Elon Musk, Carbon Credits and his "concern" for the environment
Your tech-savvy "innovative" leader does not care about the environment
In February 2021, Tesla had announced that it has bought $1.5 billion worth of bitcoins. In a filing with the Securities and Exchange Commission (SEC), the company said it bought the bitcoin for “more flexibility to further diversify and maximize returns on our cash.” Tesla had more than $19 billion in cash and cash equivalents on hand at the end of 2020 and thus, Tesla’s move into bitcoin represented a significant percentage of its cash in the investment. Tesla’s support for cryptocurrencies was followed by a huge surge in prices of different crypto assets such as Bitcoin, Dogecoin, Ethereum etc.
Then on 24th March, Tesla’s CEO Elon Musk announced that the electric carmaker company would begin to accept Bitcoin as a payment for its cars.
"Tesla is using only internal & open source software & operates Bitcoin nodes directly. Bitcoin paid to Tesla will be retained as Bitcoin, not converted to fiat currency," Musk said in a tweet after the initial announcement.
Tesla and Elon Musk’s announcements made it clear that they were completely on board and would further help for institutional adoption of cryptocurrencies, but soon enough fear, confusion and doubt would surround Tesla and its stance on Bitcoin. On May 12th, Elon Musk confirmed that Tesla will not be accepting Bitcoin as payment for its vehicle purchases. In a tweet, he cited environmental reasons and increasing usage of fossil fuels in bitcoin mining as the main reasons behind the move.
He continued “Tesla would not sell any bitcoin and intends to use bitcoin for transactions as soon as mining transitions to more sustainable energy.” As a result, Bitcoin’s prices dropped by 15% and it kept falling in the following weeks. At the time of writing this piece, Bitcoin’s price was $35900 - down from $57500 on May 11. Bitcoin and Ethereum posted their largest one-day drop since March last year with losses of $1 trillion in the market capitalization for the entire cryptocurrency markets. The markets have not recovered since and this was yet another incident where Elon Musk’s tweet has been impactful for cryptocurrency markets. Here’s what his tweets look like against the bitcoin price in the past few weeks:
This is not the first time Elon Musk has manipulated the markets with his tweets as in 2018, the Securities and Exchange Commission (SEC) fined Tesla and Elon Musk $20 million as a part of a settlement stemming from a series of tweets that the SEC believes misled investors. He had tweeted that he was considering taking Tesla private, adding, “Funding secured.” The tweet spurred a scandal-ridden fall for Tesla and sent the stock see-sawing for weeks. In reality, funding had not been secured. The SEC statement alleged that Musk issued “false and misleading” statements and failed to properly notify regulators of material company events. Eventually, he was forced to step down as Tesla’s chairman to settle fraud charges.
The Energy Consumption Debate
Elon Musk’s opinion on Bitcoin has shifted several times in past, and his tweets have always been unpredictable and thus, Elon Musk’s sudden concern for the environment should not be that surprising. Well, he is not the only one who is attacking Bitcoin on the grounds of environmental concern. You might have come across news headlines such as ‘Bitcoin consumes more energy than some countries, ‘It’s a dirty currency because it consumes lots of electricity, “Bitcoin emissions could push global warming above 2-degree celsius, and the list is endless. Recently, Sen. Elizabeth Warren called for a crackdown on "environmentally wasteful cryptocurrencies" like Bitcoin in order to help fight the climate crisis.
All or most of the statistics that we see today supporting such headlines come from a single source - Nature Climate Change’s 2018 paper. The research paper is full of faulty assumptions on Bitcoin, how the network functions, poor understanding of basic technical concepts such as hash rates, transactional constraints imposed by block size and block interval. I won’t go into the details of the paper or the energy debate (in fact I am looking forward to writing an article on this topic) but I will cover the basics.
What drives Bitcoin’s energy consumption
In simple words, Bitcoin is a decentralised digital currency that uses peer-to-peer cryptographically driven blockchain technology that would allow online payments to be sent directly from a party to another without going through a major financial institution. Unlike paper currency like Rupee, Dollar and Euro, Bitcoin is not issued or printed. Bitcoins are “mined” using the proof-of-work (PoW) consensus mechanism. Proof-of-work is a decentralised consensus mechanism in which a group of computers around the world constantly verifying the blockchain and ensuring that all transactional history is valid. PoW makes the Bitcoin network highly secured, unhackable and prevents bad actors from manipulating the network. The process of Bitcoin mining requires a lot of energy as it involves computers competing against each other to add a block on blockchain - for which they are rewarded with 6.25 BTC.
To begin with, it is not possible to exactly determine how much electricity Bitcoin uses due to the decentralized nature of the industry and the impossibility of surveying every single mining operation in the world. In order to precisely determine Bitcoin’s carbon dioxide emissions, and thus its real environmental footprint, the actual energy mix (i.e. sources of energy used to produce electricity) needs to be examined more accurately. While some mining centres disclose the energy sources used to power their machines, the exact energy mix of the majority of mining farms remains unknown.
Elon Musk says that he is suspending Bitcoin for Tesla cars due to the “rapidly increasing use of fossil fuels for Bitcoin mining” but research by The Cambridge Centre For Alternative Finance estimates that 76% of all miners use renewable energies as part of their mix and the share of renewables in miners’ total energy consumption is 39%. Coinshares’ study has shown that a growing share of total electricity consumption originates from renewable energy’s sources such as hydro, solar, and wind power.
Comparing Grids
Well, maybe if we compare the electricity mix of Bitcoin vs some countries then the comparison would be fair. The comparison would answer our questions like ‘Where do Bitcoin and other nations get their electricity from or which among these have the cleanest electricity grid?
The electricity grid of the United States is 20% renewables and 19% coal - this essentially means that electricity in the United States is generated with 20% renewable energy sources. China, Tesla’s second-biggest market, has a grid that is 29% renewable and 61% coal. Comparatively, Bitcoin’s grid consists of 39% of renewable energy - that’s still almost twice as much as the U.S. grid and a much better figure than the Chinese grid as well. If Elon Musk is so concerned about sustainable grids and the “environment” then he should stop selling his cars in the United States or China, as the electricity going into his cars is dirtier than that going into Bitcoin.
I am not making a case that Bitcoin mining is completely green “at the moment” but there are many developments and various solutions that are being proposed to make Bitcoin mining even more environmentally friendly. One such example is the formation of the Bitcoin Mining Council. As per the website, the council aims to promote transparency, share best practices, and educate the public on the benefits of Bitcoin and Bitcoin mining. Bitcoin mining companies are even seeking different ways to turn the by-products of their mining activities into more energy such as heat emitted from their hardware. Recently, Nayib Bukele, the President of El Salvador announced that the country will mine the cryptocurrency using geothermal energy from its volcanoes. How crazy is that!!
Elon’s phoney environmental concerns
In the first part of this article, we briefly discussed Tesla, Elon Musk and his concern (at least as per his claims) for the environment but if you broaden the picture, you will realise Tesla’s decision was influenced by other significant factors that the company doesn’t want us to know. I mean I refuse to believe that the CEO of a company worth half a trillion dollars did not simply know about the energy consumption of an asset before purchasing it and opening it up for transactions.
On 22nd April 2021, 20 days before Tesla’s announcement of Bitcoin, Elon Musk even agreed to Jack Dorsey where the latter claimed: “Bitcoin incentivises renewable energy.” So, what is this all about? Why Elon Musk’s tweets are contradicting his own claims? What is going on behind the scenes? Well, Elon is simply reacting to recent changes in the Renewable Energy Credit market and there have been two major changes on that front. Allow me to explain…
Carbon Credits and RECs
Renewable Energy Certificate (REC) is a market-based instrument that represents the property rights to the environmental, social and other non-power attributes of renewable electricity generation. RECs are issued by regulatory bodies when one megawatt-hour (MWh) of electricity is generated and delivered to the electricity grid from a renewable energy resource. RECs are completely tradable and thus, RECs received from the government can then be sold on the open market as an energy commodity. RECs earned are generally sold as “carbon credits” to other environmentally inefficient entities that are polluting the environment.
A carbon credit can be understood as a permit that allows the company that holds it to emit a certain amount of carbon dioxide or other greenhouse gases. One credit permits the emission of a mass equal to one ton of carbon dioxide. Polluting firms buy carbon credits from environmentally efficient companies which allow them to continue to pollute up to a certain limit. That limit is reduced periodically. Many private companies earn lots of money through their activities in the Renewable Energy Credit market.
Tesla and RECs
So far so good? Awesome. RECs are Tesla’s secret profit-making tool since Tesla dominates the renewable energy credit (REC) market for clean vehicles. Last year, Tesla accounted for around 58% of all EVs sold in the U.S. All those vehicles have zero emissions, whereas, for most of the traditional manufacturers, EVs are a very small percentage of the overall mix. This factor puts Tesla in a strategic position of selling credits to other manufacturers: General Motors, Ford, Chrysler and earns significant revenues.
It is surprising to note that Tesla makes most of its revenues from selling carbon credits, not from selling cars! The company never had a profitable year without the sales of carbon credits. In 2020, Tesla generated $1.6 billion in revenue from sales of regulatory credits, nearly tripling its 2019 figure of $594 million. That’s greater than the company’s profit of $721 million reported in 2020, which was its first profitable year. Tesla’s sheer dominance in renewable energy credits was about to diminish.
Recent announcements
A week prior to Tesla’s statement on Bitcoin, Franco-Italian carmaker and Tesla’s rival Stellantis told Le Point that the firm would achieve its European carbon dioxide (CO2) emissions targets this year without buying carbon credits from Tesla. What does this mean? It simply implies that the firm will not need to buy carbon credits from Tesla anymore.
Why is this significant? Well, Fiat Chrysler accounted for $2.4bn of Tesla carbon credit sales from 2019 to 2021 and 55% of Tesla sales since 2008. In 2020 alone, Fiat Chrysler spent $362 million on carbon credits - most of which was bought from Tesla. Fiat Chrysler is not the only automaker buying these credits from Tesla. For example, Honda committed to buy credits late last year, according to Schmidt Automotive Research. Tesla’s dominance will likely decline as more companies will follow Stellantis as they roll out their EVs.
Tesla knew what was coming on their way and therefore, Tesla is now seeking to enter the multi-billion dollar U.S. renewable fuel credit market, hoping to profit from the Biden administration's march towards new zero-emission goals - Reuters reported. As per Reuters’ sources, Tesla has a pending application at the Environmental Protection Agency tied to power generation and renewable credits. The Biden administration with the help of environmental regulatory bodies will likely review applications to lay out who could qualify for these tradable credits. It is quite obvious that environmental regulators do not typically love Bitcoin.
This is the primary reason why Elon Musk made two important but shocking calls. The first one was Tesla’s announcement that it would suspend Bitcoin as a payment method for their car sales and the second, Tesla’s revelation that they cashed out $272 millions of bitcoins on 27th April.
By now, it should be clear that this fiasco was all about Tesla’s marketing strategy to hide what was going on behind the scenes. It is quite unfortunate that this news was the primary reason why crypto markets crashed recently. To conclude, your tech-savvy “innovative” entrepreneur does not give a damn about climate change, the environment and how much you lose in crypto trading due to his market manipulation.
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