China's fast-growing cryptocurrency mining sector holds major promise for businesses across the country, but could come at the cost of nationwide carbon neutrality if more stringent controls aren't enacted, according to new research.

In an article published April 6 in Nature Communications, researchers project that without policy interventions, the annual energy consumption associated with China's Bitcoin blockchain operations will generate 130.50 million metric tons of carbon emissions in 2024. 

That output would exceed the total annualized greenhouse gas emissions of the Czech Republic and Qatar, the researchers wrote, and could undermine China's carbon-cutting goals.

"Without appropriate interventions and feasible policies, we think that the intensive Bitcoin blockchain operation can quickly grow as a threat that could hinder China's goal of achieving carbon neutrality in the future," corresponding author Shouyang Wang told The Academic Times.

Wang was one of seven authors on the paper, which used an advanced mathematical modeling technique to forecast how the industry's energy consumption and carbon emissions levels would develop under different policy regimes.

Blockchain technology has been widely touted for its applications across the worlds of business and finance. The digital ledger has been used to develop cryptocurrencies such as Bitcoin but can also be deployed to monitor industrial supply chains, facilitate international business and even verify digital contracts.

China has taken a keen interest in the technology's currency applications, making public its plans to launch a digital yuan that is expected to ultimately replace the country's paper money supply.

According to the researchers' Bitcoin blockchain carbon emission model, China's Bitcoin industry by itself could see annualized energy consumption peak in 2024 at 296.59 terawatt-hours, topping the total energy consumption levels of Italy, Saudi Arabia and all but 11 countries as measured in 2016.

Chinese mining pools have taken a world-leading role in "discovering" new virtual coins, Wang said, capitalizing on key competitive advantages.

"Due to easy access to relatively cheap electricity and close proximity to manufacturing, the majority of the mining process has been conducted in China as miners in the country account for more than 70% of the Bitcoin network's hashing power," he said.

Hashing is an important element of the blockchain on which cryptocurrencies like Bitcoin are based, generating encrypted blocks of transaction data that are effectively immune to fraud.

But the complex processes that underpin the blockchain require a lot of computing power to sustain — much of which still depends on energy sources associated with high greenhouse gas emissions, according to data from the U.S. Energy Information Administration. 

Even as China's government pushes for greater energy efficiency and anti-pollution measures across its centrally planned economy, coal, petroleum and other liquids together accounted for almost 80% of the country's total energy consumption in 2019.

To ensure blockchain operations don't come at the expense of the nation's climate goals, the researchers wrote, steps must be taken to move Bitcoin miners off the country's cheap and abundant coal base and onto "greener" energy sources such as hydroelectric power.

They determined that stricter regulations on Bitcoin mining in coal-based regions would limit carbon emissions more effectively than policy regimes targeting other facets of the industry, comparing emissions projections under different parameter settings.

As compared to the baseline scenario of minimal policy intervention, the "site regulation" model — under which only 20% of Bitcoin miners in China remain in the country's coal-based areas — cuts maximized carbon emissions per GDP of the Bitcoin industry in half.

Site regulation would require the government to encourage many Bitcoin miners to leave coal-powered regions, where an estimated 40% of them currently operate. According to Wang, however, incentivizing such a shift would likely be easier and more effective than imposing a carbon tax on the industry.

Such a tax might not be enough to substantially alter the activities of Bitcoin miners, many of whom enjoy large and growing profit margins, he said. A punitive approach could also prompt some miners to steal electricity, generating new problems for policymakers to address.

By contrast, he noted, facilitating miners' moves from coal-based to clean-energy regions is less coercive and in many cases aligns economic and environmental interests.

"By moving their operations to clean-energy regions, miners can actually enjoy the benefits of the cheaper electricity price in the regions and … lower their operational costs," he said. "Therefore, the site regulation policy actually provides incentives for the miners to move willingly. That is why it will be more effective than the current carbon tax policy in limiting the carbon emissions associated with Bitcoin mining."

Encouraging miners to move to areas supplied by green energy sources would require a mix of legislation and infrastructure investment to be successful, Wang said.

Legal prohibitions have their place, he said, noting for example that regulators in Inner Mongolia are developing a draft plan to close all Bitcoin mining projects by April.

"However, we also think that solely relying on passing [laws] to restrict mining in these areas would not be enough," Wang added. "Instead, the government should also focus on upgrading the power generation facilities in clean-energy regions to ensure consistent energy generation."

"That way the miners would definitely have more incentives to move voluntarily" to areas with cleaner energy, he continued.

However China chooses to address the environmental challenges posed by energy-intensive Bitcoin mining, Wang said, decision makers around the world should be thinking through the cryptocurrency's potential unintended consequences.

"While everyone has focused on its [Bitcoin's] great profitability," he said, "We want people to become more aware of its potential issues and start thinking about these questions: Is this industry actually worth the associated environmental impact, and how can we make this profitable Bitcoin mining operation more sustainable in the future?"

The article "Policy assessments for the carbon emission flows and sustainability of Bitcoin blockchain operation in China," published April 6 in Nature Communications, was authored by Shangrong Jiang, University of Chinese Academy of Sciences; Yuze Li and Shouyang Wang, University of Chinese Academy of Sciences, Chinese Academy of Sciences; Quanying Lu, Chinese Academy of Sciences; Yongmiao Hong, Chinese Academy of Sciences, Cornell University; Dabo Guan, Tsinghua University; and Yu Xiong, University of Surrey.