in China in 2021.The resulting exodus of bitcoin miners has made bitcoin miningeven dirtier, according to new research. Where has bitcoin mining gone?About a third of bitcoin mining appears to take place in the U.S.now, and one-tenth in Canada. Other major host countries for bitcoin miningare Kazakhstan and Russia.

Lastly, a word of caution to any current or prospective investorin bitcoins. Bitcoins are a speculative and extremely volatile assetwithout any intrinsic value. Bitcoin mining may cease if/when the cost of bitcoin mining exceeds theprice of bitcoins. Bitcoin operations may also become subject to newregulations, prohibitions, or taxation in different jurisdictions.Caveat emptor!