Billion-dollar companies across the globe are betting big on Bitcoin (BTC). Recent analysis from European investment manager Nickel Digital Asset Management found that 20 publically listed companies with a market capitalization of over $1 trillion have about $9.6 billion invested in BTC. Individual investors are also taking an increasing interest in the asset.

The “Third Annual Bitcoin Investor Study” from Grayscale Research found that demand for Bitcoin has risen tremendously. According to the study, 55% of current Bitcoin investors began buying the asset over just the last 12 months. Grayscale’s report also notes that the market for those interested in Bitcoin investment products expanded to 59% in 2021, up from 55% in 2020 and slightly more than one-third in 2019, reflecting steady growth.

Yet while the world’s enthusiasm for Bitcoin may be increasing, concerns regarding its environmental impact have become more apparent than ever. For example, Grayscale Research also found in its investor study that over 30% of investors are concerned about Bitcoin’s potentially negative impact on the environment. Interestingly, this consideration only became apparent in 2021, as shown in the report.

Models to calculate Bitcoin carbon emissions

Given the rising distress over Bitcoin’s carbon footprint, new models are emerging that aim to help investors and businesses alike understand how to ensure their BTC holdings are sustainable. For example, the Frankfurt School Blockchain Center and digital asset manager INTAS.tech published a study on Nov. 16 outlining a new approach to offsetting the CO2 emissions caused by the Bitcoin network. The formula developed factors in two approaches: a transaction-based approach and an ownership-based approach.

Philipp Sandner, a professor at the Frankfurt School Blockchain Center, told Cointelegraph that asset managers and investors across Germany, in particular, are concerned about Bitcoin’s CO2 footprint being compliant with environmental, social and governance (ESG) standards. As such, Sandner explained that he wanted to create a formula that would enable asset managers, mining companies, exchanges and individuals to calculate the CO2 footprint of their BTC:

“Normally, we assign the largest burden of CO2 compensation to Bitcoin mining companies, but you still have ETF issuers, companies and exchanges that want to prove to customers that they are doing something about their CO2 footprint to compensate for their Bitcoin.”

According to Sandner, the goal at the beginning of the study was to first compute the global energy consumption of Bitcoin between Sept. 1, 2020 and Aug. 31, 2021. The results show that 0.08% of worldwide CO2 equivalent came from Bitcoin. Based on this number, Sandner remarked that the maintenance of the worldwide Bitcoin network required 37.97 million metric tons of CO2 equivalent.

In order to calculate the carbon footprint of Bitcoin from an investor perspective, the study notes that companies can either focus on the proportional network usage in bytes in relation to the Bitcoin blockchain growth during a specific time frame or on the amount of Bitcoin held for a specific period. According to the document, an average Bitcoin transaction contains 670 bytes on the Bitcoin blockchain, representing an estimated carbon footprint of 369.49 kilograms of CO2 equivalent. Sandner explained:

“These carbon emissions can be compensated with a certificate from the EU Emissions Trading System. One certificate for one tonne of CO2 is around $50, which would equal roughly $18 to compensate for a single BTC transaction. Now, if an investor or company was holding one BTC over a year period, this would cost roughly two tonnes of carbon emissions. If compensated with the EU Emissions Trading System, this would then be around $100.”

Benjamin Schaub, senior consultant at INTAS.tech, told Cointelegraph that companies could apply the formula mentioned for transactions and Bitcoin ownership to compute their carbon footprint that should then be offset. “What makes this model great is that all the data needed is publicly available. There are no assumptions here, it’s just about how companies engage with the Bitcoin network.”

Schaub added that Iconic Holding GmbH, which offers exchange-traded products in Germany, is currently applying this method to ensure sustainability: “We are also in discussion with a few very big exchanges. I strongly believe that over the next year major players in the space will care more about this topic.”

While it’s difficult to predict the future, it’s notable that some major exchanges and exchange-traded funds (ETFs) have started to apply similar approaches to offset Bitcoin’s carbon footprint. For example, Schaub noted that the crypto exchange BitMEX is attempting to make its BTC holdings carbon-neutral. According to a recent BitMEX Research blog post, the company believes that the most effective way for users and exchanges to evaluate Bitcoin’s carbon footprint is through on-chain transaction fees. A BitMEX spokesperson told Cointelegraph that the company concluded that each $1 spent on Bitcoin transaction fees can incentivize up to 0.001 metric tons of carbon emissions, based on the company’s formula.

There are only a few approaches currently available to help companies offset their Bitcoin carbon emissions, with Sandner commenting that transaction fees become more important as the Bitcoin network ages. As such, he believes that companies must consider a transaction-based approach when it comes to ensuring carbon neutrality.

Schaub further pointed out that the source of electricity being used should be taken into account, noting that the model developed by INTAS.tech and the Frankfurt School Blockchain Center looked at the energy mix as applied in the United States and Germany: “This ensures that we can observe more miners becoming aware of this topic and are looking for electricity from renewable sources.”

In addition to exchanges like BitMEX developing models to calculate Bitcoin carbon emissions, some ETFs are doing the same. For instance, Canadian Bitcoin ETF issuer Ninepoint Partners launched a carbon-neutral Bitcoin ETF in May 2021. Alex Tapscott, managing director of digital assets at Ninepoint, told Cointelegraph that while this was the right thing to do, it also benefits the business as a whole:

“Many investors with ESG requirements were concerned about Bitcoin’s footprint and have stayed on the sideline. We wanted to make it easier for them to be stakeholders and participate in Bitcoin’s upside.”

Tapscott added that oftentimes, the investors in Bitcoin funds, along with the miners themselves, are the ones demanding that the industry be more sustainable. Given this, Tapscott believes that in 10 years, Bitcoin will be close to 100% renewable: “It may even help subsidize the development of renewable projects because it’s a rough and ready buyer you can place at source. In the meantime, carbon offsetting is a good way to bridge the gap.”

How accurate are these models?

Although it’s becoming more important for various companies to offset their Bitcoin carbon emissions, it’s vital to recognize the challenges associated with the models discussed.

For instance, Sandner remarked that all of the numbers compiled within the model he helped create are changing over time. “The hashrate is changing for example, as we recently saw with the Chinese mining ban. The hashrate dropped by 50%.” As a result, Sandner is aware that the fluctuations of metrics must be taken into consideration. He added that each country has a different mix of CO2 intense energy, noting that Norway tends to be greener than other regions. Lastly, Sandner pointed out that the carbon prices need to be carefully observed, adding that prices have been increasing during December.

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Moreover, a BitMEX spokesperson mentioned that the company’s formula is not a perfect methodology, noting that the exchange expects and welcomes critique. However, the company believes that the formula does improve on other estimates out there. According to the post, the equation used is fairly simple, as only average Bitcoin prices are leveraged rather than estimates of Bitcoin mining electricity costs. 

Sandner ultimately believes that the largest share of work to be done is still ahead, noting that most of these approaches are still emerging:

“The Bitcoin mining council in the U.S. for instance is trying to find new models. Once these methods have been developed then companies will need to adopt them, but it’s still too early. Awareness is starting to emerge, but this is just the beginning.”