Bitcoin mining is tax electrical

Carbon emissions are overheating the planet, and Americans are feeling it this summer, with unprecedented wildfires, heat waves, floods, and droughts. The most significant source of planet-heating carbon emissions is burning fossil fuels for energy.

Policymakers looking to curb emissions are turning their attention to cryptocurrency mining (validating cryptocurrency transactions on a blockchain network that stores a mind-boggling amount of data), which requires tremendous energy. Bitcoin, for example, requires between 67 and 121 terawatt-hours a year. For comparison, the entire country of Germany needs just over 500 terawatt-hours a year. Much of the energy used by crypto miners is carbon-based, about 60 percent globally and 34 percent in North America. Bitcoin generates an estimated 22 million metric tons of carbon emissions every year, equal to the country of Jordan’s total emissions.

Consider the scope of crypto mining in the US, where 35 percent of Bitcoin is mined, more than any other nation. New York, Kentucky, Georgia, and Texas are home to an estimated 70 percent of the nation’s crypto mining operations. Last month, a congressional investigation found that seven of the largest Bitcoin mining companies in the US use nearly as much electricity as all of the homes in Houston, Texas.

Meanwhile, researchers at the University of California at Berkeley found that US crypto mining could cost residents and businesses $1 billion in energy bills annually because of electricity rates that rise with demand.

Bans, Excise Taxes, or Incentives?

Should crypto miners in the US face heavier regulation of their energy use, pay a tax on their electricity use, or receive tax incentives for using renewable energy?

Worldwide, 15 countries have restricted or banned crypto mining. China used to host the most mining activity in the world, but it banned the use of cryptocurrencies in financial transactions in 2021, partly because of Bitcoin’s carbon footprint. However, the ban didn’t do much to lead to a reduction in crypto mining. It instead drove mining operations to other countries, including those that use even less renewable energy.

China’s ban led to a crypto mining boom in Kazakhstan, where renewable energy accounts for less than 1 percent of its power installations. Crypto miners subsequently overburdened Kazakhstan’s electrical grid. In response, starting in 2023, Kazakhstan will increase taxes on crypto miners based on their electricity use. If a crypto miner uses electricity generated from nonrenewable sources, their tax per kilowatt hour will be ten times higher than the tax paid by miners who use renewable sources.

Neighboring Uzbekistan is taking a similar approach. Crypto mining that uses fossil fuels during the busiest hours of the day will face excise taxes on their electricity usage. The country is also offering tax breaks to crypto miners who purchase solar panels for their electricity needs and will charge them lower electricity prices than miners who use nonrenewable energy.

Back in the US, states are now grappling with similar issues. New York lawmakers have chosen to use regulation, with the state assembly passing a two-year moratorium on some crypto-mining. If Gov. Kathy Hochul signs the legislation, the state will ban new carbon-based mining operations. Mining that uses renewable energy would be unaffected. The bill has been on the governor’s desk for weeks, and it’s unclear whether she’ll sign it, given the political pressures of an election year.

But as seen in China, if the New York bill passes, miners may simply go to other states like Kentucky or Texas. Those states are instead offering tax incentives for crypto mining, hoping to generate economic growth that offsets higher electricity bills if not effects on the climate. Kentucky offers tax incentives to crypto miners who establish operations in the state, and It’s unlikely that much of their energy use is renewable since most of the bitcoin mining operations in Kentucky use the state’s carbon-intensive electrical grid.

Texas offers comparable incentives to crypto miners that can at least access a mix of renewable, less-carbon intensive, and carbon-based energy. But its cheapest energy remains carbon-based.

There’s another option.

Given the competition to attract crypto miners in these states and others, it’s hard to imagine many states would be like Kazakhstan and tax the industry. Not to mention the contradictory signals the industry is getting from national lawmakers, who are considering tax subsidies for certain cryptocurrency activities.

US policymakers will need to address crypto mining and its energy needs soon. University of New Mexico economics professor Ben Jones and his colleagues found that $1 of bitcoin value created in 2018 led to 49 cents in climate and health damages in the US.

That’s stark. But it’s not the crypto mining that’s hurting us. It’s the carbon emissions. If only there were a tax policy that could help limit the damage of climate change, lower the budget deficit, and even fund rebates to Americans. Any ideas?

The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.

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