If we are to reach net zero emissions globally, the solutions in the digital space – including cryptocurrencies – must be just as accountable as any other industry in reducing their carbon footprint. But first, they need to find credible ways to measure it.
As one of the most widely adopted applications of blockchain technology, cryptocurrencies have the potential to power new innovations that can make the financial system more efficient, inclusive, transparent, and secure.
However, growing recognition of the harmful impacts of greenhouse gas (GHG) emissions – as evidenced by extreme global weather events and detailed in concerning IPCC reports – has caused stakeholders to address the climate impact associated with their activities, and crypto is no exception. It has long been recognized that cryptocurrency is an energy-intensive sector. In 2021, it was estimated that the Bitcoin network alone consumed over 100 terawatt hours of electricity.
One key to the security model behind cryptocurrencies is the notion of consensus – a mechanism that helps determine which transactions are legitimate and should be added to the blockchain. Since consensus protocols differ, some based on proof-of-work can be highly energy intensive; however, the long-term sustainability of the cryptocurrency sector is evolving with the development of more energy-effective protocols such as proof-of-stake and with the increased use of renewables in the mining process.
Historically, it has been difficult to consistently estimate the full climate impact of cryptocurrency activities. This requires standards for the accurate accounting of GHG emissions for stakeholders across the cryptocurrency ecosystem, which have not been available in the industry…until now.
The release of a new Crypto Climate Impact Accounting Framework is a first, coordinated effort to provide the crypto industry with measurement guidance to account for emissions and align with the global imperative of reaching net zero emissions by 2050. The framework was developed by Crypto Carbon Ratings Institute (CCRI) and South Pole, in consultation with PayPal's Blockchain, Crypto and Digital Currencies (BCDC) team and other climate and crypto experts.
As part of the framework release, South Pole and CCRI have jointly developed a methodology for crypto value chain stakeholders to allocate GHG emissions to their cryptocurrency-related activities. The report introduces a holistic framework that allocates the GHG emissions of a cryptocurrency's network across the stakeholders along the value chain based on cryptocurrency-related holdings and transactions.
“This framework helps to overcome weaknesses of one-dimensional allocation methods and provides clarity by better reflecting the responsibility of stakeholders along the value chain," says Ulrich Gallersdörfer, CEO of Crypto Carbon Ratings Institute (CCRI).
The report provides guidance on which emissions should be included in stakeholders' footprints and how to calculate these emissions. These calculations can be used to develop a corporate GHG footprint and decarbonization strategy.
"As more businesses set climate targets and interact with cryptocurrencies, there is a growing need for an agreed upon approach to allocate cryptocurrency network emissions across those who use them," says Chris Heysel, Head of Advisory, North America for South Pole. "This framework is an exciting first step towards an industry-aligned GHG accounting standard for cryptocurrency value chains."
The framework offers a method for calculating crypto emissions that is based on the amount of holdings and transaction activities of each stakeholder – referred to as the hybrid allocation method. This method takes into account three key considerations that are unique to the crypto industry:
"PayPal is focused on advancing our mission of democratising financial services while responsibly managing and reducing our environmental impact as we build towards a new digital economy," said Edwin Aoki, CTO, BCDC at PayPal. "As a leader in the digital currency space, PayPal is proud to support this initial effort to better understand how companies involved in the cryptocurrency ecosystem can begin to account for their emissions."
Now, more than ever, it is vital for companies engaged in cryptocurrency activities to consider crypto-related GHG emissions, especially in view of the growing demand for voluntary and mandatory climate-related disclosure. The new framework provides the crypto industry with valuable direction on greening the crypto ecosystem, and identifying solutions to move towards a net zero future.
The authors of the Crypto Climate Impact Accounting Framework are Chris Heysel, Emily Wafler, Hayley Herzog, and Marco Suter from South Pole, and Ulrich Gallersdörfer, Lena Klaaßen, and Christian Stoll from the Crypto Carbon Ratings Institute's (CCRI).
