Intervention for Cryptocurrency Emissions: A China Case Study

Abstract

This paper seeks to analyse the environmental effects of China's recent regulatory steps taken against cryptocurrencies and compare them with two policy alternatives. To evaluate the environmental impact, two baseline scenarios are used-a ban scenario and a no-ban scenario-which are then employed to compare China's intervention with two alternative policies; an emissions trading system or carbon taxes. It is estimated that China's decision to ban cryptocurrencies will result in a 25.7% reduction in CO2 emissions from the global Bitcoin network between mid-2021 and 2030. In comparison, under a hypothetical emission trading system (ETS) and carbon tax intervention the most stringent scenario is estimated to reduce global Bitcoin CO2 emissions by 2.9% and 8.5% between mid-2021 and 2030, respectively. Furthermore, this paper shows that the ETS and carbon tax are both restricted in their absolute ability to reduce CO2 emissions due to the difficulties associated with the practical implementation of such policies. This provides evidence for why, in terms of an environmental perspective, a cryptocurrency ban is the most effective policy in reducing the Bitcoin blockchain network's CO2 emissions. However, the paper also shows that the transition to Proof-of-Stake (PoS) blockchains may create an environment in which there is less of an argument for active government intervention in the cryptocurrency markets due to the protocol's high energy efficiency.