ACCOUNTING FOR

Cryptocurrency
Climate Impacts
APRIL 2022

About this report

Section 1:

Introduction

Section 3:

Section 2:

Understanding cryptocurrency-related GHG emissions

Section 4:

Additional considerations

Allocating cryptocurrency GHG emissions

Appendix

Executive summary
As cryptocurrencies continue their journey
into mainstream adoption, interest inunderstanding and addressing the associatedenvironmental impacts has grown.
In recent years, researchers have developed
methodologies to estimate the total electricity
consumption and related greenhouse gas (GHG)
emissions caused by the underlying blockchain
infrastructure. At the same time, stakeholders
along the value chain are considering theirindividual GHG exposure, particularly in light ofcurrent and emerging voluntary and mandatory
climate-related disclosure requirements.
Some cryptocurrency networks use
significant amounts of electricity to maintainthe blockchain, which in turn generates
substantial GHG emissions. Responsibility
for these emissions needs to be allocated inways that are consistent with existing GHG
accounting standards and practices.
The GHG accounting framework presented in thisreport aims to inform best practices for allocating
GHG emissions across the cryptocurrency value
chain. The framework builds on established
GHG accounting practices and standards, andprovides guidance for stakeholders to calculate
their value chain emissions related to theircryptocurrency holdings and transactions.

Accurately allocating
and accounting for
cryptocurrency-related
greenhouse gas emissions
is the necessary first stepto understand risks, define
mitigation measures,and design emissions
reduction strategies.

Cryptocurrency can be held to store value
or used to transact value. Understanding
the use cases of cryptocurrencies and theeconomic incentives that users provide toblock creators (miners or validators) canguide the allocation of indirect emissions
responsibility to other value chain stakeholders.
This report evaluates existing emissions
allocation methods, including the holdingbased and transaction-based methods,
and proposes a new hybrid approach.

The logic behind the holding-based, transactionbased and hybrid allocation methods andtheir application to different cryptocurrencies
is assessed using three key considerations:1.

The dynamic and decentralized natureof cryptocurrency value chains

2. Financial incentives of miners and

The proposed hybrid allocation method can beused to guide best practices in accounting for
GHG emissions across the cryptocurrency value
chain. As cryptocurrency technology evolves andstakeholders implement cryptocurrency-related
emissions accounting, there are opportunities
to build upon this work and further develop
accounting guidance for stakeholders.

validators, which can drive electricity
consumption and GHG emissions

3. Differences in incentive structure andelectricity intensity between cryptocurrencies

FIGURE 1: Hybrid GHG emissions allocation equation

Crypto value chain
stakeholder'semissionsX+ Y =1

Y

=1− X

=

Total network
emissions

X

Value of holdings
Network value

X

+

Y

Transaction fees paid
Total network transaction fees

Y

BLOCK REWARD
INCENTIVIZATION FACTOR

TRANSACTION FEE
INCENTIVIZATION FACTOR

The proportion that a block
reward contributes to validator
payout. Varies across consensus
mechanisms and crypto types.

The proportion that transaction fees
contribute to validator payout. Varies acrossconsensus mechanisms and crypto types.

E.g., if a block reward contributes to
85% of validator payout, X = 0.85

E.g., if a transaction fee contributes
to 15% of validator payout, Y = 0.15

1About this report

Section 1:

Introduction

Section 2:

Understanding cryptocurrency-related GHG emissions

Section 3:

Allocating cryptocurrency GHG emissions

Section 4:

Additional considerations

Appendix

Read this report to understand‫ں‬How cryptocurrencies generate GHG emissions‫ں‬How the consensus mechanism underlying a cryptocurrency
network influences GHG emissions‫ں‬How stakeholders along the value chain can account for
their cryptocurrency-related GHG emissions

How to use this report

About this report

This report offers a practical and open-source
framework to guide the responsible allocationof GHG emissions across the cryptocurrency
value chain. The proposed framework intends toguide stakeholders in the cryptocurrency space
who are interested in accounting for their GHG
emissions. It may also serve as a reference point
for impact investors and environmental advocateswhen designing parameters related to this issue.

This report was jointly developed by Crypto
Carbon Ratings Institute (CCRI) and South
Pole, in consultation with PayPal. The processincluded researching industry methodologies,
identifying gaps in existing guidance, andengaging cryptocurrency and GHG accounting
stakeholders for feedback through roundtablediscussions. Findings informed potential
allocation solutions, which were reviewed
and evaluated by the stakeholders, andsynthesized into the proposed framework.

This report is also intended to be a knowledge
resource for researchers, policymakers, and others
who are active in the cryptocurrency space. It canbe used to inform decision-making, but avoids
excessive detail in order to remain accessible.
The proposed framework lays an initialfoundation. As technical data becomes
more available, new use cases arise, and
GHG emissions accounting guidance forcryptocurrency evolves, more formalized
and specific guidance could be outlined.

This framework intends to align with theGreenhouse Gas Protocol (GHG Protocol)––themost widely used standard for corporate GHG
accounting––and is designed with the existing
GHG Protocol guidance in mind.1 This report
does not intend to provide any guidance that
contradicts established value chain emissions
accounting standards. Rather, it offers further
guidance to cryptocurrency value chain
stakeholders on how to appropriately account for
GHG emissions in line with the GHG Protocol.

1 The Greenhouse Gas Protocol. (2004). Retrieved from https://ghgprotocol.org/sites/default/files/standards/ghg-protocol-revised.pdf

2About this report

Section 1:

Introduction

Section 3:

Section 2:

Understanding cryptocurrency-related GHG emissions

Allocating cryptocurrency GHG emissions

Contents
EXECUTIVE SUMMARY1

HOW TO USE THIS REPORT2ABOUT THIS REPORT2

SECTION 1: INTRODUCTION

4

1.1 Climate impacts of cryptocurrency

4

1.2 Accounting for cryptocurrency-related GHG emissions

4

SECTION 2: UNDERSTANDING CRYPTOCURRENCYRELATED GHG EMISSIONS

5

2.1 The size of the challenge

5

2.2 Sources of GHG emissions along the cryptocurrency value chain

6

2.3 Proof of Work protocols use a lot of electricity

7

2.4 Proof of Stake uses considerably less electricity

8

2.5 Holding and transacting – the two main use cases of cryptocurrencies

9

2.6 Financial incentives impact GHG emissions

9

2.7 Emissions types from an accounting perspective

10

SECTION 3: ALLOCATING CRYPTOCURRENCY GHG EMISSIONS

11

3.1 Identifying the right allocation method

11

3.2 The proposed hybrid allocation method

12

3.3 Applying the hybrid method across stakeholders

13

SECTION 4: ADDITIONAL CONSIDERATIONS

14

4.1 Cryptocurrency network emissions as part of an organization’s GHG footprint

14

4.2 Opportunities to build on this framework

15

APPENDIX16

GLOSSARY

20

REFERENCES

21

Section 4:

Additional considerations

Appendix3About this report1

1.1

Section 1:

Introduction

Section 2:

Understanding cryptocurrency-related GHG emissions

Section 3:

Allocating cryptocurrency GHG emissions

Section 4:

Additional considerations

Appendix

SECTION 1:

Introduction
Climate impacts of cryptocurrency
The climate impacts of cryptocurrencies haveattracted a vibrant debate and research inrecent years. To date, research has mainly
focused on calculating the overall electricity
consumption and greenhouse gas (GHG)
emissions at a cryptocurrency network level,
particularly for the Bitcoin network.2
Cryptocurrency is one of the most widely adopted
applications of blockchain technology. Dependingon the type of blockchain protocol, the process tovalidate transactions and ownership of different
cryptocurrencies may consume large amountsof electricity. Depending upon the method ofelectricity generation, this can result in significant
GHG emissions and contribute to climate change.
As cryptocurrencies continue their journey
into mainstream finance, stakeholders along
the value chain are increasingly expected
to assess the climate exposure associated

1.2
with their activities. Although these GHG
emissions are outside the direct control ofmost stakeholders in the cryptocurrency
value chain, there is high interest in gauging
GHG emissions exposure, particularly in lightof current and future mandatory disclosures
regarding corporate climate-related risks.3

Without evidence-based
guidance, stakeholders
are left without an agreed
approach for allocating
responsibility for theirshare of cryptocurrency
network GHG emissions.

Accounting for cryptocurrency-related GHG emissions

This report aims to bridge the current
gap in GHG accounting guidance for thecryptocurrency industry, and assist companies
active in the cryptocurrency value chain toassess their climate exposure. This report starts
by exploring where these GHG emissions
come from, which parties are responsible,and how emissions can be allocated.
The remainder of this report is broken
down into three main sections:1.

Exploring the source of cryptocurrencyrelated GHG emissions and how
stakeholders across the value chain
influence these emissions.

2. Different methods for allocating

cryptocurrency-related GHG emissions toboth holdings and transactions, and a hybrid
allocation method that applies to a wide
range of cryptocurrencies and stakeholders.

3. Considerations for reporting allocated
GHG emissions, and opportunities
for further exploration.

2 Cambridge Bitcoin Electricity Consumption Index (CBECI). (2022). Retrieved from https://ccaf.io/cbeci/index
3 E.g. EU Taxonomy, Sustainable Finance Disclosure Regulations of the EU; Fossil Free Finance Act in the US; President Biden’s Executive Order on Climate-Related Financial Risk

4

About this report

Section 1:

Introduction

Section 3:

Section 2:

Understanding cryptocurrency-related GHG emissions

Allocating cryptocurrency GHG emissions

Section 4:

Additional considerations

Appendix

SECTION 2:2

2.1

Understanding cryptocurrencyrelated GHG emissions
The size of the challenge
The first and largest cryptocurrency by market
capitalization is Bitcoin, which is estimated tohave consumed approximately 100 terawatt hoursof electricity in 2021.4 This is more than double
the collective electricity consumption of Amazon,
Google, Microsoft, Facebook, and Apple.5 And thisis just Bitcoin. Combined, other cryptocurrencies
are estimated to consume an additional 50%.6

If Bitcoin was a country, it
would use more electricity
each year than Chile.9
FIGURE 2: Bitcoin’s annual electricity consumption10

Most Recent National Electricity
Consumption Data (2019–2020)

The industry is shifting from using Proofof Work (an electricity-intensive consensus
mechanism) to Proof of Stake (a less electricityintensive mechanism).7 With this shift, overall
electricity intensity and associated GHG
emissions are expected to decrease. These
kinds of changes highlight the importanceof finding ways to continually measurecryptocurrency-related climate impacts.
The sources of electricity generation used in
cryptocurrency networks are difficult to discern,
constantly evolving, and are continually being
studied. It is clear that a significant part of theelectricity historically used for cryptocurrency
networks has been generated from fossil fuelsources, generating substantial GHG emissions.8
A standardized and fair approach to allocatingthese GHG emissions is required to accountfor climate impacts and lay the foundation
for responsibility and future mitigation.

UK

Australia

Sweden

UAE

Argentina

Netherlands

317 TWh251 TWh131 TWh131 TWh129 TWh

117 TWh

Bitcoin
100 TWh

Chile
81 TWh4 Cambridge Bitcoin Electricity Consumption Index (CBECI). (2022). Retrieved from https://ccaf.io/cbeci/index
5 Financial Times. (2021). How tech went big on Green Energy. Retrieved from https://www.ft.com/content/0c69d4a42626-418d-813c-7337b8d5110d
6 Gallersdörfer, U., Klaaßen, L., & Stoll, C. (2020). Energy Consumption of Cryptocurrencies Beyond Bitcoin. Joule, 4(9), 1843–1846.
7 CCRI. (2022). Energy efficiency and carbon emissions of PoS Networks. Retrieved from https://carbon-ratings.com/pos-report-2022
8 de Vries, A., Gallersdörfer, U., Klaaßen, L., & Stoll, C. (2022). Revisiting Bitcoin’s carbon footprint. Joule. https://doi.org/10.1016/j.joule.2022.02.005
9 U.S. Energy Information Administration (EIA). (2020). Electricity Net Consumption. Retrieved from https://www.eia.gov/international/data/world/electricity/electricity-consumption
10 IEA. (2021). Key World Energy Statistics 2021. Retreived from https://iea.blob.core.windows.net/assets/52f66a88-0b63-4ad2-94a5-29d36e864b82/KeyWorldEnergyStatistics2021.pdf

5About this report

2.2

Section 1:

Introduction

Section 3:

Section 2:

Understanding cryptocurrency-related GHG emissions

Allocating cryptocurrency GHG emissions

Section 4:

Additional considerations

Appendix

Sources of GHG emissions along the cryptocurrency value chain
It is important to understand how
cryptocurrencies cause GHG emissions, so thatthose emissions can be allocated, managed, andultimately reduced. Emissions occur across thewhole value chain, from hardware manufacturing
to holding or transacting by cryptocurrency users.
The generation of electricity needed to power
cryptocurrency stakeholder activity is the primarysource of GHG emissions for today’s most popular
cryptocurrency networks. Often, the vast majorityof the electricity is used during the networks’
block creation process which is called ‘mining’ or‘validation’.11,12,13 During these processes, new block
entries are suggested, which are confirmed by
the network as valid, adding new blocks to theblockchain.14 The ’mining’ or ’validation’ process
could be energy-intensive depending on the typeof consensus mechanism. However, the process
is needed to prevent double-spending and is a
key security feature of blockchain technology.

To understand ‘mining’ or ‘validation’ andthe associated drivers of electricity use, it isimportant to first understand the two mostcommon types of consensus mechanisms:
Proof of Work (PoW) and Proof of Stake (PoS).

Consensus mechanism

The process by which
the network agrees on
the next valid block andits transactions.15

FIGURE 3: Typical cryptocurrency value chain

11 “Block producer” is a more accurate term that can be applied to all consensus mechanisms and cryptocurrencies. However, for the sake of simplicity, this paper uses the terms “miners” and “validators,” as appropriate.
12 de Vries, A. (2020). Bitcoin’s energy consumption is underestimated: A market dynamics approach.Energy Research & Social Science, 70, 101721. https://doi.org/10.1016/j.erss.2020.101721
13 Digiconomist. (2022). Bitcoin Energy Consumption Index. Retrieved from https://digiconomist.net/bitcoin-energy-consumption
14 IEA. (2019). Bitcoin energy use - mined the gap. Retrieved from https://www.iea.org/commentaries/bitcoin-energy-use-mined-the-gap
15 In blockchain systems, each block (with its predecessors) represents an individual state, e.g. the monetary distribution after all transactions that are included in the respective chain of block up until that point, have been executed.

6

About this report

2.3

Section 1:

Introduction

Section 2:

Understanding cryptocurrency-related GHG emissions

Section 3:

Allocating cryptocurrency GHG emissions

Proof of Work protocols use a lot of electricity
In Proof of Work (PoW) systems, multiple miners
compete to create a valid block by solving
computationally-intensive (and thus electricityintensive) cryptographic puzzles. The miner that isfirst to solve the puzzle, and thus create the valid
block, receives a block reward (a compensation in
cryptocurrency). They also receive the transaction
fees from the transactions within the new block.

In large PoW networks like
Bitcoin, thousands of miners
across the world compete
at once. Combined, these
hardware devices requirelarge amounts of electricity.
A main driver of PoW network validation activity
is the price of the underlying cryptocurrency.
When the price of the underlying cryptocurrency
rises, the revenue potential of a mining operation
also rises, therefore incentivizing existing miners
to increase their computational power by buying
and running additional hardware. New miners
are also incentivized to start mining. This leads
to more computing power being added to
the network, increasing the overall electricity
consumption and associated GHG emissions.

Higher cryptocurrency value= greater incentive to mine= more miners and increased
computational power= more electricity consumption= (potentially) more GHG emissions.

Section 4:

Additional considerations

Appendix7About this report

2.4

Section 1:

Introduction

Section 3:

Section 2:

Understanding cryptocurrency-related GHG emissions

Allocating cryptocurrency GHG emissions

Section 4:

Additional considerations

Appendix

Proof of Stake uses considerably less electricity
Another common consensus mechanism
is Proof of Stake (PoS). Ethereum, currently
the second largest cryptocurrency by market
capitalization, plans to transition to PoS. Insteadof relying on computational power as a scarce
resource, validators are selected to produce andadd a new block based on the amount of theirown cryptocurrency they have ‘staked’ in the
network.16 A higher stake increases the likelihoodof being selected to create a new valid block.

FIGURE 4: Electricity consumption of validation activity in PoS and PoW networks

PoW network

PoS network

1. A new block is created

1. Protocol chooses a block producer

Miners collect and bundle new network transactions
into a new block

A block producer is chosen from the set of validators in
the network. This validator, chosen as a block producer,
can produce the next block.

Stake

Locking up cryptocurrency
tokens in order to support
the security of the networkand make a validator
eligible to receive rewards.

2. Miners compete to ﬁnd a cryptographic
solution for the new block
All the miners race to solve a cryptographic puzzle
for the block. The miner who finds the solution
broadcasts the block to the other miners in the network.

3. The block is veriﬁed by network consensus
In contrast to Proof of Work, an increase in thecryptocurrency’s value does not incentivize
increased computational power and associatedelectricity consumption. Rather, entities are
incentivized to commit more stake and therefore
increase their revenue, skipping the acquisitionof additional electricity-consuming computing
hardware. Proof of Stake networks are therefore
estimated to consume orders of magnitudeless electricity than Proof of Work networks.17,18

The other validators in the network check thecorrectness of the block and its transactions.
If valid and accepted by the majority, theblock producer receives its rewards.

2. Block producer proposes a new block
The block producer proposes a new block by bundling
new transactions into the block. They thenbroadcast it to the other validators in the network.

3. The block is veriﬁed by network consensus
The other miners in the network check the correctnessof the block and its transactions. If valid and accepted bymajority, the miner who originally broadcast theblock receives its reward.

POW electricity consumption:

POS electricity consumption:

All nodes consume electricity when verifying the new block.

Since there is no requirement to use specialized machines to findthe cryptographic solution, and because multiple validators are notcompeting at once to be the block producer, PoS cryptocurrencies
use considerably less electricity than PoW cryptocurrencies.

However, most of the total network electricity consumption
originates from the large number of attempts by miners
who use specialized machines to solve the cryptographic puzzle.

16 “In decentralized networks, a scarce resource is required to prevent single actors from increasing their chance to be selected as the next block producer
disproportionately. Both hardware and the cryptocurrency itself require upfront investments by the respective entity and can therefore be used as a means to
select block producers. An alternative consensus mechanism relying on a different scarce resource is Proof of Space, requiring hardware storage.
17 CCRI. (2022). Energy efficiency and carbon emissions of PoS Networks. Retrieved from https://carbon-ratings.com/pos-report-2022
18 Platt, M., Sedlmeir, J., Platt, D., Tesca, P., Xu, J., Vadgama, N., & Ibañez, J. (2021). Energy Footprint of blockchain Consensus Mechanisms Beyond Proof-of-Work. Retrieved from https://arxiv.org/abs/2109.03667

8

About this report

2.5

Section 1:

Introduction

Section 2:

Understanding cryptocurrency-related GHG emissions

Section 3:

Allocating cryptocurrency GHG emissions

Holding and transacting – the two main use cases of cryptocurrencies
For holding, as a means of storing value

2. For transacting, to exchange goods and services

2.6

Financial incentives impact GHG emissions
In both PoW and PoS networks, miners are
incentivized by block rewards and transaction
fees. Higher demand for a cryptocurrency leads
to higher prices and consequently to higher
value block rewards. A greater number oftransactions generates more transaction fees.
For many cryptocurrencies, block rewards
constitute the majority of the financial incentive
for miners and validators, and consequently are
the main driver of GHG emissions. For Bitcoin (aPoW network), miners receive the vast majorityof their payout from block rewards and only asmall portion from transaction fees. Holding
and increasing the value of Bitcoin and its
associated block rewards therefore has a muchgreater influence on miner incentives (andresulting GHG emissions) than transacting.19
Other cryptocurrencies may be more
affected by the volume of transactions, thenumber of validators with a stake in the
network, and the overall network value. Bothtransaction fees and block rewards drive

Additional considerations

Appendix

To comprehensively
account for emissions
across different currencies,
it is critical to assess theemissions encouraged
by both transaction feesand block rewards.

There are two main ways cryptocurrency is used:1.

Section 4:

FIGURE 5: Cryptocurrency holdings as a driver of network GHG emissions

GHG emissions, and the dynamics of the
reward structure may change over time.
Ultimately, those that transact and holdcryptocurrency have a responsibility for the
associated GHG emissions. When entities
transact they pay a fee for validators to
confirm the transaction, a process which
incentivizes electricity consumption. Thosethat hold cryptocurrency (even with very few
or no transactions) still contribute to network
electricity consumption. They are benefitingfrom the ongoing consensus processes that
secure the held assets and the incurred valuethat is gained during the holding period.
Additionally, during the mining process, newcoins are minted and paid to the miner as a
block reward. These new coins increase the total
supply of coins and thus deflate the value of theexisting coins of holders. Consequently, block
rewards represent an implicit value transferfrom holders to miners and the contribution ofholders to the continuation of the network.

More demand

19 Carlsten, M., Kalodner, H., Weinberg, S., & Narayanan, A. (2016). On the Instability of Bitcoin Without the Block Reward. Proceedings Of The
2016 ACM SIGSAC Conference On Computer And Communications Security. https://doi.org/10.1145/2976749.2978408

9

About this report

2.7

Section 1:

Introduction

Section 3:

Section 2:

Understanding cryptocurrency-related GHG emissions

Allocating cryptocurrency GHG emissions

Section 4:

Appendix

Additional considerations

Emissions types from an accounting perspective
Regardless of the consensus
mechanism, the validationof cryptocurrency networks
requires electricity.
Until all cryptocurrency-related electricity
generation sources verifiably reachnet-zero emissions, accounting for
associated GHG emissions is necessary.
The Greenhouse Gas Protocol is themost commonly used global standard
for corporate GHG accounting.20 Under
this standard, GHG emissions for entities
are categorized into three scopes.
Scope 1: Direct GHG emissions
occurring from sources that are owned
or controlled by an organization,
Scope 2: GHG emissions from thegeneration of purchased electricity
consumed by the organization,
Scope 3: GHG emissions that are aconsequence of the activities of theorganization, but occur from sources not
owned or controlled by the organization.21

FIGURE 6: GHG emissions across the value chain

Upstream

Downstream

Hardwaremanufacturing

Validation
network

Layer 2 token
offerings

Electricity
production

Most emissions
are generated invalidation & mining.

Scope 1 & 2Combustion of fuels forelectricity generations;electricity use for
manufacturing

Custodial
services andproducts

Non-custodialservices andproducts

Cryptoend users

As applicable.

Wallets, custodians,
etc.

Funds, transaction
services, payment
providers, etc.

Entities that holdor transact crypto.

Scope 1 & 2

Scope 1 & 2

Scope 1 & 2

Scope 1 & 2

Scope 1 & 2

Sourcing of electricity
for validation & mining
operations

Sourcing of electricity
for servers & mining
operations

Sourcing of electricity
for servers & mining
operations

Sourcing of electricity
for servers & mining
operations

Sourcing of electricity
for servers & office
operations

Scope 3The proposed framework provides Scope 3
accounting guidance to cryptocurrency value
chain stakeholders for allocating GHG emissions
to their cryptocurrency-related activities (i.e.
transacting and holding cryptocurrency).
For network validators, the emissions generated
from their validation activities would fall into
Scope 1 and Scope 2. Accounting for theseemissions from the validator’s perspective
is beyond the scope of this report, but it isbeing addressed by other research efforts.22

Refer to appendix (GHG Protocol
Guidance) for more information on GHG
Protocol inclusion and contextualizationof Scope 1, 2, and 3 GHG emissions
across the cryptocurrency value chain.

20 The Greenhouse Gas Protocol. (2004). Retrieved from https://ghgprotocol.org/sites/default/files/standards/ghg-protocol-revised.pdf
21 The Greenhouse Gas Protocol. (2004). Retrieved from https://ghgprotocol.org/sites/default/files/standards/ghg-protocol-revised.pdf
22 The Crypto Climate Accord. (2021). Guidance for Accounting and Reporting Electricity Use and Carbon Emissions from Cryptocurrency.
Retrieved from https://cryptoclimate.org/wp-content/uploads/2021/12/RMI-CIP-CCAGuidance-Documentation-Dec15.pdf

10About this report

Section 1:

Introduction

Section 2:

Understanding cryptocurrency-related GHG emissions

SECTION 3:
3

3.1

Allocating cryptocurrency
GHG emissions
Identifying the right allocation method
It is important to define responsibility forallocating, managing, and reducing theemissions generated by cryptocurrency
mining and validation.

There are four primary considerations
that determine the volume of
cryptocurrency network emissions
that an entity is responsible for:In line with the GHG Protocol, stakeholders
have a shared responsibility for GHG emissions
along their value chain. Without cryptocurrency
users and the services they employ (e.g., crypto
wallets and exchanges), miners and validators
would have no economic incentive to consume
electricity. With more media coverage on GHG
emissions from mining, users and service
providers are becoming increasingly awareof how their activities incentivize mining.23

1.

On-chain transaction

A cryptocurrencytransaction that occurs
on the blockchain and isdependent on the state of
the blockchain for its validity.

The value of their cryptocurrency holdings,
which drives block reward value.

2. The number of transactions theysubmit on-chain, and the resulting
transaction fees they pay.

3. The underlying consensus mechanism of thecryptocurrency being held or transacted.

4. The reward structure of the cryptocurrency(i.e., the percentage of the total validation
incentive that the block reward andtransaction fees each make up).

Current research proposes two methods forallocating cryptocurrency network emissions:the holding-based method and thetransaction-based method.24,25

Section 3:

Allocating cryptocurrency GHG emissions

Section 4:

Additional considerations

Appendix

THE HOLDING-BASED METHOD

THE TRANSACTION-BASED METHOD

Allocating GHG emissions tocryptocurrency holders based on theirshare of ownership in the total network

Allocating GHG emissions tostakeholders based on their share oftransaction fees in the total network

Existing accounting guidance forfinanced GHG emissions typicallyallocates emissions based on the ratioof value owned by an entity, relative
to the total value of the asset.26

In the transaction-based method, GHG
emissions are allocated to stakeholders
based on their proportional share of
total network transaction fees. Network
GHG emissions are divided among
entities by comparing the value of thetransaction fees paid by the reporting
entity to the total transaction fees acrossthe network for a given period of time.

In the holding-based method, the same
logic is applied, as all owners in thecryptocurrency network are responsible forthe ongoing GHG emissions that mining
and validating generates. A cryptocurrency
holder or service provider’s share of total
network GHG emissions is equal to thepercentage of total network value they hold.
This method works well for networks where
the block reward makes up the vast majorityof the miner payout. Those that holdmore of the cryptocurrency have greater
impact on its value, influencing the valueof the block reward, and incentivizing GHG
emissions-intensive mining and validation.
However, under the holding-based
method, transactions are not assigned
any GHG emissions. This is problematicfor networks where transaction fees
account for a significant share of
the overall reward, creating a strong
incentive for mining and validation.

The holding-based method
does not properly accountfor the climate impacts
of user transactions.

Depending on the overall compensation,transaction fees can provide a meaningful
incentive for miners or validators toinvest in hardware and electricity, which
ultimately causes GHG emissions.
Therefore, the more fees paid by a user tothe network, the higher the accountabilityof the user for network emissions.
However, this method does notincorporate the impact that holdings
have on driving the underlying
cryptocurrency value and thus, validator
block reward incentives. Users thatsolely hold cryptocurrency would
therefore be held less accountablefor emissions, while users that mainly
conduct transactions are assigned
the major share of GHG emissions,despite limited miner incentivization.

The transaction-based method
does not properly accountfor the climate impacts ofholding cryptocurrency.

Refer to appendix (Emission allocation methods) for more information.

23 de Vries, A., Gallersdörfer, U., Klaaßen, L., & Stoll, C. (2021). The true costs of digital currencies: Exploring impact beyond energy use. One Earth, 4(6), 786–789. https://doi.org/10.1016/j.oneear.2021.05.009
24 Gallersdörfer, U., Klaaßen, L., & Stoll, C. (2021). Accounting for carbon emissions caused by cryptocurrency and token systems. https://doi.org/10.48550/arXiv.2111.06477
25 The Crypto Climate Accord. (2021). Guidance for Accounting and Reporting Electricity Use and Carbon Emissions from Cryptocurrency. Retrieved from https://cryptoclimate.org/wp-content/uploads/2021/12/RMI-CIP-CCAGuidance-Documentation-Dec15.pdf
26 PCAF. (2020). The Global GHG Accounting & Reporting Standard for the Financial Industry. Retrieved from https://carbonaccountingfinancials.com/files/downloads/PCAF-Global-GHG-Standard.pdf

11About this report

3.2

Section 1:

Introduction

Section 2:

Understanding cryptocurrency-related GHG emissions

Section 3:

Section 4:

Additional considerations

Allocating cryptocurrency GHG emissions

Appendix

The proposed hybrid allocation method
Under the hybrid allocation method, GHG
emissions are allocated to stakeholders
based on both the value of a user’s holdings(which drives block reward incentives)
and the transaction fees paid by the user(which drives transaction fee incentives).

FIGURE 1: Hybrid GHG emissions allocation equation

Validators are incentivized differently, dependingon the proportion of the total payout made up by
block rewards or transaction fees. This proportion
varies across cryptocurrencies and over time. The
hybrid allocation method, as initially outlined
by CCRI, aims to be a complete and consistentmethod for fairly allocating GHG emissions byactors across the value chain of different currency
networks and consensus mechanisms.27

Crypto value chain
stakeholder'semissions

The hybrid method factors in the reward
structure of the cryptocurrency, in terms of
the percentage of the validation incentivethat block rewards (see Figure 1 “X”) andtransaction fees (see Figure 1 “Y”) make up. This
reflects the extent to which a cryptocurrency
user encouraged miners or validators to
perform work, which determines electricity
consumption and ultimately GHG emissions.
Refer to appendix (Accessing cryptocurrency
network-specific variables) for more information.

X+ Y =1

Y

=1− X

=

Total network
emissions

X

Value of holdings
Network value

X

+

Y

Transaction fees paid
Total network transaction fees

Y

BLOCK REWARD
INCENTIVIZATION FACTOR

TRANSACTION FEE
INCENTIVIZATION FACTOR

The proportion that a block
reward contributes to validator
payout. Varies across consensus
mechanisms and crypto types.

The proportion that transaction fees
contribute to validator payout. Varies acrossconsensus mechanisms and crypto types.

E.g., if a block reward contributes to
85% of validator payout, X = 0.85

E.g., if a transaction fee contributes
to 15% of validator payout, Y = 0.15

27 Gallersdörfer, U., Klaaßen, L., & Stoll, C. (2021). Accounting for carbon emissions caused by cryptocurrency and token systems. https://doi.org/10.48550/arXiv.2111.06477

12About this report

3.3

Section 1:

Introduction

Section 2:

Understanding cryptocurrency-related GHG emissions

Section 3:

Allocating cryptocurrency GHG emissions

Section 4:

Additional considerations

Appendix

Applying the hybrid method across stakeholders
It is important to understand the hybrid method’s
applicability across all cryptocurrency value chain
stakeholders. First, there are industry precedents
for allocating responsibility for GHG emissions
based on the proportion contributed to an overall
network.28 Industry GHG accounting guidance forthe technology sector indicates that within multistakeholder systems, GHG emissions may be
assigned to stakeholders based on their relative
cost and value.29 The financial sector makes clearthat entities with operational control over an asset(i.e., cryptocurrency asset owners and service
providers) may be responsible for their relative
share of total GHG emissions.30 As cryptocurrency
is at the intersection of these industries, it reasonsthat cryptocurrency stakeholders should accountfor their emissions based on how much they use
and benefit from the cryptocurrency network.
The way that stakeholders use cryptocurrency
influences how they encourage GHG
emissions within the value chain. It is
important to note these differences, butalso that they are not mutually exclusive.

‫ں‬For stakeholders holding cryptocurrencies,
their emissions impacts are largely driven
by their ownership share of the network(which influences block reward incentives).

‫ں‬For stakeholders transacting in order
to exchange goods and services,
their activities have a greater impact
on network transaction fees (which
influences transaction fee incentives).

‫ں‬To some extent, all users influence both block
rewards and transaction fee incentives, basedon their ownership share of the networkand their portion of total network fees.

Only a hybrid GHG emissions allocation
approach consistently and comprehensively
accounts for the impacts of all users.
Refer to appendix (Determining Accounting
Boundary) for more information on
existing GHG accounting guidance.
Refer to appendix (Example hybrid allocation
method calculations) for example calculations
that apply the hybrid allocation method.

28 Malmodin, J., & Lundén, D. (2018). The energy and carbon footprint of the global ICT and E&M Sectors 2010–2015. Sustainability, 10(9), 3027. https://doi.org/10.3390/su10093027
29 Bergmark, P., Coroamă, V. C., Höjer, M., & Donovan, C. (2020). A methodology for assessing the environmental effects induced by ICT services.
Proceedings of the 7th International Conference on ICT for Sustainability, 46–55. https://doi.org/10.1145/3401335.3401711
30 PCAF. (2020). The Global GHG Accounting & Reporting Standard for the Financial Industry. Retrieved fromhttps://carbonaccountingfinancials.com/files/downloads/PCAF-Global-GHG-Standard.pdf

13About this report

Section 1:

Introduction

Section 2:

Understanding cryptocurrency-related GHG emissions

Section 3:

Allocating cryptocurrency GHG emissions

Section 4:

Additional considerations

Appendix

SECTION 4:
4

Additional considerations

4.1

Cryptocurrency network emissions as part of an organization’s GHG footprint
Once emissions are allocated, they must bereported appropriately, as per the GHG Protocol.
Upstream cryptocurrency network GHG
emissions would be reported as part of an entity’s
Scope 3 footprint. Doing so will encourage shared
responsibility for GHG emissions across value
chain stakeholders and incentivize collaboration.
While the GHG Protocol has yet to weigh in on theappropriate designation, these emissions could
be accounted for under Category 1 or Category
15 of the GHG Protocol Scope 3 Standard.31
In addition to accounting for the portion of
total cryptocurrency network GHG emissions
that their actions contribute to, stakeholders
are also responsible for the GHG emissions
generated by electricity that powers their own
products and services. Different sources of
GHG emissions associated with a stakeholder’sservice or product offering will be categorized
in different GHG Protocol categories. Emissions
associated with the delivery of a cryptocurrencyrelated product or service that occur onsite for a
stakeholder through electricity use or electricity
generation would be part of an entity’s Scope
1 and 2 footprint. For example, GHG emissions
generated from electricity used to power acryptocurrency wallet or cryptocurrency service’s
offices, or onsite servers hosting the offering,
would be categorized in Scope 1 and 2.

the offering, third parties that help maintainthe service, and end uses of a product would
be included in an entity’s Scope 3 footprint.
An organization would have to account for

all of these sources of GHG emissions, inaddition to their portion of the total network
emissions, to gain a holistic perspective of
their cryptocurrency-related GHG exposure.

FIGURE 7: Cryptocurrency value chain stakeholder emissions by scopeElectricity Use

CryptoSourcing

Electricity Use

Third party serversthat support
the delivery of
stakeholder offering

Electricity Use

Electricity Use

Crypto service
to the customer

Stakeholders may also have indirect GHG
emissions related to their cryptocurrency
product or service that are not generated by acryptocurrency network. Offsite servers that host

31 The Greenhouse Gas Protocol. (2004). Retrieved from https://ghgprotocol.org/sites/default/files/standards/ghg-protocol-revised.pdf

14About this report

4.2

Section 1:

Introduction

Section 3:

Section 4:‫ں‬

Lost coins: When assigning responsibility
for cryptocurrency network GHG
emissions, the overall value of the
network may need to be adjusted for lostcoins, and their impact on price and thecomputational power required in mining.

‫ں‬

‫ں‬

Multiple Addresses: If transaction fee
data is unavailable and GHG emissions are
therefore allocated based on the number oftransactions, there may be double allocationof network GHG emissions, as both a senderand a receiver is involved in any given
transaction. For certain cryptocurrencies,
one transaction can draw from multiple
senders and be sent to multiple receivers,
so it is possible to allocate GHG emissions
from any one transaction multiple times.

Section 2:

Understanding cryptocurrency-related GHG emissions

Allocating cryptocurrency GHG emissions

Additional considerations

Appendix

Opportunities to build on this framework
The method proposed in this document is an
essential first step in allocating cryptocurrency
network GHG emissions to users and service
providers. As GHG accounting standards aredeveloped, stakeholders can act to manage,
and ultimately reduce emissions across thecryptocurrency value chain. While this frameworkaims to provide useful GHG accounting guidanceto cryptocurrency stakeholders, many researchand development opportunities remain:‫ں‬

Data: Ideal data for allocating GHG emissions
may not yet be available or publicly accessible.
Proxy, secondary, or average data can be used
to make assumptions where primary datais missing. For example, for the transaction
portion of the equation, transaction fee data
would be most accurate. However, if thatdata is unavailable, transaction count data
could be used. Additionally, cryptocurrency
activity managed by a third party (e.g. crypto
custodians) may make necessary data
less available for end users. In such cases,
averages or estimates may be needed.

‫ں‬

‫ں‬

Layer 2 networks: This framework accounts
for Layer 1 mining and validation, as thismakes up most of the cryptocurrency market.
Layer 2 networks and their underlying
hardware need to be measured or estimatedseparately, and their activities on theunderlying Layer 1 need to be accountedfor. As the hybrid allocation methodology
already accounts for transactions, thisframework can be extended to accountfor transactions caused by Layer 2, as well
as novel use cases, such as DeFi or NFTs.
External influence: The value ofcryptocurrency is easily influenced by vocal
important figures and large entities entering
the market.32 Further investigation of the
impact of important actors on cryptocurrency
prices and transaction volumes and, as aresult, GHG emissions, may be worthwhile.

‫ں‬

Block reward: When the block reward
reaches zero, this method would not allocate
associated GHG emissions. For Bitcoin, thispoint in time will be reached in the year
2140 – hopefully long after all emitting power
generation resources have been replaced byrenewable generation resources. As needed,
this consideration could be explored further.

Beyond these technical considerations,
there are other market considerations that
may affect this framework in the future. As
data availability, knowledge, and practicalexperiences further develop, more extensive
and detailed guidance might be required.

Derivatives: Based on other industries’
guidance, there is a risk of double counting
GHG emissions if GHG emissions wereallocated to derivative holders.33 Thus,
they are not included in this framework,
but could be explored further in future.

32 Vox. (2021). When Elon Musk tweets, crypto prices move. Retrieved from https://www.vox.com/recode/2021/5/18/22441831/elonmusk-bitcoin-dogecoin-crypto-prices-tesla
33 Hokanson, A., & Salo, J. (2015). How to Account for Greenhouse Gas (GHG) Emissions of Derivatives. Retrieved fromhttps://www.researchgate.net/publication/303938941_How_to_Account_for_Greenhouse_Gas_GHG_Emissions_of_Derivatives

15

About this report

Section 1:

Introduction

Section 2:

Understanding cryptocurrency-related GHG emissions

Section 3:

Allocating cryptocurrency GHG emissions

Section 4:

Additional considerations

Appendix

Appendix
I. GENERATION OF NETWORKWIDE GHG EMISSIONS​ ue to the decentralized and anonymous natureDof cryptocurrency networks, it is difficult todetermine where mining or validation activities
are occurring. As such, data on what typesof electricity generation used for mining or
validation activities is not always available andis instead estimated by reviewing hotspots ofvalidation activities within a network. Regardless,knowing the electricity demand of cryptocurrency
networks as well as the efficiency of existing
mining and validation hardware, it is undeniable
that the mining and validation processes ofthese networks generate GHG emissions.

II. GHG PROTOCOL GUIDANCE
According to the GHG Protocol, an emission
source should be included under Scope 3 if:‫ں‬

The emission source is large relative
to Scope 1 and 2 GHG emissions‫ں‬The source contributes to GHG risk exposure‫ں‬The source is critical according
to key stakeholders‫ں‬

The source has potential emission
reductions that could be either undertaken
or influenced by the entity.34

As it relates to cryptocurrency owners and service
providers, network GHG emissions meet thefirst three criteria. Available data on network
GHG emissions clearly indicate that upstream
network GHG emissions are large relative to an
asset owner or service provider’s Scope 1 and
2 GHG emissions. Particularly because of thesize of the network GHG emissions and thecurrent public criticism surrounding it, these
GHG emissions will continue to contribute tovalue chain stakeholders’ GHG risk exposureand be of importance to other stakeholders.

use of sold products). While these stakeholders
are not the focal point of this framework, their
GHG emissions are relevant to downstream
stakeholders who use their products and services.

The connection between cryptocurrency asset
owners and cryptocurrency service providers
and their ability to reduce GHG emissions isless obvious. However, these stakeholders dohave options to reduce their contribution tototal network GHG emissions––namely, they
can reduce the value, size, or frequency of
their cryptocurrency transactions, as well as
choose less GHG emission-intensive consensus
mechanisms for their cryptocurrency. As
cryptocurrency technology advances, additional
opportunities for these stakeholders to further
reduce network GHG emissions may arise.

Downstream stakeholders are responsible forthe operational Scope 1 and 2 GHG emissions
related to their cryptocurrency offerings. Thatis, they are responsible for the GHG emissions
generated by servers and other electricity thatis used to facilitate their products and services,or to access their cryptocurrency. Additionally,
these stakeholders are responsible for the portionof the total network GHG emissions that theiractions contribute to; these GHG emissions areallocated in their Scope 3 GHG footprints.

While identifying specific reduction opportunities
for non-mining and non-validating stakeholders
is outside of the scope of this framework, thepotential for reduction does exist. This, coupledwith the significant size, risk, and criticism
associated with network GHG emissions, indicate
they should be included in the boundary ofthese stakeholders’ Scope 3 GHG footprints.
An entity’s location along the value chain
will determine how it should approach andcontextualize its cryptocurrency-related GHG
emissions. Upstream stakeholders generate
GHG emissions either from the productionof equipment for miners or validators or the
production and distribution of electricity for thevalidation network (this would be included within
the Scope 1 and 2 footprint for these entities). The
electricity used and GHG emissions generated
by the validator network would be included
within these stakeholders’ Scope 3 footprints (i.e.,

The different downstream stakeholder groups
within the value chain are relatively consistentacross cryptocurrency types, however, there
are critical differences among their usagesof crypto, as well as the different currency
consensus mechanisms, that change theamount of total network GHG emissions theentity is responsible for.

III. DETERMINING ACCOUNTINGBOUNDARY​ onsidering the high volume of GHG emissions
C
generated by cryptocurrency networks, it is
crucial to note why value chain stakeholders
outside of miners and validators shouldtake (partial) responsibility for these GHG
emissions. This first requires an examinationof existing GHG accounting guidance;
specifically, available methods around Scope
3 boundary setting in adjacent industries

networks; more specifically, methodologies
on how to attribute emission reductions
among multi-stakeholder services.35 While
GHG emissions reductions are outsideof the scope of this framework, these
attribution principles offer parallels for
assigning GHG emissions responsibility
within the cryptocurrency ecosystem.
Emission Reduction Attribution
Principles - Technology Sector:‫ں‬

Attributing GHG emissions based on a
stakeholder’s financial cost and value‫ں‬

Attributing GHG emissions fully to all
stakeholders (“touch it and it’s yours”)‫ں‬Attributing GHG emissions fully to theprimary stakeholder (“winner takes all”).36

Cryptocurrency asset holders and service
providers are likely to agree that the “touch it andit’s yours” and the “winner takes all” approaches
would not offer fair emission allocation. Under
the former, all stakeholders would be responsible
for all GHG emissions on the network (anoutsized responsibility), while in the “winnertakes all” approach, the entity with the largest
transaction on a block may be responsible for
all associated GHG emissions––also unfair.
Therefore, of these, the financial cost andvalue approach would be most appropriate
for cryptocurrency stakeholders as it
splits downstream responsibility basedon the relative amount contributed to
the network by the stakeholder.

In the technology sector, the most relevant
accounting guidance focuses on traffic in data

34 The Greenhouse Gas Protocol. (2004). Retrieved from https://ghgprotocol.org/sites/default/files/standards/ghg-protocol-revised.pdf
35 Malmodin, J., & Lundén, D. (2018). The energy and carbon footprint of the global ICT and E&M Sectors 2010–2015. Sustainability, 10(9), 3027. https://doi.org/10.3390/su10093027
36 Bergmark, P., Coroamă, V. C., Höjer, M., & Donovan, C. (2020). A methodology for assessing the environmental effects induced by ICT services.
Proceedings of the 7th International Conference on ICT for Sustainability, 46–55. https://doi.org/10.1145/3401335.3401711

16About this report

Section 1:

Introduction

It is also important to take into account thefinancial components of cryptocurrency
operations, as it offers additional industry
precedents outside of the technology sector.
Existing precedent in the financial sector dictatesthat entities that have “operational control” overan asset should take accountability for them.37
Cryptocurrency custodians face uniqueconsiderations under this logic. “Operational
control” may be defined as having the ability
to buy, sell, or trade without the consent
of the depositor. However, their users still
have ownership and “operational control” ofassets as they initiate transactions. As such,
both entities in such a relationship havesome responsibility for initiating transactions
on the network, and should therefore takeaccountability for any associated GHG emissions.

IV. EMISSION ALLOCATION METHODS
It is important that whatever allocation method
is used meets the following identified criteria:‫ں‬Consistency - an allocation methodshould be able to applied across different
systems, parameters, and situations‫ں‬Continuity - methodology
continues to function despite any
system changes over time‫ں‬Completeness - the approachshould adequately address all
system GHG emissions.38

Existing network GHG emissions calculations
primarily utilize two types of calculation
methods: the holding-based approach and thetransaction-based approach. These methods
were evaluated with the above criteria in mind
to determine applicability for cryptocurrency
asset owners and service providers.

Section 3:

Section 2:

Understanding cryptocurrency-related GHG emissions

Section 4:

Additional considerations

Allocating cryptocurrency GHG emissions

Appendix

TABLE 1: H olding-Based Allocation Method Analysis

Holding-based method
For holders of crypto, the holding-based method
allows each owner to account for their respective
share of GHG emissions. This method works
particularly well for networks like Bitcoin where
block reward constitutes the majority (currently,
approximately 99% for Bitcoin) of the miner
payout.39 The value of the block reward increases
based on the value of the cryptocurrency andthe value of the cryptocurrency increases as
more users pay into the system. Thus, thosethat hold more value are more responsible forincreasing the block reward and incentivizing
miners to perform and generate GHG emissions.
However, the holding-based allocation method
is not without its drawbacks. Notably, withineach block on the blockchain, each transaction
will take up an amount of space independent
from value (therefore a large value transaction
could take up the same amount of space as asmall value transaction). Owning 100 units of acryptocurrency may incur more GHG emissions
if it is transacted over two 50 unit transactions
instead of one 100 unit transaction. Moreover,one 50 unit transaction may occupy the same
space as one 100 unit transaction in a block.
Since block size is limited, higher transaction
volume can increase traffic on the blockchain,increasing computational requirements
and electricity use in the process. As such, it
is important to not only note how much anentity owns in the network, but also how manytransactions it took to acquire it. Currently, theholding-based approach does not accountfor this. Table 1 contains a comprehensive
analysis of the holding-based approach.

Strength

Weakness‫ں‬Allocation is consistent acrossreporting entities - factors such as
batching won’t affect allocation‫ں‬

Does not address the nuances of transaction
emissions - namely, one large value transaction
will have less of a verification emissions
footprint than many, smaller value transactions‫ں‬

Increases accountability for entities
that have a larger holding values,
and thus, control over the market‫ں‬% network ownership is not a static metric,
and can change with network fluctuation
outside of a reporting entity’s control‫ں‬

Not always possible for L2 technologies- leave out landscapeOpportunity

Threat‫ں‬

Fairly accessible for stakeholders
methodology for stakeholders‫ں‬

Risk of double counting GHG emissions if
boundaries are not clearly and consistently
defined- can occur when different investments
are made in the same value chain‫ں‬Simple data collection process
as both entity and network value
are relatively accessible figures‫ں‬Transaction stakeholders may be excluded‫ں‬

Entities may report “reductions” when
they experience decreases in relative value,
without actually encouraging change‫ں‬

Ongoing GHG emissions generation attributed
to entities with low or no trading activity‫ں‬Entities may not want to disclose holding value

37 Any future formal, regulatory classification of cryptocurrency as a financial asset will further influence this logic. Here, the term “operational control” is in reference to the term defined by the GHG Protocol and detailed in the Glossary.
38 Gallersdörfer, U., Klaaßen, L., & Stoll, C. (2021). Accounting for carbon emissions caused by cryptocurrency and token systems. https://doi.org/10.48550/arXiv.2111.06477
39 Buy Bitcoin Worldwide. (2022). Fees. Retrieved from https://stats.buybitcoinworldwide.com/fees-percent-of-reward/

17

About this report

Section 1:

Introduction

Transaction-based method
For cryptocurrency transactors, the transaction
method allows each stakeholder to account for
their respective transaction share of total network
GHG emissions. Specifically, for consensus
mechanisms like PoS where transaction fees area greater portion of validator incentive, assigning
allocation based on transaction fee value makes
sense - the more transactions that are initiated,the more transaction fees are incurred and themore validators are incentivized. Users thathave higher amounts of activity take on a larger
share of GHG emissions than those that areless active. Since block size is limited, initiating
more transactions increases computational
requirements and electricity demand. Those thattransact more then contribute to this demand
and are more accountable under this method.
However, like the holding-based method,
this approach also loses some nuances. Thismethod does not take into account the impact
larger holdings have on driving cryptocurrency
value and thus, validator incentives and GHG
emissions. Table 2 contains a comprehensive
analysis of the transaction-based approach.

Section 2:

Understanding cryptocurrency-related GHG emissions

Section 3:

Allocating cryptocurrency GHG emissions

Section 4:

Additional considerations

Appendix

TABLE 2: T ransaction-based Allocation Method Analysis

Strength

Weakness‫ں‬

Reflects a fair emission share of an entity if a cryptocurrency
is used for payment services or other services on
the blockchain (smart contracts, dApps, etc.)‫ں‬

Only accounts for impacts when transacting, no holding
emissions or downstream network GHG emissions‫ں‬

Data on transactions is usually readily available.

‫ں‬

Need to translate different hashrates from different cryptocurrency
types into comparable metrics. Differences between PoS and PoW hashrate is generally driven by price, PoS emissions follow number oftransactions more; potential for inconsistencies among currencies

Opportunity

Threat‫ں‬‫ں‬Applications such as batching and layer 2 protocols may makedata collection and calculation difficult for downstream users‫ں‬

Double or undercounting - as consumers use transaction services,
both may take responsibility for transactions initiated‫ں‬

Number of transactions isn’t tied to value - potential
for undercounting the impacts of high value‫ں‬

Number of transactions is not always proportional to transaction fees multiple transactions can have a smaller size than one large transaction

By continually updating calculations by the latest hashrate
activity, there is potential for more accuracy and addressing
network impacts on on ongoing basis for POW systems

18

About this report

Section 1:

Introduction

Section 3:

Section 2:

Understanding cryptocurrency-related GHG emissions

Allocating cryptocurrency GHG emissions

V. ACCESSING CRYPTOCURRENCY
NETWORK-SPECIFIC VARIABLES

VI. EXAMPLE HYBRID ALLOCATIONMETHOD CALCULATIONS

evident that their relation differ significantly
across different cryptocurrency networks:

Cryptocurrency network-specific variables
known as incentivization factors indicate theextent that block rewards and transaction fees
each contribute to overall miner or validator
participation in the network. These factors canbe determined by reviewing publicly available
data of the cryptocurrency validation reward
structure. For instance, a block reward at times
could constitute 95% of the total reward, andthus, the block reward incentivization factor
would be 0.95, and thus the transaction fee
incentivization factor would be 0.05.40 Given thatthese values may fluctuate over time, taking
an average of this data to align with the time
period being measured should be sufficient.

See below for examples of the hybrid
allocation method in practice.42‫ں‬

For Bitcoin: X = 94% ; Y = 6%

‫ں‬For Ethereum: X = 73%; Y = 27%

Reporting entities then should identify the valueof the currency transacted over time and––using
network value data––determine their share of
the total network value. By combining value
share with the block reward incentivization
factor, they should be able to determine theextent their share of the block reward (and thus
miner and validator motivation) contributes
to GHG emissions. Similarly, reporting entities
should identify the total amount of transaction
fees paid over the same time period anduse total network transaction fee data andthe transaction fee incentivization factor todetermine the extent to which their transaction
activity contributes to total GHG emissions.41

First, assume the following amounts
that correspond to the values for
total network emissions in 2021:‫ں‬

For Bitcoin: 59.1 Mt CO2e in 2021

‫ں‬For Ethereum: 9.0 Mt CO2e in 2021

In this example, assume the following cases:▷▷▷

Company A holds 6 BTC for 1 year
(0 transactions; average holdingof 6 BTC over the year)
Company B buys 1 BTC every monthof the year (12 transactions; average
holding of 6 BTC over the year)
Company C buys 1 ETH every monthof the year (12 transactions; average
holding of 6 ETH over the year)

For the emission allocation, take the average
daily block reward and transaction fee values toderive the block reward incentivization factor(X) and the transaction fee incentivization
factor (Y). Use publicly available block explorers
to derive the share of block reward andtransaction fees from the miner revenue. Note,by looking at average values for the block reward
incentivization factor (X) and the transaction
fee incentivization factor (Y) in 2021, it becomesThis leads to the following emission allocations
for each company in this example:▷

Company A: 17,700 kg CO2e on
holdings / 0 kg CO2e on transactions/ total 17,700 kg CO2e▷Company B: 20,040 kg CO2eon holdings / 440 kg CO2e ontransactions / total 20,480 kg CO2e▷Company C: 480 kg CO2eon holdings / 50 kg CO2e ontransactions / total 530 kg CO2eVII. CONSIDERATIONS FOR REPORTING
Potential options for categorizing cryptocurrency
GHG emissions under the GHG Protocol.
To date, the GHG Protocol has notformally recommended what Scope 3
emissions category cryptocurrency GHG
emissions should be classified under.
There is a possibility that some may consider
accounting for cryptocurrency GHG emissions
under the GHG Protocol Scope 3 Standard,Category 15. However, further regulatory andindustry guidance around cryptocurrency isneeded to further clarify how appropriate thisallocation is for value chain stakeholders.

Section 4:

Additional considerations

Appendix

Given the different use cases of crypto, Category
1 could also be an appropriate classification. It
may be tempting to account for cryptocurrency
as a purchased good. However, as an asset withan indefinite lifespan, there are nuances thatcomplicate this classification. For example,
following traditional accounting approaches for agood would require knowing the GHG emissionsof a given coin at the time it was generated,
and then allocating those GHG emissions to all
owners of that coin over its lifespan. This would
require tracking each individual coin back to thepoint it was generated (a difficult technologicalprocess). Additionally, it would mean accounting
for these GHG emissions indefinitely as thecoin passes between users, requiring thesizable GHG emissions generated from the coin
generation process to be accounted for again
and again. This approach would potentiallycontradict the fungibility of cryptocurrency.
Alternatively, obtaining cryptocurrencies can beconsidered a purchased service. The verificationof the transaction on the blockchain by aminer or validator (the process that is driving
GHG emissions) is paid for by the user throughtransaction fees. From this perspective, GHG
emissions are not pegged on the intangible
cryptocurrency asset (which would be difficult
to trace over its indefinite lifespan), butrather the services necessary to acquire it.
As the GHG Protocol considers the dynamics of
cryptocurrency, more insights on the appropriate
Scope 3 classification may be developed.

40 Buy Bitcoin Worldwide. (2022). Fees. Retrieved from https://stats.buybitcoinworldwide.com/fees-percent-of-reward/
41 If such data is available, reporting entities may also use transaction count data and compare the number of transactions they initiated to the total number of network transactions.
42 All calculations are performed with the CCRI Sustainability API. Link to documentation: https://docs.api.carbon-ratings.com

19About this report

Section 1:

Introduction

Section 2:

Understanding cryptocurrency-related GHG emissions

Section 3:

Allocating cryptocurrency GHG emissions

Section 4:

Additional considerations

Appendix

Glossary
Batch transactions: The process of aggregating
several outgoing transactions in one transactionin order to minimize transaction costs.
Block reward: The block reward describes the
reward in the form of coins that validators obtainafter validating new transactions in a block. The
block reward is usually one part of the incentive
for validators to invest electricity and equipment
in a network, together with the transaction fees.
Blockchain technology: The underlying
technology of most cryptocurrencies. A
blockchain describes the digital ledgerof transactions that are summarized inblocks and secured by the network. The
structure of the blockchain makes it very
resistant against attempts of changing
or hacking past transactions.
Control approach: Refers to the financial or
operational control approaches set by theGreenhouse Gas (GHG) Protocol, to define theorganisational boundaries for reporting entities.
Consensus mechanism: An algorithm thatfacilitates the functioning of decentralized
ledgers. Specifically, it decreases the possibilityof double-spending a cryptocurrency byconfirming that all nodes in the network areconsistent and valid (allowing honest nodes toalign and dishonest nodes to be rejected).
Clearinghouse: an entity which collects anddistributes on behalf of users, in this case,organizations that manage cryptocurrencytransactions on behalf of buyers and sellers.
Cryptocurrency: a digital asset class that
oftentimes uses blockchain technology to keep
track of transactions in a decentralized ledger.
Due to its decentralized structure, cryptocurrency
is considered very secure against fraud.
Crypto custodians and custody solutions:a third party service that provides
secure storage for cryptocurrency.
Crypto wallet: A software, service, device,or
physical medium that allows to store the public
and private keys which are needed to accessthe cryptocurrency and create transactions.

Downstream: any processes or stakeholders thatare involved in a value chain after the reporting
entity, e.g. when an electricity provider generates
electricity, which is then used by a validator, thiselectricity consumption happens downstream
from the electricity provider’s perspective.
Equity share approach: The second approachthat can be applied to define the organisationalboundaries. With the equity share approach, therelative share of equity that the reporting entity
owns in another entity is the deciding factor foraccounting GHG emissions from operations.
Financial control approach: A subcategory of
the control approach, describes the approachof accounting for all emissions from operations
where the reporting has financial control.
Greenhouse gas (GHG) emissions: a measure of
the global warming potential of different gases,summarized in the unit CO2 equivalents (CO2e).
Greenhouse gas (GHG) inventory: Provides
an overview of an entity’s total emissions,
categorized in the three different scopes aswell as the scope’s different subcategories.
Greenhouse Gas Protocol (GHG Protocol):the most widely used international accounting
tool for government and business leaders
to understand, quantify and manage GHG
emissions. The GHG Protocol was developedin a partnership between the World
Resources Institute and the World BusinessCouncil for Sustainable Development.
Hashrate: a measure of the total computational
power of all validators in a network. Most
POW-cryptocurrencies adjust their hashingalgorithm difficulty (mining difficulty) to the
network’s hashrate in order to guarantee
a steady generation of new blocks.
Holding-based method: GHG emissions
are allocated to the reporting entity basedon a ratio of the amount held by an entity
compared to the total network value.

Hybrid allocation approach: A more advanced
method of allocating crypto’s GHG emissions
that takes the cryptocurrency-specific incentive
structure into account. By taking into accounthow many transactions an entity conductedduring a reporting period as well as how
much of the total value was owned by thereporting entity, a fairer allocation is possible.
Incentivization factor: describes a networkspecific and often fluctuating incentive
structure for the validators. Describes theratio of block reward to transaction fees
Holding-based approach: A simple method toallocate GHG emissions from a cryptocurrency
based on the share of a crypto’s total valuethat an entity owned during the reporting
period. To be able to do so, the network’s total
GHG emissions are divided by the network’s
total coins or value in the reporting period.
Layer 1: The main layer of a cryptocurrency
network. The layer where valid blocks are
stored as part of the distributed ledger.
Layer 2: A layer that is on top of a crypto’s
main layer. Layer 2 transactions are usually
not directly linked to the layer 1 structure
but rather use the structure and rules ofthe main layer to settle transactions.
Nodes: A computer connected withina cryptocurrency network that aids
in maintaining network data.
Operational control approach: A
subcategory of the control approach, which
describes the approach of accounting
for all emissions from operations where
the reporting has operational control.
Proof of Work (PoW): A type of consensus
mechanism that is used to verify transactions
on the decentralized ledger. With thisconsensus mechanism, validators that are able
to computate more calculations in a shortertime are more likely to get the block reward
and validate the transactions in that block. In
order to obtain the block reward, validators
must solve cryptographic problems.

Proof of Stake (PoS): A type of consensus
mechanism, where the right to verify newtransactions is given out to entities that stake acertain amount of their coins. The more coins anentity has staked, the higher the probability thatthat specific entity will verify new transactions.
Upstream: any processes or stakeholders
that are involved in a value chain before thereporting entity, e.g. when an electricity provider
generates electricity, which is then used by avalidator, the electricity generation happens
upstream from the validator’s perspective.
Scopes 1, 2, and 3: A concept introduced by
the GHG Protocol to delineate the different
sources of a company’s emissions and theirinfluence over these emission sources.

‫ں‬

Scope 1: direct GHG emissions from sources
owned or controlled by the company.

‫ں‬

Scope 2: indirect GHG emissions frompurchased energy sources (electricity,
heating and cooling, steam)‫ں‬

Scope 3: other indirect GHG emission
sources from sources not owned
or controlled by the company.

Transaction fees: A fee that is paid by usersof the cryptocurrency network to incentivize
validators to include their transactions in a
future block. Transactions fees constitutein many networks the other incentive forvalidators, besides the block reward.
Transaction method: A simple method toallocate GHG emissions from a cryptocurrency
based on the number of transactions thatan entity conducted during the reporting
period. To do so, the network’s total GHG
emissions are divided by the network’s totaltransactions during the reporting period.
Validators, miners, and block producers:
Entities that validate and add new transactions
to the distributed ledger by adding new blocks
to the blockchain. In Proof of Work networks,
validators are often also called miners.

20About this report

Section 1:

Introduction

Section 2:

Understanding cryptocurrency-related GHG emissions

Section 3:

Allocating cryptocurrency GHG emissions

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Section 4:

Additional considerations

Appendix21