As the use of bitcoin increased over the past decades, its environmental toll became more apparent, creating a dilemma for policymakers and investors. Stringent climate policies can reduce bitcoin’s environmental impact but may also undermine its role as a hedge against fluctuations in equity markets. Seyedmehdi (Mehdi) Hosseini, Mohammadhossein Lashkaripour and Rizwan Ahmed studied the incentives for bitcoin miners and recommend targeted policy initiatives.

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For over two decades, the world has raced to combat climate change, deploying carbon taxes, renewable energy subsidies and emissions trading systems in a high-stakes effort to stabilise the planet. Meanwhile, in the shadows of this planetary rescue mission, a new asset class has emerged: bitcoin. Born from a 2008 white paper, this decentralised digital asset has evolved from a niche technological experiment into a $1 trillion enigma (as of September 2024).

Bitcoin’s ascent comes with a less convenient truth: its growing environmental footprint. According to Digiconomist, if bitcoin were a country, it would rank 24th globally in terms of energy consumption. The energy-intensive process of bitcoin mining now generates carbon emissions comparable to those of entire nations. This environmental footprint not only exacerbates climate change but also imposes significant negative externalities on the broader economy. One study estimates that every $1 increase in bitcoin’s price results in $3.11 to $6.79 in external damages from carbon emissions alone, far exceeding the value it adds through mining.

The simultaneous rise of bitcoin, its environmental toll and the global push for climate mitigation present a pressing dilemma for policymakers and investors alike. In light of this tension, our study examines the policy and investment implications of bitcoin’s growth in an era of accelerating climate action. We found that stringent climate policies can reduce bitcoin’s environmental impact but may also undermine its role as a hedge against fluctuations in equity markets.

Conversely, lenient policies allow environmental damage to persist while preserving the currency’s hedging functionality. This trade-off holds significant implications for investors seeking portfolio diversification and policymakers navigating the transition to a low-carbon economy.

Security versus sustainability

Bitcoin secures its blockchain through a process called proof-of-work (PoW), which involves solving complex mathematical problems—a process that requires huge amounts of electricity. While this mechanism strengthens network security—an essential feature for trustless transactions—it also consumes vast amounts of electricity. According to the  Cambridge Centre for Alternative Finance, a large share of this electricity is still sourced from fossil fuels. As a result, bitcoin’s carbon emissions are now comparable to those of entire nations.

The PoW mechanism presents a fundamental trade-off:  higher energy consumption enhances network security, but it also exacerbates climate change due to the fossil fuel dominance in bitcoin mining. We show that this duality gives rise to a U-shaped relationship between bitcoin’s expected return and mining-related emissions.

Initially, up to a certain emissions threshold, the security benefits of increased energy use outweigh the environmental costs. In this range, the net effect of higher emissions on bitcoin’s price is positive, demanding lower expected returns. However, beyond that threshold, the environmental damage surpasses the security gains. At this point, the net effect of higher emissions becomes negative, leading to lower bitcoin prices. Expected return demands rise as prices begin to decline.

Financial spillovers

We developed a theoretical framework to understand how bitcoin interacts with equity markets under different climate policy regimes.

We found that when there are no rules limiting emissions, investors start to recognise the environmental risks and shift their money into cleaner, low-emission assets. In this setting, bitcoin makes the environmental problem worse, and the impact spreads across the whole economy. Its carbon footprint adds to the overall risk, which also affects traditional investments like stocks.

Once a policy such as an emissions cap is introduced, things change. Bitcoin’s mining operations face stricter constraints, reducing network security and weakening its market appeal.

Our model and real-world data suggest that under these policies, the correlation between bitcoin and equities increases. When bitcoin and the stock markets move in tandem, the cryptocurrency no longer works effectively as a hedge. In short, stringent climate policies may erode one of the key reasons investors turned to bitcoin in the first place: its perceived independence from traditional financial markets.

Real-world evidence

To test our theory, we examined the conditional correlation between bitcoin and equities. Conditional correlation means looking at how closely the movements of these two assets are linked during certain situations. In this case, we measured this correlation around three major climate policy events:

• The European Green Deal (2019)
• China’s bitcoin mining ban (2021)
• The US Inflation Reduction Act (2022)

In all three cases, we observed a statistically significant rise in the correlation between bitcoin and equity returns. These findings, consistent with our theory predictions, suggest that bitcoin started moving more closely with the equity market—diminishing its role as a portfolio hedge.

Can green mining help?

Is it possible to reconcile bitcoin’s security needs with environmental sustainability? Potentially. If miners transition to renewable energy sources, the emissions intensity per unit of energy would decline. Our theoretical model suggests that such a shift could reduce the negative externalities bitcoin imposes on equity markets. However, it may also weaken bitcoin’s effectiveness as a hedging instrument, given that the move toward cleaner energy is likely to increase its correlation with traditional financial assets.

A recent study analyses the feasibility of this transition and identifies several barriers that may hinder the shift to renewables. The study argues that bitcoin’s lottery-like proof-of-work mechanism favours consistent, reliable energy output, which gives an advantage to fossil fuels over intermittent renewable sources.

Also, because bitcoin mined from renewable and non-renewable sources is indistinguishable, investors tend to penalise the overall carbon footprint of the network. As a result, even miners using green energy face the same financial penalties as those relying on fossil fuels.

What can be done to overcome these obstacles and achieve a more sustainable bitcoin network? Some engineering studies propose that using stranded or wasted energy for mining could reduce its carbon footprint. One suggestion is that repurposing flared gas for mining operations may help lower bitcoin’s emissions. However, this approach has been criticised for potentially undermining long-term decarbonisation goals by extending the life cycle of fossil fuel extraction.

Another perspective in the engineering literature suggests that bitcoin mining can support the expansion of renewable energy. Yet other authors argue that although mining may facilitate increased renewable capacity, it simultaneously contributes to higher carbon emissions.  

In contrast to the engineering perspective, our study adopts an economic lens. We focus on the incentive structures that shape miners’ behaviour and recommend that policymakers prioritise targeted initiatives and subsidies—rather than relying solely on emissions caps or tax-based policies.

Policy recommendations

One major challenge in subjecting bitcoin to policy interventions is the pseudonymous nature of the network. Because the currency operates on blockchain technology, mining activities are largely anonymous, unless miners voluntarily disclose their identities. This makes traditional regulatory tools, such as taxation or emissions caps, which depend on traceability and verification, difficult to implement and enforce. The pseudonymous nature not only hampers environmental policy efforts but also facilitates illicit activity. A 2019 study estimates that approximately one-quarter of bitcoin users were involved in illegal transactions.

A second challenge lies in the high mobility of bitcoin miners. Unlike most industries, mining operations can be swiftly relocated to jurisdictions with lenient regulations. A prominent example is the mining ban imposed by China’s State Council in May 2021. While the ban aimed to achieve environmental goals along other goals, there are estimates that bitcoin’s carbon emissions may have increased by 17 per cent in August 2021 compared to the average emissions in 2020. This increase likely resulted from miners moving from Chinese provinces powered by renewable hydroelectric energy (such as Sichuan during the wet season) to global regions reliant on fossil fuels, including coal-rich Kazakhstan and natural gas-powered areas in the United States.

Given these limitations, policymakers should consider incentive-based approaches, such as subsidies that encourage miners to self-identify and transition to greener energy sources. Such positive incentives may be more cost-effective and easier to implement than punitive or regulatory measures in shaping miner behaviour.

Another key implication of our model is the importance of investors’ climate awareness. Educating investors about the consequences of climate change can foster climate-conscious investment behaviour. If a critical mass of investors becomes climate-aware, they may begin to internalise the environmental costs of bitcoin mining. They would do that by ensuring that the true environmental damage is reflected in prices and adjusting their portfolios accordingly. This means that those who produce the damage also bear the cost, rather than society or the environment absorbing it. This behavioural shift could, in turn, encourage miners to adopt renewable energy sources in order to keep bitcoin attractive as an asset.

Key takeaways

For investors, our findings highlight a critical trade-off under stricter climate policies: while bitcoin’s environmental externalities may be reduced, its effectiveness as a hedge and safe-haven asset diminishes.

For policymakers, the implications are clear: bitcoin must be part of the climate dialogue. Its emissions pose both environmental and financial risks, and any comprehensive climate strategy should incorporate digital assets into the broader economic framework.

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• This blog post is based on Bitcoin Growth Amid Climate Change: Policy and Investment Implications.
• The post represents the views of its author(s), not the position of LSE Business Review or the London School of Economics and Political Science.
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