How a Canadian bitcoin ETF is going 'carbon neutral'

Last month, Canadian asset management firm Ninepoint Partners announced that it would “fully offset” the carbon footprint of its six-month-old Bitcoin exchange-traded fund (ETF).    

The move means that investors in the fund will have “carbon neutral exposure to Bitcoin,” according to Alex Tapscott, managing director of the Digital Asset Group at Ninepoint. 

Ninepoint is one of many crypto companies that have recently launched campaigns aimed at making up for the carbon dioxide emissions associated with public blockchain networks like Bitcoin and Ethereum — generally by paying a third-party firm to “offset” emissions by planting trees, preserving forests, funding renewable energy projects, or engaging in other conservation efforts meant to reduce carbon dioxide generation.

But how effective are these efforts?

It’s hard to say, for at least two reasons. First, given the nature of public blockchain networks, it is very difficult to pinpoint the exact mix of energy sources powering a given network at any moment in time.

Second, the practice of carbon offsetting has drawn critics who say that they are an ineffective climate change mitigation tool. Some have even gone so far as to say offsets are “worse than doing nothing” to reduce greenhouse gases.

Of course, the devil is in the details. So what exactly does it mean when Ninepoint says it is offsetting its carbon dioxide carbon emissions?

The carbon footprint of a bitcoin ETF

Ninepoint relies on two third-party firm to take care of offsetting the carbon dioxide emissions associated with its bitcoin holdings: the Crypto Carbon Ratings Institute (CCRI), a Germany-based group that analyzes the environmental impacts of cryptocurrency investments, and CarbonX, a Canadian company that funds ecological carbon offset projects. 

According to Tapscott, the CCRI figures out the energy mix and the total energy output of the total Bitcoin network on a rolling basis over a given period and then calculates Ninepoint’s contribution to that. (He said during a May episode of his podcast that Ninepoint holds $150 to $175 million in bitcoin.) 

Tapscott says Ninepoint picked the CCRI because of the reputation of the people behind it. The fact that the CCRI team has been researching crypto sustainability for the past few years “gave us [Ninepoint] a lot of comfort,” he says. 

To estimate Bitcoin’s carbon footprint, the CCRI uses a methodology described in a 2018 paper published in the journal Joule, authored by the firm’s three team members: Christian Stoll, who researches energy and environmental policy at MIT and at the Center for Energy Markets of the Technical University of Munich; Lena Klaaßen, who researches climate finance at ETH Zurich; and Ulrich Gallersdörfer, a research associate at the Technical University of Munich’s department of informatics.

According to the paper, the team estimates bitcoin’s power consumption “based on IPO filings of major hardware manufacturers, insights on mining facility operations, and mining pool compositions.” For the research described in the paper, the authors then used IP addresses gleaned from the websites of two major mining pools to estimate the carbon footprint of the whole network.

In fact, the science of estimating Bitcoin’s energy use and carbon footprint is still developing. The research field has been challenged by the lack of complete data sets about which machines are in use and where exactly they are located. This makes it difficult to determine exactly what energy sources are being used, and which of the various types of mining hardware that miners are using at any point in time.

Gallersdörfer acknowledged in an email to The Block that the CCRI’s models for Bitcoin’s environmental impact are based on a set of assumptions, as the network’s size, decentralization, and anonymous nature obfuscate its true energy costs.

“We monitor the market closely and collaborate with researchers around the globe to keep track of technological progress," Stoll said in a separate email.

The CCRI’s process is the best way to get “the most authoritative analysis as possible, the one that was the most defensible, and the one that we knew we could figure out how to offset,” says Tapscott, adding:

“The alternative was ‘let's only try and source Bitcoin that we believe has been mined in some net-zero way,’ and ultimately that that analysis is too difficult, it's too prone to error.”

The uncertainty of carbon offsets

Armed with CCRI’s estimate, Ninepoint then purchases so-called carbon credits — which are supposed to stand for a metric ton of CO2 that has been removed from the atmosphere — from CarbonX. 

Bill Tapscott, CarbonX’s CEO (and Alex’s uncle), says that his company is an environmental fintech firm that was originally interested in converting carbon credits into tokens. CarbonX merged with the Toronto-based carbon accounting and mitigation firm Zerofootprint to use blockchain to track and sell carbon credits in the regulatory market. 

“We're in the business of calculating the emissions and sourcing the offsets to create carbon-neutral things — anything, a product, service — at a personal level or institutional level,” Bill Tapscott says. 

Two main projects produce CarbonX’s carbon credits. One is a forest preservation and land restoration project in Peru’s Cordillera Azul National Park that generates an average of 2.5 million carbon credits annually, according to the firm. The other is an ecological conservation project involving the Tambopata-Bahuaja Biodiversity Reserve, also in Peru, which CarbonX says generates an average of 400,000 carbon credits per year.  

To verify that these projects are really offsetting the amount of carbon dioxide that CarbonX says they are, the firm relies on another third-party, U.S. nonprofit called Verra.

Bill Tapscott says Verra determines engineering requirements on how carbon projects should be monitored and the standards for acceptable carbon data. Verra then leans on a global network of third-party experts to verify that a given project is indeed reducing the amount of emissions that its organizers claim.

But carbon offsets are controversial. It is difficult to be certain that they are “additional,” meaning the offsets induced atmospheric carbon reduction that otherwise would not have happened, says Ken Gillingham, a professor of economics at the Yale School of Environment. 

Gillingham also cautions that groups and companies that verify carbon offsets have a business incentive to say that their carbon offsets are additional. There are also various unknown factors — often beyond the control of those in charge of offsetting projects — that can reduce an offset's environmental impact, he says.

For instance, loggers who encounter a piece of forest that is protected because it is part of a carbon offsetting project may cut trees elsewhere, effectively rendering the offset useless. It’s also hard to guarantee that a protected forest will stay protected forever. “You can’t reliably be confident that the government’s going to stay in place and allow those offset contracts to remain,” says Gillingham.

Alex Tapscott admits that carbon offsetting is not perfect for mitigating bitcoin's carbon footprint. But he says that by making an attempt to mitigate bitcoin’s energy needs, more people and institutions will become willing to own the digital asset. 

“This is not a cure-all but a real substantive step that we're taking to offset the footprint,” he says.