How Ethereum is fighting climate change 🌳
What are current emissions, why will they drop by 99.9% in 6 months and how is Ethereum supporting the storage of millions of tonnes of CO2?
Making Ethereum carbon negative 🌳
The settlement and security layer of web3, is today responsible for a significant portion of crypto’s energy usage, but not for long. Since inception, Ethereum has had a Proof of Stake (PoS) centric roadmap, where energy use to run the chain is decreased by ~1900x, or 99,9%, reducing emissions by a similar amount. In this post, I will quantify current and future emissions, as well as how Ethereum is providing financial infrastructure to capture over 1000x more carbon than it emits, making it the first large scale negative emission economy.
The move from PoW to PoS
We have since 2009 known about the perils of large scale Proof of Work (PoW) implementations.
For this reason, a shift to PoS has been on the Ethereum roadmap since inception. The PoS algorithm, means instead of energy intensive mining operations, a stake of Eth is used to validate the transaction on the chain, this consumes almost no energy at all. Ethereum launched its PoS chain, called the Beacon Chain in December 2020, and it now has over 240,000 validators. Currently, all core client development teams are focused on The Merge, which combines the current Ethereum PoW chain with the Ethereum PoS chain. This is anticipated to be completed Q1/Q2 2022 and will result in energy use and carbon emissions dropping by 99.9%. Lets dig into the numbers.
Understanding current energy use
Estimating both energy use and emissions is complicated. We don’t know exactly how efficient miners are, and what their source of energy is. For example, much of mining energy comes from stranded or otherwise wasted energy sources, as argued by Nic Carter. Furthermore, there are strong arguments for why PoW mining contributes to development and deployment of renewable energy as argued by Ark Invest. With that said I have attempted at making a fair estimate of energy use based on available data with all assumptions stated below.
Assumptions
Estimate of PoW energy calculation taken from Digieconomist which reasonably overestimates emissions slightly. A more nuanced estimate is available from The Cambridge Bitcoin Electricity Consumption Index whose estimate is ~35% lower than Digieconomist, and expresses the broad range of possible emissions (38-256TWh for the Bitcoin network). The former estimate was chosen because it includes both Ethereum and Bitcoin.
Estimates of energy use per validator were taken from the research of the Ethereum Foundation. Their estimate of energy use per validator: 18.18w
Validator counts were taken from: https://beaconcha.in/
Emissions per KWh of energy was placed at 230g CO2, based on average grid composition excluding China. This is likely an overestimation as a significant amount of validator and mining activity is based on renewable sources or cleaner grids.
Price per tonne of voluntary carbon offset was based on Ecosystem Marketplace’s estimate for credits from forestry and land-use projects: 4.73$/tonne of CO2.
Energy use
Today, it is estimated the Ethereum PoW network consumes about 6TWh per month, or about the energy use of Bangladesh. As can be seen above, though Ethereum PoW uses less energy than Bitcoin PoW, it still uses orders of magnitude more energy than Ethereum PoS. Ethereum PoS currently uses about 310,000 KWh per month, or about as much as 3,381 US households. Compared to the value it generates (1.5T$ settled/quarter, growing 380% year over year), it is almost nothing. In fact, the traditional finance and banking sector uses 263TWh of energy per year, or 7,089 times more than PoS.
Carbon emissions
Ethereum, and blockchains in general, produce emissions from one main area: energy use. The amount of emissions per TWh of energy is directly tied to the composition of the electrical grid. A mining operation that uses renewable energy, is not necessarily polluting anything. In a way, it is a double standard to blame Ethereum and Bitcoin for its emissions related to energy use, when they don’t control grid composition. When we charge an electric car with coal powered energy, we don’t blame Tesla for the emissions from the energy use of its cars. If we did, what country could we compare Tesla's energy use with?
With this said, we can generally quantify emissions from energy use based on the country the mining activity occurred in, though this is an overestimation because mining uses proportionally more renewables than the average grid user. Based on the above assumptions, the estimate for emissions from Ethereum PoW per year is 16 million tonnes of CO2 or about as much as 800,000 US households. For PoS this figure is only 8,553 tonnes of CO2 or as much as 427 US households. Imagine a global financial and digital property rights system that only consumes 427 households’ worth of energy, that is what we have built.
When Ethereum moves to PoS, the question of emissions becomes mute. In fact, the argument reverses, Ethereum will become perhaps the most sustainable alternative to conduct any form of financial activity on.
Carbon Credits
Ethereans are going far beyond just reducing emissions from energy use, and are building out the financial infrastructure for carbon credit markets. Carbon emissions are today an unpriced negative externality. If the emitters of carbon paid a fair price for the damage from those emissions, then pollutive technologies would become much less favorable over alternatives. Creating these financial incentives, is the role of carbon taxes and voluntary credits.
There are two types of key categories of carbon credits, voluntary and mandatory. Mandatory credits are more or less a carbon tax imposed by the government. Voluntary credits are a self-imposed carbon tax that comes from companies committing to offset their emissions. By paying to become carbon neutral, you create a financial incentive for companies to use technologies that cut emissions. The market for carbon credits was valued at 272b$ in 2020, though at the moment Ethereum intersects mainly with voluntary credits.
In the voluntary carbon market, carbon standards such as Verra's Verified Carbon Standard and Gold Standard set the rules and requirements carbon projects need to follow in order to demonstrate they meet minimum quality criteria. The projects in question measure their baseline emissions, and can reduce their emissions by sequestering carbon for example by planting trees or adopting sustainable farming practices. When the quantity of emission reductions are verified, the project owners receive credits that they can then monetize.
Ethereum 🤝 carbon credits
Ethereum aids the carbon credit market in three main ways: Firstly, as a settlement/registry for tokenized carbon credits. Secondly, by financializing tokenized carbon credits through DeFi. Thirdly, by using Ethereum's financial resources to finance carbon capture projects and technologies.
Tokenization and settlement of carbon credits
The first step in supporting the carbon market is providing a settlement layer to track certificates. Ethereum proves excellent tooling for this, as all activities are open and verifiable. Two leading companies in this area are Nori and Toucan.
Nori provides a methodology for farmers to adopt farming practices that sequester carbon. Through Nori farmers can monetize this sequestration by minting carbon credits that are tokenized on Ethereum as NFTs, to be sold in their marketplace. This service is now live, and has already sequestered 50,000 tonnes of CO2, or about the equivalent of over 5 years of PoS emissions. Carbon sequestration in farmlands has the potential to store gigatons of carbon.
Toucan provides both a bridging service where carbon credits can be tokenized (currently on the EVM sidechain Polygon). This way, carbon markets can interact with DeFi. Toucan goes beyond this, to put tokens into standardized categories, which improves their liquidity. This piece of carbon market infrastructure is critical to enable a growing carbon finance economy on Ethereum.
Integration with DeFi
Once verifiable carbon credits are on-chain as ERC20 or 721 tokens, they can start leveraging the DeFi infrastructure composable with those standards such as Uniswap or Opensea.
One protocol that is exploding in popularity and is taking a novel approach to integrating carbon markets with DeFi is Klima. Using carbon bridged by Toucan, Klima offers a bonding mechanism (a fork of $OHM), where Klima can be bought at a discount by bonding carbon units for a set amount of time. This encourages demand for buying and storing more carbon, as well as yield opportunities by staking Klima. Klima’s social traction is proving there is a clear product market fit for carbon negative finance. Through DeFi tooling, such as Klima we are in effect creating systems to make it easier and more profitable to deploy capital towards carbon capture. Klima is launching soon, and is expecting the initial batch to contain 1,600,000 tonnes of CO2, or about as much as running Ethereum PoS until year 2104.
A more detailed thread on Klima:
Funding climate solving technology
A third way Ethereum contributes towards negative emissions is efforts to finance technologies that reverse climate change. The Ethereum economy has generated a significant amount of wealth to its users and protocols. Many of the participants in this economy seek to create an impact with their wealth in systemic ways. Ethereum has already created systems for reinvesting in public goods, such as Gitcoin, and there is experimentation ongoing to use funds and DeFi to fund ESG. One such proposal that received a lot of attention was through Maker, to use Makers lending infrastructure to fund ESG projects, but there are multiple other groups working to leverage crypto funds and technologies to combat climate change including Climate Chain, Blockchain for Social Impact and Crypto Climate Accord.
Ethereum, the first carbon negative economic system
The narrative that Ethereum/DeFi/NFTs are causing climate change, stems from the complexity to understand how it actually works. This narrative is not only inaccurate today, but completely ignores the tremendous impact Ethereum is having on solving climate change. I think we should communicate what Ethereum really is bound to become, the first carbon negative economic system. Not only does Ethereum contribute several thousand times less to emissions than the systems it replaces, but it meaningfully supports the reversal of climate change through financialization of carbon markets. It expends its resources, infrastructure and talent to drive a positive impact on society, and should be recognized as the important solution to reversing climate change that it really is.