Key Takeaways
- Crypto mining and data centers account for 2% of global electricity use and nearly 1% of global emissions, with projections indicating further growth.
- Implementing targeted taxes on electricity use could incentivize emissions reductions and generate significant government revenue.
- Urgent policy action, including carbon pricing and cross-border coordination, is needed to mitigate the environmental impact of these power-hungry industries.
The Rising Energy Demand of AI and Crypto
Crypto mining and data centers now account for 2% of global electricity use and nearly 1% of global emissions, with their footprint expected to grow. “What do AI and Crypto Assets have in common? Both are power hungry.”
Because of the electricity used by high-powered equipment to “mine” crypto assets, one Bitcoin transaction requires roughly the same amount of electricity as the average person in Ghana or Pakistan consumes in three years. Similarly, ChatGPT queries require 10 times more electricity than a Google search, due to the electricity consumed by AI data centers.
As the Chart of the Week shows, crypto mining and data centers together accounted for 2% of world electricity demand in 2022. That share is likely to climb to 3.5% in three years, according to estimates based on projections from the International Energy Agency—equivalent to Japan’s current consumption, the world’s fifth-largest electricity user.
The Escalating Carbon Footprint
The climate impact of these activities—irrespective of their social and economic benefits—is cause for concern. A recent IMF working paper found that crypto mining could generate 0.7% of global carbon dioxide emissions by 2027. Extending the analysis to data centers, their carbon emissions could reach 450 million tons by 2027, or 1.2% of the world total.
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Tax Policy as a Solution
The tax system is one way to steer companies toward curbing emissions. According to IMF estimates:
- A direct tax of $0.047 per kilowatt hour would drive the crypto mining industry to curb its emissions in line with global goals. Including air pollution’s impact on local health, that tax rate would rise to $0.089, translating into an 85% increase in average electricity price for miners. This levy would raise annual government revenue of $5.2 billion globally and reduce annual emissions by 100 million tons—around Belgium’s current emissions.
- For data centers, a targeted tax on their electricity use would need to be set at $0.032 per kilowatt hour, or $0.052 including air pollution costs. This could raise as much as $18 billion annually.
Current Incentives vs. Environmental Costs
The situation today is the opposite: many data centers and crypto miners enjoy generous tax exemptions and incentives on income, consumption, and property. Considering the environmental damage, the lack of significant employment, and pressures on the electrical grid—possibly raising prices for households and reducing demand for other low-emission goods like electric vehicles—“the net benefits of these special tax regimes are unclear at best.”
The Need for Broad Policy Measures
For policymakers, a broad carbon price coordinated across countries would be the best way to curb emissions, because it would encourage reduced fossil-fuel consumption, cleaner power sources, and improved energy efficiency. To limit global warming to 2 degrees, countries would need to introduce additional measures equivalent to a carbon price rising to $85 per ton by 2030.
Incentivizing Positive Change
In the absence of a global carbon price, targeted measures could encourage crypto miners and data centers to use more energy-efficient equipment and may even motivate the adoption of less energy-intensive crypto mining. Complementing electricity taxes with credits for zero-emission bilateral power purchase agreements and potentially renewable energy certificates would also help.
Cross-Border Coordination is Crucial
Cross-border coordination remains important, as stricter measures in one location could encourage relocation to jurisdictions with lower standards. As the window of opportunity for containing rising temperatures rapidly closes, expanding renewable energy sources and adopting an appropriate carbon price are urgently needed.
As the environmental impact of AI and crypto continues to surge, policy changes—including targeted taxation and international cooperation—may indeed turn the tide.
Related Article: Gen AI: A Catalyst for Achieving the Global Sustainable Development Goals
